How Portfolio Size Affects Early-Stage Venture Returns
We looked at more than 10,000 investor portfolios to solve a puzzle about venture capital: How can early-stage venture returns look great in aggregate but disappointing to individual investors at the same time?
Apr 22, 2020 — 3 min read
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With the caveat that the bulk of returns are unrealized and may fall in value in the future, the aggregate returns from early-stage venture look appealing. Cambridge Associates data suggests that venture capital has outperformed the public markets over the past decade. Additionally, our own data agrees with a provocative conclusion from Invesco: venture capital and public market performance are generally uncorrelated. Competitive and uncorrelated performance suggests that early-stage venture is a materially different asset class which investors could benefit from.
But at an individual level we commonly hear a different story from small-scale seed investors. There are plenty of posts around the Internet about folks giving up on or disparaging angel investing based on their own bad experiences, and these posts align with many anecdotes I have heard from angel investors who have abandoned investing in startups. While there could be issues for these investors around access or selection, I do not think that these stories represent especially unlucky or unskilled cases. In fact, our data suggests that the median investor exposed to three or fewer startups on AngelList has a negative portfolio value.
So, how can early-stage venture look like an attractive asset class but be repellent to individual investors at the same time? My colleague Nigel Koh and I looked at the performance of more than 10,000 AngelList investor portfolios to find the answer: Investors who invest in more deals do better, both in average and typical return.
As an example, the below figure displays the median IRR for investors on AngelList grouped by the number of investments they are exposed to — so if, for instance, an investor had participated in two syndicate deals and a microfund that has made 11 investments they would be counted as having made 11+2=13 investments. The dots are the grouped medians, and the black line is a linear regression fit:
Performance generally increases in the number of investments made; the coefficient of the linear regression line here is 9 basis points per investment (one basis point is one one-hundredth of a percent), suggesting that the typical investor with a 100-investment portfolio outperforms the typical investor with a single investment by almost 9% a year.
One of the easiest ways that an investor could take a broad and systematic approach to early-stage venture capital is through investing in vehicles that broadly index into early-stage venture capital, such as the AngelList-managed Access Fund. In our paper we also look at the performance of investors who participated in the Access Fund against those who did not. We found that, across many years of investment activity, Access Fund investors typically and in expectation outperform those investors who did not participate in an Access Fund.
Our whitepaper “How Portfolio Size Affects Early-Stage Venture Returns” has all of our results and methodology.
Disclaimer
This document and the information contained herein is provided for informational and discussion purposes only and is not intended to be a recommendation for any investment or other advice of any kind and shall not constitute or imply any offer to purchase, sell or hold any security or to enter into or engage in any type of transaction. Any such offers will only be made pursuant to formal offering materials containing full details regarding applicable risks, minimum investments, fees, and expenses of such transaction. The terms of any particular fund, including size, costs and other characteristics, are set forth in the applicable constituent documents for such fund and may differ materially from those presented in this presentation. Past performance is not indicative of future results. There is no guarantee that any current or future fund will achieve the same exposure to, or quality of, startups held by any existing AngelList fund. Any investment in venture funds, including AngelList funds, involves a high degree of risk and is suitable only for sophisticated and qualified accredited investors. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. AngelList returns data may include investments by institutional and professional investors that have superior access to deals and information from AngelList and leads. Returns for these investors may differ materially from returns achievable by other investors on the AngelList platform. All AngelList returns contained in this presentation are as of April 3, 2020. They may include valuation events that occurred (or were learned about) after that date, which is standard practice. We undertake no obligation to provide updates or revisions to reflect any changes in actual or expected returns. Valuations are generally marked to a company’s latest priced financing round, as disclosed to us. While our valuation sources are believed to be reliable, we do not undertake to verify the accuracy of such valuations. Companies that have not received new investments in a priced round since the last mark are held at cost or may be marked down at our discretion according to our valuation policy. Valuations and returns do not account for liquidation preferences and other non-financial terms that may affect returns. Investments in later-stage companies may be sent to a third-party for valuation if (i) the company’s estimated value is over $100M, (ii) the investment is estimated to be worth over $10M and (iii) 24 months have passed since the last investment. The AngelList Access Fund investment committee may change without notice. Investments will generally be approved by a majority vote within the investment committee.
