Don't Read Too Much Into The Claims That Intellectual Ventures Returns Are Negative

from the too-early-to-tell dept

A bunch of folks have sent over the story from TechCrunch, based on a tweet from Chris Dixon that patent hoarding giant Intellectual Ventures isn't doing so hot for those who invested in it. Now, it's no secret that I'm no fan of Intellectual Ventures. I believe the company represents a huge tax on innovation and has a variety of very questionable business practices. I would be very happy to hear that it was doing poorly. But, unfortunately, the numbers being revealed are mostly meaningless. To understand why this information is even out there, you have to go back to 2002. Historically, the internal rate of return (IRR) for venture capital funds was kept secret from the outside world. However, many big public universities invest in such funds and get the usual reports about those funds' performance. Back in 2002 (I believe, due to a reporter's request), the University of Texas was the first of a few public institutions to realize that, being public, they probably should publish that information. Venture capitalists freaked out that people would misinterpret the results.

That's because the IRR for a venture fund, especially in the early years, is pretty meaningless. A typical venture fund lasts ten years, and the first few years is when all that money is being invested, and there's no real returns. On top of that (and, more importantly), the IRR is usually reported based on a totally made up number, which is what the VCs believe their portfolio is valued at, since it doesn't involve a liquid market. VCs were afraid that publishing such numbers would freak people out, and lead VCs to focus on more short-term investments. I don't think that's really happened, but it does appear that the Intellectual Ventures funds represented here (showing IRRs of -73% and -10%) might not really mean anything.

Without knowing the details of what those funds represent, or how long the timeframe is for those funds, it's difficult to assess what's really going on. It does look like IV isn't valuing its first fund very highly any more, and considering it's Intellectual Ventures I, perhaps you can assume it's further along in the process. But, in a game where a sudden "home run" can change things quickly (even if we're talking about patent infringement lawsuits or licensing demands, rather than true venture investments), it's difficult to make any serious call on the performance just yet.

Filed Under: irr, patents, returns
Companies: intellectual ventures, university of texas