Alumni Ventures: Returns and Performance Insight for Early-Stage Venture Capital Investments
Sourced by Michelle Chan for Wearenoyack
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Regarded as one of the most active venture firms in the world by Pitchbook, Alumni Ventures' deal sourcing, diligence, and fund performance are in many ways a function of strong entrepreneurial affinity networks. According to Alumni Ventures, a significant portion of value creation from an investment opportunity standpoint can now firmly reside in the private markets, as opposed to the IPO and public stages. Openview Venture Partners support this perspective, adding that this shift can be attributed to several factors, including the increased difficulties and regulations associated with being a public company and the high costs of compliance and IPO fees. Recent years have also seen more companies choosing to remain private for a longer period of time, or not go public at all. Additionally, the reduction in the cost of technology and advancements in the secondary market for illiquid investments have made it possible for companies to reach scale without relying on public markets.
For investors looking for potentially oversized returns, Alumni Ventures suggests investigating the private markets with an eye on pre-seed and seed-stage venture capital. Industry Ventures concurs, finding data from Cambridge Associates to show the average net annual returns for early-stage funds as 21.3% over a 30-year period (as of December 31, 2014). They hypothesized that an early investment fund of $100 million with management fees, carried interest, and diversification, could yield a gross expected return multiple of 3.8x and a net multiple of 3.1x with an IRR of 20%. On the other hand, growth venture funds, or funds that invest in later-stage companies, have a more modest return profile. The same data set showed the 30-year average annual net return for late and expansion-stage funds as 12.6%. This is due to the lower risk profile of these investments and the greater likelihood of quicker exits at much lower multiples.
Notable startups over the last few years paint a good picture of the potential value of early-stage investing in favorable circumstances.* Note that these examples and the returns shown are not typical. Investors in venture capital as an asset class typically expect to achieve their returns from just a few of their investments while expecting most to fail or under-achieve. Still, the examples below are intended to show the potential returns when investing in private markets rather than waiting until companies go public.
According to data located by Alumni Ventures, an initial investment amount of $100,000 with Pinterest at Seed 1 yielded a return of 60x when the company IPO'd in April 2019. With the company valued at $9.2B at IPO, the exit value on that investment was $9.0M. In comparison, after a 15-month period following the IPO, investors would have only seen a roughly 38% increase from the initial share price of $16. Reporting from The Information also showed the potential early-stage investing has for high growth, as demonstrated by Five of Pinterest's largest investors. Bessemer led Pinterest's Series A funding round in 2011 and saw a return on investment of 2,781% when the company went public, valued at $951 million. FirstMark, an early investor in Pinterest, invested in the company's first seed round in 2009 and saw a return of 2,224% valued at $710 million. On the other hand, Andreessen Horowitz, who led Pinterest's Series B in 2012, saw a return of 1,500% valued at $696 million. Valiant Capital, who led Pinterest's Series D funding round, saw a return of 118% valued at $433 million. Fidelity, a late-stage investor in Pinterest, saw the lowest return of 56% valued at $516 million. It's important to note in these numbers that the return potential diminished with each successive round of investment (i.e., investing in Series A vs Series B or C).
Uber
Alumni Ventures also found that an initial investment amount with Uber at the Angel round of $300,000 yielded a return of 122,000x when the company IPO'd in May 2019. With the company valued at 75.1B at IPO, the exit value on that investment would have been $36.6B. The Observer notes several early-stage venture investors who experienced oversized returns with Uber. Lowercase Capital invested $300,000 in Uber's angel round in 2009. By the time Uber hit IPO, the 4% owned by the investment firm had grown to roughly $36 billion. Similarly, First Round Capital's estimated total ownership in Uber was close to two and a half billion after the IPO. Their initial seed funding was only $1.5 million for the company's first two financing rounds. In comparison, after a 14-month period following the IPO, investors would have seen a 31% drop off from the initial share price of $45.
You will notice in the examples above that it was well-known venture capital firms, which typically have very high minimums and so invest on behalf of large institutions and very high net worth individuals. Until now, it has been virtually impossible for a typical accredited investor to access these attractive opportunities - or be able to create a diversified mix of such investments. Investments in venture capital certainly have their risks, and it's up to every investor to determine their risk comfortably. However, Alumni Ventures endeavors to mitigate risk by constructing large, diversified portfolios on behalf of its investors. Investing across all stages, sectors, geographies, lead investors, and vintages is a strategy to reduce risk and intended to increase the likelihood in finding a high-performing investment.
* The examples provided are for illustrative purposes only, and are not representative of the risk-return profile or anticipated performance of any available AV investment or fund. Alumni Ventures did not invest in the companies discussed, except where expressly indicated. All investment involves risk, including risk of loss. Venture capital investment involves substantial risk, and not every venture capital investment will be successful.
Original (article) Written By: Alumni Ventures.
Published on: Feb 14, 2023.