Early-Stage Venture Capital Funds Will Outperform Recent History, Later Stage Funds and Buyouts Will Underperform, Says Milestone

Milestone Venture Partners' Co founder Edwin A. Goodman, a 31 year veteran of venture capital, forecasts that early stage venture investing will out perform historical results 19.8% per year during the last 20 years by as much as 25%. He

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Milestone Venture Partners’ Co-founder Edwin A. Goodman, a 31-year veteran of venture capital, forecasts that early-stage venture investing will out-perform historical results — 19.8% per year during the last 20 years — by as much as 25%. He added that later-stage VC and buyouts will under-perform their 13 – 13.7% per year results over the same time period.

He forecast returns generated in 2010 through 2020, from funds created in 2005 through 2010.

Goodman explained that it is easier to achieve outsized venture returns with a $150 million fund investing in smaller companies than with a $1 billion pool of larger companies.

He said, “Since large institutions cannot put enough money to work in funds less than $200 million, they ignore the category. That results in relatively light competition for these smaller venture funds vying to invest in early-stage or seed companies. In turn, less competition helps the early- stage venture fund to negotiate lower pricing and other preferable deal terms, which increases the likelihood of higher fund performance.

“The most exciting aspect of early-stage investing, which will drive lucrative returns, is the dynamism of new-company development serving rapidly growing new markets. With less money, a tolerance for greater risk, and an aspiration for dramatic growth and attendant higher returns, the smaller funds shun mature markets in search of newer high-growth sectors. The diligent and skillful venture capitalist will perceive these opportunities well before they are generally visible,” he concluded.