Contrary to the belief that success in venture capital investment is concentrated in a small number of managers, the majority of value creation came from outside the top 10 deals, according to a Cambridge Associates study spanning 1995-2012.
The report refuted the idea that “if investors cannot access this highest echelon of VC, they may as well abandon the asset class altogether” and suggested investors look further afield than the “difficult-to-access, select group of franchise managers” ranked in the top 10.
Of the top 100 venture investments each year between 1995 and 2012, the study found an average of 61 firms a year accounted for the value created. New and emerging firms typically represented at least 40 percent of value creation in those investments observed.
“[t]he notion that the only the top 10 percent of the industry matter is both outdated and unsubstantiated, and may lead investors to miss attractive opportunities with lesser-known managers that have provided exposure to substantial value creation,” Cambridge Associates managing director Theresa Hajer said.
The VC industry has evolved over the years in three ways, the report said. First, there has been increased specialisation: instead of focusing on technology broadly like they did a decade ago, VC firms today focus on subsectors such as information technology infrastructure and consumer technology.
Second, VC firms have been looking closely into ways to support and scale their companies efficiently by, for example, seeking specific expertise for portfolio companies’ businesses.
Third, outperformance in the industry is no longer concentrated to the traditional VC areas of San Francisco, Massachusetts and New York. The report said Seattle, Los Angeles and the Midwest are all seeing VC activity, along with China and Europe internationally, and cited sunken costs of company creation as a reason.
However, Hajer warned that despite returns, “developing a venture capital portfolio is not easy, and requires selectivity and rigorous due diligence on the part of investors. Only institutions with truly long time horizons and the ability to absorb extended negative returns should embrace this asset class.”
Some of the VC-backed investments include Andreessen Horowitz’s $30 million funding in CipherCloud in 2012, a $75 million investment round by shaving startup Harry’s backed by SV Angel, and data collection and analysis software Qualtrics raising $70 million from Accel and Sequoia in 2012.