Innovation: Path to Wealth Creation and What VC All About

. . . Stock market returns over the past seven or eight years admittedly look great, but that’s due largely to the bounce-back in prices following the devastating collapse of 2008–09. A look at the stock market over a more extended time frame presents a more sobering picture. Factoring in all the ups and downs, from January 1, 2000 to January 1, 2017, the S&P 500 index grew just

2.7%/year. Add dividends paid by the S&P 500, which have averaged around 2% annually, and you’re looking at an average annual return of slightly below 5% over that period.

Moreover, the rise in stock prices to historical highs has been helped in recent years by the near-zero interest rate environment, which has forced investors to turn disproportionately to stocks for any hope of decent returns.

So how can the American Dream of wealth creation continue? The key is, and has always been, major innovation—new technology and new product development that address new needs or meet existing needs dramatically better.

The most successful major companies understand this. Today’s Wall Street darlings –companies like Microsoft, Alphabet (the parent of Google), and Facebook—were yesterday’s venture capital–funded startups. These companies understand that major innovation must never stop.

. . . Venture capital returns historically have been handsome, averaging about 12%/year. That’s a lot better than the almost 5% average return from the S&P 500 over the past 16 years, and almost anything beats today’s near-zero interest rates.

Some venture capital leaders have done even better. The funds we’ve managed have generated investor returns averaging 28%/year over the past 30+ years. We’ve done that even through the dot-com collapse of 2000 and the broad economic plunge of 2008–09.

Our secret approach in fact isn’t really a secret. We’ve shared it openly in the past, and will share it with you in this book. It takes lots of hard work, screening hundreds and even thousands of venture opportunities to select the few that we believe could grow into billion-dollar+ home runs. We review at least a hundred ventures for every one in which we invest. We usually get in early, while these ventures still carry low valuations, before others recognize their potential.

The exhaustive screening and due diligence pay great dividends.


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