The Harsh Reality of the VC Industry: 50% of Funds Fail to Achieve Profit After Inflation Adjustment
Rex Salisbury warns that 50% of VC funds fail to achieve positive returns after adjusting for inflation.
This data highlights the highly differentiated Power Law characteristic of the venture capital industry, where most funds struggle to cover costs and provide real returns to LPs, with only a few top funds consistently generating excess returns.
In the current environment of high interest rates and pressured exit conditions, the survival difficulty of ordinary VC funds has further increased, with capital continuing to concentrate towards top managers, accelerating industry reshuffling.
Source: Public Information
ABAB AI Insight
Rex Salisbury has been tracking VC data and sharing industry insights for a long time, previously emphasizing the extreme uneven distribution of VC returns. This reminder continues his warning to LPs and emerging managers about realistic expectations, similar to his repeated emphasis over the years that "most funds do not outperform the index."
On the capital path, LPs are strengthening their due diligence on funds' historical performance, fee structures, and exit capabilities, accelerating the flow of capital from average funds to the top 5-10% of institutions that have performed well over the past 9-10 years, strategically reducing allocations to mid-tier VCs to enhance overall portfolio returns.
This reality resembles the reshuffling phases of several historical VC cycles (such as post-2000 and post-2008), with the VC industry currently undergoing a transformation period of digesting the 2021 peak bubble and differentiating in the new AI cycle.
Essentially, this is about capital concentration: the extreme manifestation of Power Law in the VC field leads to further concentration of industry capital towards a few sustained winners, as the structure of 50% of funds losing money determines that only a very small number of managers can survive long-term and dominate the next round of allocations.
ABAB News · Law of Cognition
The fact that 50% of funds lose money is not an anomaly, but rather the underlying mathematics of the VC industry; Power Law never spares the median. The real profits are always made by that 10%, while the remaining 90% serve as the denominator for the average; capital is never evenly distributed. Choosing a VC fund is more important than choosing a project; the failure of most LPs is predetermined from the moment they choose the wrong manager.