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.

 

  •   17 July 2019
  • 1
  •      
  •   
banner

Most viewed in recent weeks

Noel Whittaker’s take on the budget

Marketed as a fix for inequality and housing affordability, the latest budget instead delivers a tangle of tax changes that leave everyday Australians worse off.

Australia has no death duties. Technically.

Australia may not levy formal death duties, but a growing web of tax measures is quietly shaping what wealth passes between generations. Now, the 2026 budget adds another layer.

Welcome to Firstlinks Edition 662 with weekend update

The debate over the budget is increasingly shaped by frustration and perceptions of unfairness, rather than clear-eyed assessment of policy outcomes.

How to minimise tax with a will

Inheritance tax implications in Australia may surprise some, as poor estate planning without proper wills or trusts can lead to costly tax bills and delays for beneficiaries.

How inflation is quietly moving the goalposts on retirement

Inflation doesn’t just raise today’s bills - it quietly increases the amount needed to retire, while simultaneously making it harder to save. Three steps to take before June 30th to improve retirement outcomes.

Back to the future - Why indexing CGT is a good idea

A return to indexation of capital gains would be a fairer way to compensate households for the effects of inflation than the current discount. Importantly, it opens the door to future, broader reforms to stop the taxation of inflation.

Latest Updates

Investment strategies

High quality businesses are on sale

Beneath the dominance of the ASX's largest stocks, much of the market has been left behind. High-quality companies are now trading at levels rarely seen, offering opportunities for investors willing to look deeper.

Investment strategies

The whirlwind is upon us

Something unusual is happening in markets. The winners are pulling further ahead at an extraordinary pace. As return dispersion hits extreme levels, volatility is rising and the investing landscape is becoming harder to navigate.

Strategy

Inequality destabilises economies

Extreme wealth concentration is no longer just a side effect of growth. As inequality deepens, its consequences are shifting from a social concern to a broader threat to economic stability and democratic resilience.

Investment strategies

Have AI’s four horsemen arrived?

AI exuberance is colliding with economic reality. Cracks are emerging as spending surges, ROI remains uncertain and enterprise behaviour shifts. The next phase may look less like an expansion and more like a reckoning.

Taxation

Budget tax changes only scratch the surface. Here are 4 reforms Australia needs next

The 2026 budget has reignited Australia’s tax reform debate, but more work remains. Beneath the surface lies a harder question: what structural reforms are needed to make the country's tax system fit for the future?

Taxation

Negative gearing: quarantined, not killed

The Budget's negative gearing changes defer deductions rather than deny them, yet a worked example shows quarantining can halve the tax benefit's present value for buyers of established dwellings.

Investment strategies

Family offices have quietly taken over Australian private capital

In just four years, Australia's private capital landscape has transformed. We are seeing changes across who deploys capital, how deals are structured and why new platforms and investor pathways are rapidly emerging.

Sponsors

Alliances

© 2026 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.