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We’ve reported in the past that portfolios with more early-stage venture investments tend to generate higher returns. We recently looked at the AngelList platform data to understand more about AngelList SPV returns and how that fits in with our previous research.
The AngelList platform has generated returns, net of fees, of 26.5% per year for investors (LPs) dating back to 2013*. One might presume, then, that the typical AngelList startup investment returns 26.5% per year, with some variance. As such, investing in lots of startups (i.e., having a larger total portfolio) could be a good approach because it might lower the variance of returns in the portfolio.
However, one of the key insights of our previous research has been that winning startup investments follow a power-law distribution, with extreme outliers and a huge disparity between average (mean) and typical (median) investment returns. Under this extreme power-law return regime, investing in more startups could be a good idea because it might increase portfolio returns, rather than lower variance.
To differentiate between these two investment approaches we asked: what happens to the typical startup investment on AngelList? The following graph displays the return multiple to LPs (i.e., net total value paid in) of all SPVs on the AngelList platform for the first 1-5 years (displayed in months) after the investment was closed**:
You’ll note that net TVPI starts out slightly negative for virtually every SPV because of fees paid by the SPV. It takes the typical (median) SPV about three years to get to breakeven. The median SPV then hovers right around a 1x return. Even the 75th percentile of SPVs only get to a 2x return after about 4 years, or a net IRR of 19%—still well below AngelList platform performance.
It’s not until you reach the 90th percentile of SPV investments that you start seeing net TVPI at or above the AngelList platform performance. Since money-losing venture investments lose most of their value, a decent rule of thumb emerging from our data is that early-stage venture investments up to the 90th percentile net out to zero returns—and, inversely, that any positive returns in a venture portfolio are a function of the outlier returns of investments in the top decile. As such, one may be motivated to invest in a large number of startups because it might increase portfolio returns, not because it’ll reduce variance.
Investors on the AngelList platform can access a broad array of opportunities across the startup ecosystem. LPs on AngelList can invest in a portfolio of startups hand-picked by leading fund managers via Venture Funds, invest quarterly with Rolling Funds, or discover great individual startups to invest in using AngelList Syndicates.
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*Returns data is as of April 1, 2023, and is the net IRR to LPs for every cashflow related to all special purpose vehicles (SPVs), venture funds, and rolling funds on the AngelList platform. This includes funds that are not advised by AngelList Advisors, LLC. Returns data includes both realized and unrealized returns. The AngelList platform performance metric does not represent returns achievable by any investor on the AngelList platform. There is no guarantee that the AngelList platform will continue to experience the same exposure to investment opportunities in the future.
**Chart references all SPVs on the AngelList platform, excluding SPVs into secondary opportunities. SPV data is as of April 1, 2023.
Past performance is not indicative of future results. Venture investing involves a great degree of risk and is only suitable for sophisticated investors. The information above is presented for informational purposes only and is not investment advice or a recommendation of any kind.
