Earlier this year, one of our M&A team had a conversation with a cashed-up serial entrepreneur who was contemplating a change of strategy that involved putting some of his money into Venture Capital funds. A couple of his buddies had done so a few years ago and struck a gold vein. He was sceptical, to be fair, but wondered what we thought about that strategy in the current climate?
The entrepreneur was told that we’re not investment advisers. But we could give him an idea of the general chances of success, given that he did not have a particular VC fund in mind nor had he even created a shortlist.
The big problem is that nearly all VC funds are neither high quality nor lucky. You have to treat money going into a VC fund as a moonshot investment. That is because they are inherently very high-risk. Many startups fail, and only a few provide significant returns. The hope is that one or two big winners will offset the losses from the majority of investments that don't pan out.
Most investors way overestimate the odds.
Now a report has come out from Edward Stanley and Matias Øvrum, equity analysts at Morgan Stanley, that looks at the returns from VC funds and stocks over the past 20 years. There’s a great summary of this report on FT.com.
They found that the average VC fund doesn’t reliably outperform the average stock.
In fact over half of all global VC funds (and 50% of US funds) have lost investors money, i.e. produced negative returns.
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