AngelList: Early-Stage and Late-Stage Investments Should Be Different Asset Classes

Venture Capital is a young industry, and until recently, it has been difficult to find adequate data to mathematically model VC strategies and draw conclusions about which strategies pay off the most. Frustrated by the lack of quantitative evidence to inform decision making at VC funds, AngelList Head of Data Science Abraham Othman used AngelList data on more than three thousand investments including valuations and price-per-share figures to understand how each successive year of a startup’s existence affects investment returns.

In a paper published earlier this month, Othman shared a number of conclusions to inform decision making for venture investors and policymakers.

1. Early-stage investments and late-stage investments are so different in their expected returns that they should be treated as entirely different asset classes. Investors in different rounds of fundraising at the same startup experience fundamentally different expected returns for their winning investments, and these expected winnings change very significantly over the company’s lifetime. This explains why many venture capital firms are organized by company stage, as opposed to by industry vertical.
2. Early stage investors should be allowed to cash out from winning investments, because in the later stages of company growth, early investors find themselves owning an entirely different type of asset class from what they signed on to. These investors may prefer cashing out and reinvesting their money in other early stage companies.
3. Policymakers should open up the opportunity to make retail investments to accredited retail investors.  Companies are staying private longer, and these high growth private companies are powerful tools of wealth creation. At the same time, policymakers should not open up the opportunity to make early-stage retail investments to non-accredited retail investors. Early-stage investments remain incredibly risky, especially for investors who do not have the means to diversify their investments.

Contributed by Lili Torok.

To access the original article by Abraham Othman titled Startup Growth and Venture Returns, please visit this link.