Is investing in the beginning of a startup always better?

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

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

In fact, according to the company’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’s bragging rights about being an early investor in a company like Snowflake, Uber, or Airbnb, you’re not necessarily making more money than later investors in the game.

Search less. Close more.

The fact that returns on later-stage investments outperformed those on earlier-stage investments over the past decade was what struck me most about the report.

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

For the report, the consultancy analyzed all technology, media and telecom IPOs from 2011 to 2021. It did not include SPAC mergers in its analysis of 147 companies across multiple verticals.

The benefits of a “risk-free” investment

The result of the analysis is the antithesis of what people expect, as the popular idea is that investing sooner leads to better returns.

Series D is an inflection point for this “no risk” according to the data, because it is around this time that investment risk “starts to go from ‘Is this company going to make it or not or is this company going to flourish? to be a company that exits through an IPO or other form of exit event?’”.

It should also be noted that the report has an “inherent ‘survivor’ bias” because it only analyzed companies that went through an IPO. Obviously, to go through an IPO, you have to do something right.

Returns by step

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

For example, investments made in the Series G and H stages had annualized returns of over 80% at the six-month close, while investments made in Series A had an annualized return of around 63%.

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

Entering at the offer price produced the worst annualized returns of the data analyzed – at the close of six months, investments made at the offer price had an annualized return of 39.8%.

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

With companies remaining private longer, late-stage deals grew and grew larger and larger in size, keeping pace with growing demand. More private capital available means companies can remain private longer, which means more private capital can be deployed, which leads to more private capital raised by funds;

And with the IPO market almost at a standstill this year, it certainly looks like companies will remain private even longer.