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Increased capital in the space doesn't necessarily mean bad news for venture returns
Key Takeaways
- More and more money is moving into venture capital, the highest returning asset class for top managers.
- Later stage venture capital may have a harder time returning as much given all of the competition, but returns will likely still be in the high teens for good managers.
- At the earlier stages, more money can actually make more projects viable and lower the risk of going under in the first few years. More viable projects means returns won't be as affected, and the risk/reward profile may actually improve.
- Joe Lonsdale believes venture will remain the top performing asset class, despite more money moving in.
Transcript
I'm Joe Lonsdale. I'm an entrepreneur and investor. I founded several companies, including Palantir, Addapar, Open Gov, Affinity, Resilience Bio, and I run a firm called 8VC. We manage about $5 billion a committed capital, backing the best entrepreneurs figuring out what's newly possible in the world. So venture capital has become a lot bigger asset class in the last 20 years, used to be a really tiny part of global finance, and now obviously, there's hundreds of billions of dollars a year, and it's still a lot smaller than private equity. The rest of private equity is much, much smaller than most of the global financial markets. Venture capital still only a few percent of the global financial markets, but it's growing quickly. And first of all, it makes sense that a lot more money would be going into venture capital because of the types of problems the venture capital are solving now matter a lot to the fortune 500, the Fortune 100, to our government, to the state of the world. Venture capital has become a key part of our economy. So, of course, there's going to be more money involved in it. There is a lot of money right now in the late stage. You've had some really impressive firms like D1 and Tiger and General Atlantic, and they're writing late-stage venture capital checks. You've had others like SoftBank, putting huge amounts of money into this space, and so you have a lot of money flying around. I do think it has definitely lowered returns at the late stage part of venture capital. You used to be you can get 30% annualized investing in growth companies. It's going to be a lot harder to do; most likely, it's going to be closer to the high teens for the good firms. It's a very late stage, which is a tougher asset class there. You know, for the early part of the asset class, in some ways, it's an advantage that there's more money because a lot of the early-stage firms are building companies, are helping people build companies then have access to a lot of capital they didn't even have access to before. So there's types of problems you can go after. We can build things where we start new manufacturers for biology, for semiconductors. We could do things in infrastructure. There's just all sorts of companies you can only build if you have a lot more capital that you can now start that you couldn't before. If you have the right reputation, you can get access to a lot of capital for your early-stage companies now. So I don't think it's going to hurt returns too much for the very early stage builders, and it's actually going to reduce the risk in the space a lot by being able to access so much capital. That said, as these big firms continue to keep coming down earlier and earlier stage, you're probably not going to get quite as high returns as you have, but it's still probably going remain the highest returning asset class.
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