Which Industries Are The Winners and Losers for Venture Capital Investments?
Most investors, aspiring or experienced, know the basics of venture capital investments and the huge returns they can bring. But the million dollar question for any VC is which industry to focus on. Do some outperform others?
As a whole, VC investments have drastically outperformed the long run average of the major stock indices. The Cambridge Associates LLC US Venture Capital Index®, an aggregate of venture capital returns, reports a 30 year annual average return of 18.31%, 2x the S&P 500 over the same range. At the very least this should encourage some investment to higher-risk VC opportunities.
Some industries prove to be more profitable, whereas others fail to meet the high expectations of venture capital. The data, from 1997–2015, points out the losing industries, the winning industries, and those that really are not as successful as they are made out to be. Are tech returns really that extraordinary? Do the benefits of environmentally friendly investments outweigh the costs? Industrial startups for sure lag, right? And what about biotech?
The Losers
Beginning with the losing industries of the venture capital landscape, we have environmental and energy coming in with long-term returns of -1.51% and 0.99%, respectively. VC dollars have flowed into environmentally and socially conscious investments, but the returns don’t seem to justify the flows.
Environmental startups range anywhere from finding ways to clean up the ocean to creating environmentally friendly foods. A successful environmental startup is Impossible Food Inc, who creates plant-based food options for health conscious consumers. Impossible Food Inc is certainly an outlier in the environmental industry with its successes, including investments from Bill Gates and Google Ventures.
The Winners
The clear winners are in the tech sector. Information technology has led the way with average returns of 46.88%. We broke down IT into five sub-sectors: Internet-eBusiness, Internet-eCommerce, Telecom Network/Systems, Telecom Products, Telecom Services. eCommerce leads the way with an average return of 78.15%, but this figure is somewhat misleading. This includes the Dotcom bubble where returns in 1997 and 1998 were 692.94% and 334.83%, respectively. If we control for the skewed 1997 and 1998 returns, Telecom Network/Systems takes the lead. If we remove the Dotcom bubble era, information technology returns find their way back from the stratosphere to a more realistic 18.19%.
Software is second followed closely by hardware. Software tends to overshadow its less glamorous, yet equally important counterpart, hardware, but both produce returns around 30%. Increased data flow across all industries will continue opportunities for software startups specializing in big data. AI is another field with increasing popularity where startups specializing in software and hardware may jump on the bandwagon and continue to produce returns for VCs.
The Surprises
When people think venture capital, biotech and healthcare quickly come to mind. However, healthcare is only slightly above average at a 19.89% return. If you dive deeper into the data, the healthcare industry is divided into sectors that range from 6% to 30% returns. As most would assume, biotechnology really drives the performance for the healthcare industry. Biotechnology is composed of firms that perform genetic engineering to improve human life. Pharmaceuticals relating to biotechnology and research both fall into the biotech field as well.
A comparable industry which typically doesn’t come to mind when thinking of startups is industrials at 19.4% returns. Uptake, a startup that works with Caterpillar to analyze data from their machines, is an example of a successful industrial startup. Healthcare is viewed to have more potential for earth-shattering developments and industrials is viewed as a rather conservative and stagnant industry, but both produce nearly identical returns.
The Low-Down
The data from Cambridge Associates proves the generally accepted relationship between risk and returns. Investors willing to take on the additional risk in VC tend to be rewarded. Unfortunately, most amateur investors lack the resources to diversify their asset holdings with startup equity, Slice Capital provides the platform for anyone to diversify their portfolio with startup investments.
Disclaimer: This article does not intend to provide investment advice. The companies mentioned are not currently or planning to raise funds via Slice Capital’s funding portal. Slice Capital does not view the companies mentioned as direct competitors to any of the issuers currently raising on Slice’s funding portal.
