bumper sticker

There used to be a bumper sticker in the Valley in the wake of the dot com collapse that read something like: “Please, Lord, give me just one more bubble.”

That somewhat crass sentiment gives rise to a big debate over the good and bad of bubbles. There was certainly a lot of carnage from the first one that most of us would rather not relive. But to see why the average venture capitalist might unabashedly want one — check out the new return study released by Cambridge Associates and the National Venture Capital Association today.

Overall, the average 10-year return across some 1,500 firms edged up to 7.36 percent — the twelfth quarter in a row they’ve improved. That’s good news. But — and it’s a big “but,” considering the risk in this asset class — the 10-year returns still lag the broader markets. Considering venture firms are supposed to be ten year investments, that’s a meaningful time frame to measure, as opposed to studies that look at one year or three year returns.

More troubling, the early stage index over 10 years is just 6.38 percent. Meanwhile, late stage investments are performing at nearly 11 percent over 10 years. The positive way to spin that is that it increasingly takes companies longer to exit than in past years. That will hopefully not continue to bear out: A venture industry where the investors taking the earliest risk aren’t making the most money is troubling.

The single best time to be a VC? Investing in early stage 15 years ago when average returns were over 70 percent. That’s a huge difference in five years, and shows the beauty of investing in 1998. It’s not about the valuation the next round is priced at — it’s what you can actually exit for that counts. And unlike public market investors, employees, or founders, a lot of VCs get out once there’s an IPO. Those late 1990s returns from the bubble remain a lovely snapshot in time that didn’t necessarily crater along with the stocks of the companies they invested in.

Indeed, the 15- and 20-year time horizons are the only two Cambridge measures where venture capital outperforms the Dow Jones Industrial Average, the NASDAQ Composite, and the S&P 500.

Please, Lord, give me just one more bubble…

The single best quarter according to Cambridge & Associates was the fourth quarter of 1999 when the net return to limited partners was 84 percent. You almost couldn’t do any wrong as a VC for that flicker of a moment in time.

The numbers show stark evidence that this venture capital bubble that so many commentators insisted we’ve been in since 2006 or so has absolutely never existed. Simply put: VCs clinging for dear life wish we’d been.

Please, Lord, give me just one more bubble…

Of course, as we reported before, the problem with stories extrapolating trends from  venture capital data is they include the whole compendium of venture capitalists from Kleiner Perkins and Andreessen Horowitz to a no-name firm in the middle of nowhere. Venture capital — like categories that VCs ironically disdain like online gaming — is a hits driven business. Averages don’t capture the best performers, because the best performers are outliers.

And that gets to the problem with a bubble as epic as the 1999-2000 one: Venture capital suddenly looked easy, and everyone piled in. As they made easy money, more piled in. Then when they stopped, investors assumed it was a minor correction, and yet even more money piled in. We’re only seeing the results of the long slow unwinding of that now.

The NVCA predicts that returns will start to get better once a backlog of IPO candidates go out in the second half of the year, citing the strength of the public markets year to date. Said the NVCA’s Mark Heesen in a statement:

The surge of the public markets in the first quarter of this year was very difficult to compete with from a returns perspective, yet there is clearly a silver lining if these indices remain strong. Venture-backed companies that have been waiting for the right time to go public or an attractive acquisition price will be able to move forward in a favorable manner which will improve valuations across the board. All of these factors will drive improved performance over the remainder of 2013.

Cambridge Associates added that LPs got more money back from VCs in the first quarter than they paid out — certainly a positive.

I’m sure for many funds, Heesen’s comments ring true and that there are some great poised candidates that represent years of hard, board-heavy lifting. But for the asset class as a whole, I’m skeptical. I feel like every study released since the early 2000s points to the great backlog of IPO candidates that are about to start filing any second. Facebook in particular was supposed to open the flood gates. Instead, we watched as Facebook, Zynga, and Groupon all disappointed, and many companies shelved plans to go public soon as a result.

Venture capitalists may never enjoy the same terms it did in its early days, when Arthur Rock got half of Intel for about $2 million — a worse valuation than PandoDaily got for Christ’s sake. And bear in mind, Gordon Moore and Robert Noyce were two of the Valley’s first serial entrepreneurs by that point, so that price was a premium for the time.

The pre-bubble days were a time when few VCs existed and even fewer people understood the asset class. It seemed almost unimaginable to entrepreneurs: You mean you’ll just give us $1 million in exchange for half of nothing but an idea, and if it fails I owe you nothing? WHERE DO I SIGN?

Venture capital fore-father Bill Draper spoke to this in a recent Q&A, saying:

The returns for the venture capitalists have gone down dramatically and will probably continue to stay low in and around Silicon Valley. For the entrepreneur, it’s a very healthy environment, because the odds of their getting financed are very good. Very often at the earliest stages, the most sophisticated venture capitalist doesn’t know if that’s gonna work or not. So the risk for the venture capitalist has gone up, and the risk for the entrepreneur has gone down.

But venture capital isn’t dying with the times; it’s just changing. Despite talk about the dramatically lower cost of starting a company, actually building a company to an exit takes far longer and far more capital than it ever has before. The ecosystem needs venture capital. And many venture capitalists are having epic runs right now, as the consumer Web and mobile are global opportunities unleashing the ability to build truly massive companies.

In the last 10 years, as venture capital returns overall have underperformed the broader markets, Andreessen Horowitz came out of nowhere to become a top firm; Midas List topper Jim Breyer pulled Accel back from the post-dot com brink; and David Sze, Aneel Bhusri, and Reid Hoffman have made dying East Coast firm Greylock a Silicon Valley powerhouse with investments in Workday, LinkedIn, Facebook, and more. Facebook alone has minted several new billionaires. (Disclosure: Marc Andreessen, Accel, and Greylock are all investors in PandoDaily.)

Here’s the thing about venture capital that explains the declining returns and all the contortions and smack-talking and competition between surging and dying firms: It’s incredibly hard to do well. There are only so many huge wins, and it’s not identifying them that’s hard — it’s winning the deal and actually adding enough value so that people want to work with you again.

Also this: A lot of the firms making money are doing so by paying higher and higher valuations, which Benchmark’s Bill Gurley defended in our recent PandoMonthly. And that does change the way VCs make money — possibly for good.

Individual VCs who are good at this will continue to do well. There are only two ways that the aggregate venture capital numbers really start to improve: The first is that we actually have another bubble. No signs of that happening any time soon. The second is that the zombie firms who aren’t very good at it continue to die off and stop dragging down the average.