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The Market Minute: Is Investing Early In A Startup Always Best?

Illustration of a board game in the style of Chutes & Ladders named The Market Minute.

The conventional theory in the world of venture capital is that investing as early as possible produces the greatest returns.

But that’s not always the case, according to a new report by Manhattan Venture Partners, an investment firm focused on late-stage private companies.

In fact, according to the firm’s analysis of annualized returns on pre-IPO and IPO investments over the past decade, later-stage investments outperformed early-stage investments. So while there are bragging rights that come with being one of the earliest investors in a company like Snowflake, Uber or Airbnb, you’re not necessarily making more money than investors who arrived later to the game.

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I chatted with Andrea Walne, a general partner at Manhattan Venture Partners, to learn more about the report and what the firm learned from its analysis. The fact that returns on later-stage investments outperformed those of earlier-stage investments in the past decade stood out most to me. 

The firm also found that investing in pre-IPO rounds of tech companies generated better returns than investing at the IPO, which produced lower returns.

For the report, MVP looked at all the technology, media and telecommunication IPOs from 2011 through 2021. It didn’t include SPAC mergers in its analysis of 147 companies across multiple verticals. 

The benefits of a ‘de-risked’ investment

The results of the analysis is the “antithesis of what people expect,” according to Walne, pointing to the idea that investing earlier leads to better returns.

“What’s so interesting about what we found out is there’s a lot of promise in companies that are late-stage companies to actually deliver results because by the time they’re late stage, they’re inherently a lot more de-risked than a company that’s early stage,” she said.

The Series D is an inflection point for that “de-risking” according to Walne and the data, because it’s around then that investing risk “starts going from ‘Will this company make it or not or will this company flourish into being a company that exits by way of an IPO or another form of an exit event?’”

MVP notes that the report does have an “inherent ‘survivor’ bias” because it only looked at companies that went through an IPO. Obviously, to go through an IPO, you have to do something right. 

Returns by stage

It’s still noteworthy to see the annualized returns for early-stage investments compared to late-stage ones. 

For example, investments made at the Series G and H stages had annualized returns above 80 percent at the six-month close, whereas investments made at Series A had an annualized return of close to 63 percent. 

Investments made at the Series B, C and D entry points had annualized returns of 53 percent, 55.3 percent and 54.6 percent, respectively, as of the six-month close, per the report. 

Entering at the offer price produced the worst annualized returns of the data analyzed—as of the six-month close, investments made at the offer price had an annualized return of 39.8 percent.

As Walne put it, the late-stage investments are derisked, which “actually leads to an exit strategy.”

Companies are also staying private longer, with the average age of companies that underwent an IPO between 2011 and 2021 reaching 12 years (for context, the average age of companies going public between 1997 and 2001 was around 5.5 years).

“With companies staying private longer, late-stage deals have surged and have been increasingly larger in size, in step with the rising demand. The private markets in essence are benefitting from a flywheel impact,” MVP wrote in its report. “More private capital available means companies can stay private longer, which then means more private capital can be deployed which leads to more private capital raised by funds.”

And with the IPO market nearly at a stand-still this year, it certainly seems like companies will be staying private even longer.

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Illustration: Dom Guzman

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