Epoch 42: Venture Capital Returns Not Worth the Time?

Apple vs. S&P vs. Venture Capital

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Hello Avatar! Welcome back for another week of biotech analysis. As always Sunday’s are dedicated to strategic discussions.  Today we are going to explore venture capital and how they compare to public equity investing.  The top is inspired by a Financial Times article we came across which suggested venture capital is NOT worth the time.  Given we are active in the VC space we had to understand what this was all about and today we are going to share those findings with you.

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Enough shilling for the day, lots to cover this week, let's get started!

VENTURE CAPITAL A WASTE OF TIME AND MONEY?

Today we are going to present you with a topic skeptics of venture capital will relish  - “is venture capital a waste of time and money?”  Keep in mind, we are a biotech venture capitalist by day, so full disclosure we DO NOT think venture capital is a scam.  

Today’s topic is something that has been on our radar since this summer.  The Financial Times published an article which caught our attention titled: Venture capital funds are mostly just wasting their time and your money.  We are going to go into the details with you, but the TLDR is that the authors believe VC bad.

PUBLIC VS PRIVATE RETURNS

The figure below is meant to point out the inconsistency of private equity returns.  Yes, top quartile funds consistently beat public stocks, but the median is more of 50-50 toss up over short time horizons and over longer horizons public equity will outperform private stocks in the short term.

To be honest we were not quite sure where the argument was going after looking at this first graph.  VC/private equity is a long term game, we all know this.  There is a reason why the typical fund is structured as a 10-yr vehicle.  The data shows over the longer term private consistently outperforms public.

For now, the main take-away is that it appears the authors argument is that VC/private investing returns is more of a crapshoot (at least in the short term) where performance is at best dictated by chance and investors must be lucky enough to pick the funds that wind up in the top quartile.

TOP QUARTILE FUNDS DRIVE RETURNS

Building on this concept that investors must be lucky enough to invest in a private funds that by chance finds a unicorn the authors comment:

“Mostly, though, the few big winners were funds that either backed tech giants pre float or caught 2021’s SPAC boom”

The chart below is meant to visually show this as the top quartile IRR set of funds dominate the returns and essentially due to scale on the y-axis make all other funds are irrelevant in comparison.