The benefits of investing early

Investing earlier in a company's lifecycle, on average, yields higher investment returns. One way to illustrate the relative returns from earlier, mid and later stage equity investing is to study venture capital fund returns.

Thomson Venture Economics and the National Venture Capital Association analyze returns from 1750 US venture capital funds of all types. Their data showed that as of December 31, 2004, early-stage and seed venture capital investments produced the highest returns over the past 1, 10 and 20 year periods. Over the most recent 3 and 5 year periods, the returns on early stage and seed funds were lower, due primarily to the tech market collapse following 2000.

The table below also segments the returns from different types of venture capital funds into the standard categories of later stage, balanced and early-stage / seed venture funds. This clearly shows how much higher the returns have been over the medium and long term in early-stage and seed funds.

Thompson Venture Economics' US Private Equity Performance Index Investment Horizon as of 12/31/04

We believe there are several reasons why early-stage and seed capital investments have provided the highest investment returns. Early-stage companies are more entrepreneurial and more agile. They often outperform their larger competitors by responding more quickly to changing market conditions and by more rapidly deploying new technologies. Their relatively smaller size also allows them to grow faster on a percentage basis than larger organizations. This corresponds directly to higher investment returns.

While the returns have traditionally been higher with early-stage investments, the quid pro quo is that these investments are also more risky. Investors are cautioned that, while Fundamental Technologies II will use all of our team's skill, knowledge and efforts to make our investee companies a success, and thus provide superior returns to our investors, there is no guarantee that any or all of our investments will be a success, or that our company will provide a superior return.

© Fundamental Technologies II - 2007