Katie Benner and Michael J. de la Merced reported in Monday’s New York Times that, “For the last few years, the spotlight in start-up investing has largely shone on those who poured money into a company when it was already well along on a growth path. It turns out that spotlight may have been misdirected.
“While some investors are throwing giant sums into more mature start-ups like Uber and Airbnb at soaring valuations, it is the venture capitalists who identify a promising company at its infancy and bet on its growth who often come out on top.
“Known as early-stage investors, they dominate a list of the top 20 venture capitalists worldwide that was recently created by the research firm CB Insights. About three-quarters of the top 20 are investors who put money into start-ups during their early rounds of financing. Only a handful on the list are focused on investing at a later stage in a company’s life.”
The Times article explained that, “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.
“But the value of investing in a company when it is still nascent has been somewhat obscured in recent years as hordes of nontraditional start-up investors — including mutual funds, hedge funds and sovereign wealth funds — have piled into private tech companies, often when those start-ups are already proven growth stories. When Uber raised around $2.1 billion in December, for example, one of its investors was Tiger Global Management, a New York investment firm with a hedge fund component.”
The article added that: “Yet there is more risk in early investing, since unproven start-ups can easily fail;” however, “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.”
