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The old overlap
Limited partners, starting with David Swensen, backed venture for the chance at insane multiples on invested capital, which beating the Nasdaq by three to five points a year could never offer. For most of the industry's history, early stage was the way to get those multiples, and the two circles in the Venn diagram almost perfectly overlapped.
A widening circle
In the last few years, outcomes and markets have grown enough that the circle of high-multiple opportunities reaches beyond early stage. It is not so large that a gazillion new companies can return 100x, but many outside early stage can still generate high returns. A firm acting on that raised its first growth fund in a long time.
The team question
The biggest argument against was whether the partnership had the team to do it, since growth investing is a different mentality with different ways of evaluating things. Several times in recent years the right instinct about a company went unacted on because the opportunity sat outside the usual box.
Why did David Swensen favor venture?
Swensen ran Yale's endowment from 1985 until his death in 2021 and championed assets outside public stocks and bonds. His 2000 book Pioneering Portfolio Management set out that approach, later called the Yale model. Illiquid assets like venture and buyouts offered returns that public markets could not, in exchange for locking up money for years. Yale's endowment grew from about 1 billion dollars to over 30 billion during his tenure.
Why does early stage allow 100x outcomes?
An early-stage investor buys a stake when the company is valued at a tiny fraction of what it could become. A stake bought at a 10 million dollar valuation and held until the company is worth a billion has grown a hundredfold, before dilution. Later-stage buyers pay prices that already assume success, so the same multiple would need an implausibly large company. Each new funding round also dilutes earlier shareholders' percentage.
Why is growth investing a different mentality?
Early-stage investors judge people and potential with almost no data. Growth investors judge a business with a record, using measures such as revenue growth, margins, and net revenue retention, the share of last year's revenue still present a year later. They also pay higher prices, so valuation discipline matters more. General Atlantic, founded in 1980, is among the best-known growth equity firms.
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