SAN FRANCISCO — For the last few years, the spotlight in start-up investing has largely shone on those who poured money into a company when it was already well along on a growth path. It turns out that spotlight may have been misdirected.
While some investors are throwing giant sums into more mature start-ups like Uber and Airbnb at soaring valuations, it is the venture capitalists who identify a promising company at its infancy and bet on its growth who often come out on top.
Known as early-stage investors, they dominate a list of the top 20 venture capitalists worldwide that was recently created by the research firm CB Insights. About three-quarters of the top 20 are investors who put money into start-ups during their early rounds of financing. Only a handful on the list are focused on investing at a later stage in a company’s life.
CB Insights generated the list using criteria such as how big a return an investor was able to produce when his or her investments went public or were acquired. CB Insights focused on the performance of investors since 2008 for the list.
The top 20 includes Peter Fenton of Benchmark, who invested in Twitterwhen the social media company had only 25 employees and was trying to fix its once-common service failures; the company went public in 2013. The list also includes Jim Goetz at Sequoia Capital, who was one of the few to invest in the messaging service WhatsApp before it was acquired by Facebook, and Jenny Lee of GGV Capital, who was among the earliest investors in 21Vianet, a Chinese data center services provider that has since gone public.
The idea that early-stage investors can generate much larger returns has long been a core principle of venture capital: Get in early and grab a bigger stake in a company, with more opportunity for a larger return later, the thinking goes.
Early-stage investments have accounted for the lion’s share of the venture industry’s gains since 1994, according to Cambridge Associates, a research firm that studied the quarterly financial reports of dozens of venture firms. Since the dot-com boom of the late 1990s, between two-thirds and three-quarters of the industry’s returns have been generated by early-stage investments in any given year.
But the value of investing in a company when it is still nascent has been somewhat obscured in recent years as hordes of nontraditional start-up investors — including mutual funds, hedge funds and sovereign wealth funds — have piled into private tech companies, often when those start-ups are already proven growth stories. When Uber raised around $2.1 billion in December, for example, one of its investors was Tiger Global Management, a New York investment firm with a hedge fund component.
“When you write bigger checks, it’s more natural that people will notice,” said Anand Sanwal, chief executive of CB Insights. In contrast, early-stage investing tends to involve smaller checks and puts an investor into just one of scores of start-ups, making it harder to stand out immediately.
Rebecca Lynn, a managing director and co-founder of Canvas Ventures who is on the CB Insights list, said early-stage investments generally pay off more because “investors can get more of an ownership stake and you’re also part of the team.”
Ms. Lynn, who invested early in the alternative lending platform Lending Club, which went public in 2014, added that “later-stage investing is more like a stock bet. You’re along for the ride.”