Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 315

The ‘six or out’ VC approach to portfolios

American venture capitalists (VCs) often talk about home runs. VC portfolios are structured to maximise the chance of at least one successful investment that will return the fund multiple times the original investment. Statistically, we know that around 90% of returns for VC investors will come from just 10% of early-stage investments. These are the home runs. The other 90% of businesses will either deliver a modest return or worse-case scenario, no return at all. Home runs are essential to provide the returns that set VCs apart and that investors are expecting.

In the more popular language of cricket for Australia, VC investors need to maximise their chances of hitting a six when constructing their portfolio. And those of us who have dedicated many a summer (or winter in the recent Cricket World Cup) to watching cricket will know that if a batsman protects their wicket too intensely, they can’t take the backswing necessary to hit the six. Instead, they will be forced to settle for singles and dot balls.

Losing wickets is inevitable in early-stage investing

VCs also know that losing a few wickets is an inevitable and necessary part of the game. VCs are generally comfortable with this but for some investors the idea that loss is inevitable can be uncomfortable and off putting. These investors are hindered by loss aversion and the belief that losses fundamentally loom larger than gains.

VC is different and requires a different mindset. Every investment is made with the conviction that it could be the outlier and an acceptance that many will not. It is okay to lose if there’s a big winner in the portfolio.

To labour the cricket metaphor, we can look at the statistics of cricket legend and former Indian captain, Sachin Tendulkar. During his test career, Tendulkar did not score a single run from 57% of the 29,000 balls he faced. He either blocked or let them go through to the keeper. But of the total runs he scored during his test career, over half (55%) were from fours or sixes although these made up just 7.2% of the total balls he faced. Like Tendulkar and the 29,000 balls he faced, investment in early stage businesses requires VCs and their investors to face a lot of companies and know which are worth a big swing. This is a strategic and disciplined approach to risk taking that VCs gain after years of facing start-ups.

Management of the risk

Portfolio construction in VC is geared to address and mitigate against risk factors as much as possible. Good VCs will ensure that there are enough companies in the portfolio and that there is enough diversity in terms of the different sectors and the underlying technology. Experienced VCs are also adept at spotting patterns and identifying strong founder characteristics, technical expertise and market opportunities that maximises the chances of success.

Hitting a six is not always the end game for VCs and their investors. For larger investors, this is often the beginning of a long partnership, particularly those looking to move the needle on a multi-billion dollar fund. Having identified those start-ups that are rapidly gaining traction and showing accelerated growth, larger institutional investors such as superannuation funds are able to write bigger cheques with lower risk at later stages of the business’ lifecycle. Table 1 shows the company funding life cycle with private market investors at the earlier stages and public market investors being involved at the later stages.

Source: Right Click Capital

The big wins afford VCs and their investors the opportunity to double down on later funding rounds (A, B or C rounds) and participate in growth across other stages such as co-investment opportunities, whether directly or through a mandate structure, and public listings. As high-performing investments progress through the business lifecycle, over time they provide strong returns for a superannuation fund’s venture capital, private equity and listed equities teams.

Table 2 shows an estimate of the number of Australian-based companies raising money in 2018 by stage of investment and reveals a far greater number of opportunities to invest in seed rounds than series A, B and C rounds.

Source: Crunchbase

Table 3 shows the median and average amounts invested in the same deals in 2018 and demonstrates the ability of VCs to invest larger amounts at the later stages of funding as they identify the investments where they have hit a six. VCs who put money to work in businesses at earlier stages need to continue investing in a business’s subsequent rounds in order to maximise their upside when they’re on a winner.

Source: Crunchbase

It’s more about the long term than quick wins

VC often marks the start of a long-term partnership between an investor and a start-up. Ram Nath Kovind, the first Indian President to visit Australia recently commented, “The most successful Australian batsmen in India have been those who have shown patience, read the conditions carefully, settled down for a long innings, nurtured their partnerships and not fallen for spin”.

The same is certainly true for VC investors.


Benjamin Chong is a partner at venture capital firm Right Click Capital, investors in high-growth technology businesses. This article is general information and does not consider the circumstances of any investor.



Most viewed in recent weeks

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Latest Updates


$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.


Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.