Building Wealth through Venture Capital

CHAPTER 5Venture Capital Investment versus “Buffett's Real Rules” of Investment

Earlier in this book, we told you that, over the long haul, returns on venture capital investment industry‐wide have averaged about 12%. We also mentioned that more recently, over roughly the past 20 years, the venture capital industry average return has been an even more robust 19.7%, according to the Thomson Reuters Venture Capital Research Index, which is designed to replicate the venture capital industry as a whole. We're not aware of any such scientific index available earlier, so the longer‐term rough estimate is just that, an informal estimate.

We also shared with you long‐term returns for the S&P 500, which averaged slightly below 5% annually for the period from January 1, 2000 to January 1, 2017. To keep the playing field as fairly balanced as possible, just as we cited the more recent, more robust venture capital returns, we looked for a different time period that would result in better S&P 500 returns. We found that over a longer, 30‐year period (which included the more‐bullish late 1980s and 1990s), the S&P 500 returned an average of 9.9%/year.

While the venture capital returns still look better, one would expect that comparison given venture capital's greater inherent riskiness. The 9.9% return rate for the S&P 500 looks pretty good as well. So, why not just stick with the S&P 500 for the really long haul and not try to outsmart the market?

That's all well and good if that's really ...