Writing on Accesswire, Alumni Ventures reports that Venture capital (VC) has consistently outperformed public markets over 5, 15, and 25-year periods. This conclusion is based on longitudinal data from Cambridge Associates. Looking at a ten-year period ending in June 2020, investors who allocated 15% or more of their portfolio to venture investments saw a median annualized return 300 basis points higher compared to those who allocated less than 5% of their capital to venture investments.
Even during periods of strong public market performance, the data supports that venture capital investment consistently provides stronger returns. The years between 2010 and 2016 were a significant growth period for the markets. During this time, the average internal rate of return (IRR) for VC investments was 21.9%, with the top 25% achieving an IRR of 25.6%. As for the markets during this same period, the S&P 500 had an average IRR of just 12.2%.
According to JP Morgan, VC set multiple records in 2021 (fundraising, deal activity and exits), demonstrating remarkable resilience during the pandemic. In 2021, venture-backed companies completed exits with an aggregated value of $774 billion.
One key reason that venture capital consistently outperforms public markets is the focus on value creation and investor gains in venture markets. VC involves investing in innovative, high-growth private companies with long-term equity appreciation potential. This asset class offers the potential for outsized returns.
Companies such as Amazon, Uber, Google, and Facebook were venture-backed and took years to grow from small enterprises into some of the world’s most valuable companies. This value creation often occurs before any kind of exit. This helps to drive the overall success of venture investments.
Another reason for VC’s performance is that more companies are staying private longer, or not going public at all. Venture capitalists typically invest in portfolio companies over several stages (pre-seed, early-stage, late-stage, and growth equity), providing additional funding as financial and operating milestones are achieved. Early-stage venture capital is particularly attractive due to the risk profile of this stage. This allows venture capitalists to obtain more meaningful ownership stakes with smaller investment amounts that have a greater impact.
Overall, the data shows that VC can provide valuable return enhancement for long-term investors who are willing to hold illiquid assets. Although VC carries higher risks, it has the potential for high returns and value creation over time. This makes VC a strong investment option for those who are looking to diversify their portfolio and balance risk/reward opportunities.