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.

 

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.