A glance at the rankings of the world’s top 20 venture capitalists reveals that VCs who are investing in fledgling businesses poised for growth are winning big. As much as 75 percent of the list consists of such investors who got in during early rounds.
Connectedness and exits play key role
New York based research firm CB Insights recently released a shortlist of the leading VCs of the world. In their analysis, the firm looked at critical areas like exits to see what kind of returns the start-up generated for investors when it went public or was sold. Besides the valuation, when the investor money first pumped money into the business was also taken into account. Connectedness was another criterion that CB Insights factored in, because how well networked the team was had bearing on their getting the best information, fastest. The shortlist specifically excludes unicorns, because investments in these billion dollar plus valued startups were yet to show realized gains.
Topping this list is Benchmark’s Peter Fenton who put money into Twitter before it had spread its wings and was a small firm of 25. Fred Wilson of Union Square Ventures made headlines for his investments in Twitter too, besides investing in now ubiquitous Tumblr and Etsy. Another notable inclusion on the list is Jim Goetz from Sequoia Capital, who famously invested in WhatsApp pre-Facebook acquisition.
Changing landscape in venture industry
Historically, much of the venture industry’s wins have come from early stage investments and accounts for as much as three quarter of the gains in many years, starting with the era of the dot com boom. Recently however, with mutual funds, sovereign wealth funds and hedge funds investing in bigger start-ups like Uber with proven growth, things had started to change. This high visibility investment was what was easier to notice in the market, according to the CEO of CB Insights.
Spotting the investors in early-stage financing where there were smaller checks written out and scores of similar sized start-ups in the fray, was harder. However, as co-founder and Managing Director of top 20 VC Canvas Ventures, Rebecca Lynn believes, investors gain more with early-stage investments due to the higher stake they pick up and their integral role in the team. She added that later stage investment as not unlike taking a punt on the stock market.
Until the turn of the millennium just 25 firms ruled the roost with only these firms investing in one or more top 10 deals. In the period after that however, there has been a move away from this brand name dominant early-stage VC mix to newer venture firms that have cornered a growing share of these top investments. Between 2000 and 2012, as many as 70 such firms were part of at least one of the top value creating deals. This has also meant that gains for the industry as a whole have dipped with more firms vying for bits of the top deals. Today, a 25 times return on investment is rare where it was par for the course during the dot com boom.