Seed Portfolio Performance Increases With the Number of Investments
Bottom Line: Early-stage investing in young companies is hard work often without much payoff. Venture investors can increase their success -- and expand entrepreneurship in society more broadly -- by diversifying their portfolio. Research suggests that having investments in more companies tends to generate higher investment returns.
Nearly two-thirds of venture capital financings lose money. It can be difficult to identify and access investments in the best-performing companies. Only a small number of highly successful investments account for a substantial portion of returns for the overall market. At the overall market level though, Cambridge Associates benchmark data suggests that early-stage venture capital has outperformed public stock markets over the last ten years.
Diversification can increase venture capital returns. In an AngelList analysis of more than ten thousand investors, median returns per year increase 9.0 basis points and mean returns per year increase 6.9 basis points for each additional company that an investor is exposed to. Investors who participate in a broad-based early-stage venture indexing strategy tend to outperform those who do not participate. This finding suggests that the typical investor with a 100-investment portfolio outperforms the typical investor with a single investment by almost 9% a year. In other words, investors with more holdings outperform those with fewer.
Therefore, arguably the secret to producing consistent returns in venture capital is to invest systematically and increase the number of early-stage investments made. One of the easiest ways to achieve this goal is through a fund of funds, investing in a fund directly, or investing in indexes. Investment results suggest that investors who treat early-stage venture capital as an asset class, and invest systematically into it, tend to do much better than investors who select only a few deals.
Read the full study HERE.
- Even though nearly two-thirds of venture capital financings lose money, at the overall market level, early-stage venture capital has outperformed the public stock markets over the last ten years.
- Venture investors can increase their success -- and expand entrepreneurship in society more broadly -- by diversifying their portfolio.
- The typical investor with a 100-investment portfolio outperforms the typical investor with a single investment by almost 9% a year.