Venture vs Public - is it really worth it?

Conventional wisdom

"Only top quartile venture funds beat the stock market."

There has long been a narrative about investing in Venture funds that you must find top-quartile managers to make your investment worthwhile. I mean the odds are stacked against you - the locked-up liquidity, long investment horizon, and the greater chance of failure (just check the chart out below).

All of this, plus the monumental task of choosing a fund manager able to get an allocation in the year’s hottest start-up - surely putting your money to work in the public market is a better option?

The narrative translates to the asset allocation of large institutional asset managers - most institutional investors have some exposure to the venture capital asset class. Due to this greater perceived risk of failure, however, their allocation is low... potentially lower than it should be.

New information

A new study led by the National Bureau of Economic Research (NBER) in November 2020 set out to answer this question - is investing in Venture worth it?

Using a large number of institutional investors and data that was previously unavailable to researchers, NBER found that Venture funds outperformed public markets much more broadly than commonly realised, and much more persistently than expected. 

In fact, not just the top quartile, but more than half of venture funds launched between 2009 and 2017 have outperformed public markets, net of all fees and carried interest. The narrative has been shattered!

It can also be argued that the positive returns for venture funds are potentially even better than recorded due to the numerous IPOs, SPAC exits, and the greater number of unicorns occurring since the cutoff date of NBER’s study, which was 30th June 2020.

This, coupled with fund managers using Co-investments structured through SPVs alongside their main fund, can supercharge their returns even further, potentially seeing up to 75% of venture funds outperforming public markets. 

How you can pick a top quarter (now top half) venture manager?

Experience, experience, experience.

It may seem self-explanatory, but the study finds that the main reason for the persistent outperformance of top-performing venture fund managers is their experience in the industry. 

Whether this pertains to a more robust understanding of their industry, higher-value deal flow through their tried-and-tested network, or a greater ability to identify and build relationships with promising start-ups, the past decade has shown those venture fund managers who have performed well in their previous funds are more likely to experience greater returns than public markets.

The future is bright

The narrative that only the top venture funds outperform public markets seems to be more myth than reality. With institutional investors allocating more capital to the asset class than ever before, and venture fund managers using co-investments to boost their returns further, the future is looking bright for venture capital.

Ben Morgan

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