“The dynamism of technology and healthcare markets since the bubble period has broken venture’s concentration ‘curse’.”
For the past 10 years, 40% to 70% of total gains in venture capital tracked by asset management consultants Cambridge Associates (CA) were claimed by what it called “new and emerging managers” rather than “the widely held belief that 90% of venture industry performance is generated by just the top 10 firms”.
In the post-1999 period, CA in its research note, Venture Capital Disrupts Itself: Breaking the Concentration Curse, published last month said an average of 65 firms per year made investments in the top 100* deals. This was a 33% increase from the average number of firms that made top 100 investments in the dot.com bubble period.
And while some, such as Scott Maxwell from Openview Venture Partners, rightly worry about “tourist VCs” — hedge funds, public asset managers, and corporate venture capital groups that dabble in tech VC when market conditions are favourable — a widening pool of capable investors from these and other types of managers is good for the widening pool of good entrepreneurs and innovative businesses looking to scale.
These top 100 venture deals, rather than just the top 15 sought by VCs, such as Marc Andreessen (quotes here as part of a discussion on the power law in venture), drive the industry, CA said.
Post-1999, investments ranked 11 through 100 accounted for an average of 60% of the total gains generated by the top 100 investments per investment year. The exceptions to this trend were 2005 and 2010 (and too early to say for 2011’s vintage), compared to the pre-2000 period, in which the top 10 investments accounted for an average of 57% of the total gains, ranging from 44% to 68%.
The top 100 investments accounted for between 72% and more than 100% of the industry’s total value creation between 1995 and 2012, ie in 1999 to 2003 and in 2005 and 2006 these top 100 deals had positive returns while most of the rest lost money in aggregate.
Healthcare investments accounted for 10% to 30% of the total gains produced by the top 100 investments in most years. Seed and early-stage investments have accounted for the majority of investment gains in every year since 1995, CA said.
Partly, this is because international investments, particularly China and parts of Europe, have accounted for a larger share of the top 100 gains. From 2000 through 2012, they represented an average of 20% of the total gains in the top 100, compared to an average of just 5% from 1995 to 1999, and they reached as high as 50% of gains in 2010, according to CA.
The tailwinds of lowered costs of company creation and increased access to cloud computing infrastructure, coupled with changing cultural mindsets around entrepreneurship and risk-taking, meant international deals would account for an increasingly large share of the top 100 deals, CA added.
Just looking at the diversification of corporate venturing (CVC) and the US remains dominant if looked at through the rear-view mirror.
(This slide was used as part of keynote speeches in Sochi and Moscow, Russia, this month — please email for the full presentation and full annual data will be in our World of Corporate Venturing report.)
CA concluded: “High-quality companies are increasingly created in many corners of the world on relatively lean models. The entrepreneurs of these companies are often younger, increasingly do not come from Silicon Valley, and do not need to rely on an insular group of networks to get funded or build their companies.
“Given the proliferation of these technology trends and entrepreneurs, the majority of gains in the top 100 venture investments are no longer concentrated in the top 10 investments in a given year; moreover, the strong aggregate performance of the other 90 demonstrates the value of the broader venture capital industry.”
However, given the change in limited partners committing to newer managers, particularly from corporations, family offices and governments, it could the returns from these funds will be going to a broader set of institutions — insights to this question are much appreciated as indirect as well as direct investments seem to be increasingly part of how savvy investors make up their total strategic and financial returns.
* Beginning with 1995, the first year in which the aggregate total gains in venture capital exceeded $10bn, to 2012, CA looked at the top-returning 1,800 investments, representing 1,211 companies, made by 682 funds, representing 265 global venture capital managers.