This article originally appeared in Business Insider.
The old adage that “Only 10 venture investments matter each year” has officially been debunked. A new study by Cambridge Associates, the benchmark for VC performance data, found that the distribution of venture capital returns changed dramatically after the 1999 Internet bubble. Today the majority of venture capital returns annually come from investments that are further down the tail and outside of the top 10 industry-wide outcomes. This is in stark contrast to many pre-conceived notions in the industry.
According to Cambridge Associates, since 2000, over 60% of the industry returns on average came from investments that were outside of the 10 largest outcomes. This is a significant departure from the pre-1999 era when the top 10 investments were a much larger percentage of the total pie.
Another interesting finding from the study is the democratization of returns across fund managers since 2005. Counter to conventional wisdom, between 40% and 70% of value creation in any given year has come from new and emerging managers, with established funds generating a minority of the industry’s performance over the same period. The data bodes well for smaller funds too. Over the same period, managers with less than $500 million have accounted for a majority of the industry’s returns, despite investing less money on average than the larger funds.
The last insight in the Cambridge report is that non-traditional venture markets are rising in their importance. California, New York, and Massachusetts are still the largest markets for venture capital returns, but at least 20% of returns consistently come from outside these hubs.
We expect that these last fifteen years are the new normal in venture capital. Great technology companies continue to pop up outside of traditional venture capital hubs, and we have seen that in our own business as we have traveled to Florida, Indiana, Minnesota, North Carolina, Ohio, and Utah this year, as well as international markets like Iceland, Estonia, and China. Surprisingly, only 17% of our companies are headquartered in Silicon Valley today.
Meanwhile venture managers who have concentrated portfolios should consider a diversified approach. As the distribution of returns moves from the head to the tail, a manager needs to make more investments each calendar year to be successful. The time when a manager could drive to all of his or her portfolio companies, and routinely expect a handful to generate 100x returns, has come to an end.
While Greycroft successfully raised a small fund recently, we hope the many institutions who read the Cambridge Study will follow this advice and look for other emerging managers. There are so many small funds out there struggling to attract capital, just like we did back in 2010. If these managers have a good strategy they too can generate top returns.
This article was assisted by Matt Heiman.