Investors Considering Venture Capital Should Remember That Opportunities Exist Beyond The Top Ten Firms
Data Show That Savvy Investors Have Found Strong Returns in an Increasingly Diverse Opportunity Set
Boston, MA (Dec. 16, 2015) – It is a widely held belief that a concentrated number of certain venture firms invest in the deals that account for 90% of industry performance in a given year – and that if investors cannot access this highest echelon of VC, they may as well abandon the asset class altogether.
But investors considering venture capital may benefit from looking for opportunities beyond this difficult-to-access, select group of franchise managers. In fact, between 1995 and 2012, the majority of value creation in the industry came from outside the top 10 deals, and an average of 61 firms a year accounted for the value created by the top-performing 100 investments each year – a far cry from the conventional wisdom that only the top 10 firms are notably valuable.
That’s according to a new report, “Venture Capital Disrupts Itself: Breaking the Concentration Curse,” from Cambridge Associates, a global investment advisor to institutional investors and private clients. The report analyzes the top 100 venture investments per year, as measured by value creation (total value, realized or unrealized, of a given investment less that investment’s total cost), from 1995 through 2012.
“It’s certainly true that there are a handful of well-known venture capital firms that have consistently generated outstanding performance,” says Theresa Hajer, Managing Director at Cambridge Associates and co-author of the report. “But the notion that only the top 10% of the industry matter is both outdated and unsubstantiated, and may lead investors to miss attractive opportunities with lesser-known managers that have provided exposure to substantial value creation.”
The analysis finds a broad, dynamic and diversified opportunity set in the venture capital asset class – and one different from the set many investors focus on. The research shows that new and emerging firms consistently accounted for at least 40% of value creation in the top 100 investments per year, in the years analyzed.
“While the conventional wisdom did hold some water before the 2000 tech bubble, venture capital is no longer a cottage industry,” says Nick Wiggins, Associate Investment Director at Cambridge Associates and co-author of the report. “The venture landscape is increasingly dynamic. We’re seeing a lot of strong returns generated by many more groups within the asset class, some of which have developed new approaches to the business of venture capital”
One notable evolution in the venture industry has been innovation in the delivery of services and support to portfolio companies. For example, many venture firms focus on how they can help their companies scale more efficiently, through the use of functional experts that can provide portfolio companies advice on specific areas of their business. Other firms have worked to create communities among portfolio companies that entrepreneurs can leverage.
As the costs of company creation have fallen, more venture capital outperformance is coming from outside the traditional startup hotbeds of the California Bay Area, Massachusetts and New York. Seattle and Los Angeles have enjoyed success, and the Midwest boasts a burgeoning entrepreneurship ecosystem. Industry performance is also increasingly driven by investments made outside the US. China and Europe, in particular, have strong venture scenes.
“Another venture capital shift is increased specialization. While 10 or 15 years ago, an investor may have referred to a specialized firm as one focused only on technology, today’s successful emerging firms have refined their focus to subsectors like IT infrastructure and consumer technology, or specific themes like investing in transformational data assets or network-driven businesses,” says Wiggins. “This newer breed of managers is taking advantage of developments in IT, mobile and health care technologies that have allowed companies to develop significant scale in a short amount of time.” A number of these firms are worth investigating, Hajer says.
“There’s isn’t another asset class today that can offer the same return profile as venture capital, and there’s really no other way to access the disruptive emerging technologies that are funded by venture investments,” says Hajer. “That said, developing a venture capital portfolio is not easy, and requires selectivity and rigorous due diligence on the part of investors. Only institutions with truly long time horizons and the ability to absorb extended negative returns should embrace this asset class.”
For more information or to speak with Theresa Hajer or Nick Wiggins, please contact Eric Mosher, Sommerfield Communications at +1 (212) 255-8386 / Eric@sommerfield.com.
This release is provided for informational purposes only and is not intended to be investment advice. Any references to specific investments are for illustrative purposes only. The information herein does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. This release is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. Past performance is not a guarantee of future returns.
Copyright © Cambridge Associates LLC 2015. All rights reserved.