Venture capital investments have effected – and benefitted from – the evolution of technology
On 28 October 2021 eQ Asset Management and TrueBridge Capital Partners announced their co-operation and the first close of the inaugural venture capital fund-of-fund for limited number of professional investors. The partnership combines TrueBridge’s deep venture capital networks and strong track record from investing with elite venture firms over decades with eQ’s customer-focused service offering covering fund administration, reporting and best-in-class client service.
Investors are reminded that venture capital investments are risky by their nature and are not suitable to all investors. This article is not an offer or invitation to invest in any financial product.
Venture capital investments have effected – and benefitted from – the evolution of technology
Venture capital has grown steadily for decades as an attractive asset class, with strong returns driven largely by growth in the technology sector. It requires long-term commitment and is noted for the role that it plays in driving innovation by funding companies at their earliest stages. But investors need to be strategic about adding venture managers – manager selection is critical as there is a broad gap between the top performers and the bottom quartile firms. While the overall asset class has outperformed traditional stock indices over five-, ten- and fifteen-year periods, top quartile funds have seen average annual returns of almost 30% to more than 45% IRR over the past decade and a half. This compares to bottom quartile funds that have seen negative to less than 10% IRR over the same periods. And access to top managers is constrained as those VCs have their choice of investors with which to partner.
While venture investments date back to the 1960s, the venture industry began expanding in the 1990s as new firms were created to invest in the tech companies that began to spring up as part of the digital transformation we have experienced over the last few decades. Particularly over the last 20 years, we have witnessed a software renaissance as technology has evolved to touch every aspect of work and personal life.
This trend of technology disruption has led to more opportunities for venture capitalists – and those opportunities have presented at a larger scale and with substantially larger exits for investors. In 2012, for example, there were four software companies with a market capitalization of $20 billion or greater; today, there are nearly 30. Underpinning this is the shift in how enterprises and individuals use technology – and how that shift will continue to effect change globally.
A fundamental reason technology continues to be an attractive investment opportunity for venture investors is the large and expanding total addressable market (TAM). The software TAM alone is estimated by some to be $1 trillion and is a function of several factors: the fact that digital transformation is catalyzing cloud adoption at an almost exponential rate, that software continues to automate new areas in existing as well as new markets, and that we see continued innovation applied to nearly every industry. Companies like Airbnb and Uber aren’t just competing in the hotel and transportation industries, respectively – they have completely disrupted them and changed fundamental consumer behavior. On top of that, the broad digital economy is increasing in share as an overall percentage of GDP. FAANG companies (Facebook, Amazon, Apple, Netflix and Google) will do $1.1 trillion in revenues this year, making them the 13th largest GDP in the world if they were a country. We expect these tailwinds to persist, resulting in technology gaining share for many years to come.
Additionally, with the onset of the pandemic, an entire decade of expected tech growth was condensed into months. The pandemic transformed consumers’ lives, driving meaningful changes in behavior and preferences and, as a result, significant VC investment and exit activity. McKinsey & Company estimates there was a “10-years-in-8-weeks” jump in e-commerce deliveries, driving the success of companies like Doordash, which then used that momentum to expand its global footprint with the notable acquisition of Finnish start-up Wolt in an $8 billion all-stock transaction. McKinsey also estimates that we saw a 10x increase in 15 days for telemedicine and a seven-year acceleration of online entertainment within five months. Companies like Zoom that enabled remote working and learning saw massive growth. Other companies with forward-thinking business models that capitalized on these consumer trends have also flourished. While much remains to be seen, there are signs that many of these new digital behaviors have become habits and will likely continue after the pandemic.
With this recognition, top venture investors will continue to focus on technology. But which VCs will successfully pick the top tech winners to back? Research shows that investors who allocate capital to VC firms whose funds have strong performance in the past are well-served, as successive funds tend to outperform. VC funds in the first and second quartiles consistently outperform public markets, and this strong performance persistence in venture capital suggests that successful venture managers have skills and networks that are more difficult to attain and replicate. This underscores the importance and value of venture capital funds of funds cultivating relationships with and maintaining access to “winning” managers.
TrueBridge is fortunate to sit in the central hub in the VC ecosystem, connected to companies, VC managers, and limited partners by deep relationships developed over decades. This unique position provides us with pervasive networks, unique insight, and deep expertise in the world of venture capital. Our data-driven approach and longstanding relationships allow us to both identify those top-performing VC managers and gain continued access to them. In addition, we serve as the data engine behind the Forbes Midas List, Midas List Europe, Brink List, and Next Billion-Dollar Startups, and regularly publish industry articles and opinions on the Forbes platform. This strategic partnership with Forbes has helped us create and deepen relationships within our industry even further.
Looking ahead, the future is brighter than ever in venture capital. Venture-backed technology companies continue to highlight the efficiencies that technology can bring to every facet of life. And the pandemic acted as a stress test of sorts, showing investors where there are capability gaps – and opportunities – in massive markets. Venture investors are embracing the opportunity to fund companies that address those gaps and the upside has never been greater. While competition between VC firms is fierce, TrueBridge is well-positioned, having strong, longstanding relationships with durable brands.
Edwin Poston is a General Partner and Co-Founder of TrueBridge Capital Partners. He was previously managing director and head of private equity at The Rockefeller Foundation, where he helped invest a $4 billion endowment in some of the venture industry’s top performing managers.
Staffan Jåfs is the head of private equity at eQ Asset Management.
