As yields in other asset classes have stagnated over the last few years, non-traditional venture investors have poured capital into late stage private companies — the so-called “Unicorns” — at an unprecedented pace. With what seemed like up and to the right growth and public declarations of profitability (or at least a reasonable line of sight to sustainability), these companies (and their investors) could do no wrong.
In recent periods, many companies in the billion dollar valuation club have run into issues. Zenefits, for example, fired its CEO amid allegations of skirting insurance laws and an unsavory company culture, companies like Snapchat and Dropbox have had their value marked down significantly by Fidelity, and reports about on-demand darlings like Instacart point to business models that lack long-term viability.
What seems to have remained true through all of the hoopla however, as outlined in a recent New York Times piece, is that investors who make the commitment to find and work with companies at the earliest stages — often called the Seed Stage — tend to see a majority of venture returns in spite of the skewed nature of headlines.
A few key quotes from the article:
The idea that early-stage investors can generate much larger returns has long been a core principle of venture capital: Get in early and grab a bigger stake in a company, with more opportunity for a larger return later, the thinking goes.
Early-stage investments have accounted for the lion’s share of the venture industry’s gains since 1994, according to Cambridge Associates, a research firm that studied the quarterly financial reports of dozens of venture firms. Since the dot-com boom of the late 1990s, between two-thirds and three-quarters of the industry’s returns have been generated by early-stage investments in any given year.
Early-stage investing has changed in recent years. The top-returning venture-capital investments in any given year were once dominated by just a handful of brand name, early-stage venture firms. That has shifted: Over the last decade, new venture firms have contributed to an increasing share of the best investments, according to Cambridge Associates.
“The tech market has massively expanded, and tech is now far more accessible all around the world,” said Theresa Hajer, a managing director at Cambridge Associates.
That is not to say investing at the earliest stages is without risk, of course Companies fail for a number of reasons – lack of market viability, personnel issues, and competitive forces – and those issues are certainly magnified at the seed stage where the margin for error is thinner.