Are these IRRs illusory?

Matt and Dan are both talking about the IRR uptick in venture capital.  "We're baaaaack".

Maybe.

A lot of venture valuation math is based on  the subsequent rounds of private investment, not realizations.  Realizations is VC-speak for what everyone else calls real money in your pocket. 

I wonder if the current IRR improvements are simply a money-supply effect. The VCs I know all marvel at how much cash there is in the system.

"I can't believe they raised a new fund  - and $XXXm!" 

That makes capital cheap for everyone.  Cheap capital enables high follow-on prices for private investments.  As we all know from our tutelage from the Fed, when the money supply increases too fast, asset inflation follows, and then the sorrow and the pity soon thereafter.

Simply put, Is this "improvement" just private equity inflation?  The exit valuations (IPOs and M&As) haven't gotten really astronomical (yet).  Are VCs anticipating impending exit value inflation or simply looking to put money to work at any price?   

I am reluctant to use the B-word.   Asset inflation and deflation are part of the business cycle.  They are not speculative to same degree as the B-word suggests.  But maybe this is just semantics.

I think VC valuations have historically lagged and not led the public markets valuations.  This is part of what creates the boom/bust cycle.  So I tend to believe the rise in IRRs is inflation due to excess money supply.  Great for entrepreneurs.  Not so great for VCs.   Worse still for LPs. Boom for some. Bust for others.  It corrects, over time.

If it is an asset inflation, it doesn't seem to have impacted the A rounds as much as the later ones -- perhaps because you can't put $15M to work in most Series A companies without crowding out the team.  If abundant capital has changed the VC business into a banking business, then it would  follow that the later stage end of business is about finding mature, well-packaged deals that require less work (more time leverage) and can use a lot more capital.

I expect A rounds will get more expensive, too. When they do, we'll stop, for a while.  For now the cheap late stage money is a good thing for us, too.  But we're not confused.  We realize all that matters is realizations.

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And consider this sobering observation from Fred Wilson.