Great aggregate returns attract institutions

Institutions Love Venture Capital’s Great Aggregate Returns

. . . Aggregate returns for the asset class have historically been outstanding, and there’s no sign that will change anytime soon.

This is demonstrated well by the Thomson Reuters Venture Capital Research Index, launched in 2012 to replicate the venture capital industry as a whole. Based on that index, venture capital investment has on average returned 19.7% per year since 1996, notwithstanding the 2000 dot-com collapse, versus modest single-digit returns for traditional equities and bonds.

. . .  That’s why most sophisticated pensions and endowments have come to the conclusion that allocating a portion of their total portfolio to venture capital (and other private equity investments, particularly when private equity funds were doing better) makes sense. Yale University’s endowment, often held up as a standard of investment excellence, has generated nearly a 30% average annual return on its venture capital and private equity investments since 1973. Their commitment is so great that the university has invested in a large satellite campus, west of Yale’s hallowed downtown New Haven, Connecticut campus, dedicated largely to scientific and technological research, has actively fostered entrepreneurial development in its graduate business school, and has invested with thriving venture capital firms that have sprouted right in New Haven.

Again, keep in mind that institutions like Yale can diversify their venture capital allocation across a large number of promising ventures. While you won’t be able to diversify your venture capital allocation to nearly the same degree, the high-risk/high-reward aspect of venture capital still makes diversification within this asset class important.


Len Batterson is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund