The general misery that the public markets have subjected us all to over the past 12 years - with the Dow Jones, the S & P, and the NASDAQ all trading lower today than they were in 1999, begs the question - how does stock market performance affect startup investing returns?
The answer seems obvious. A falling tide sinks all boats. So goes the public markets, so go the private equity markets, of which startup investing is a subset.
This is best illustrated by the depressing statistic that in the last 12 years there has been more money invested into the venture capital industry than has come out of it.
A lot of effort for naught.
But in spite of this, and maybe even because of it, startup investing returns over the past decade have been surprisingly, even shockingly good.
According to data compiled by Thomson Financial and corroborated by eight large studies in the US and the UK over the past three years, average returns for startup investing were in excess of 20% annually this past decade, and over a longer 20-year period, have averaged more than 25% annually.
Why Is This and Will It Continue?
If you step back and think about it for a moment, these high returns make perfect sense. Startup investing is high returning because:
1. As Compensation for Illiquidity. As the vast majority of startups are privately-held firms, higher returns must be offered as compensation for illiquidity. You can't day-trade startups as you can public stocks. This, of course, is both a good and a bad thing.
2. As Compensation for High Variance. Startup investing is characterized by a few winners and lots and lots of losers. To incent investors to play this high volatility game, alluring terms and returns must be offered.
3. Small Businesses are Fundamentally More Efficient Allocators of Capital. The plain but powerful truth is that a startup firm is by FAR the most efficient form of human organization ever devised to allocate time and capital.
And with more efficient allocation of time and capital, higher returns naturally follow.
As Picasso so famously said, "Work is the Ultimate Seduction."
And the most seductive form of work for the best and brightest these days is to start and grow a company.
Best illustration of this - in spite of throwing millions at them, Google has a hard time hanging onto their best engineering talent.
The wonder kids just prefer their own gigs. Always have, always will. And anyone who has spent just a little time with a dynamic entrepreneur knows, they're in it to win it.
And when they do, like Picasso's Les Demoiselles d'Avignon, the results just take your breath away.
Are you in it to win it too?