One of America’s oldest venture firms is doing something unexpected:
It’s returning its investors’ money — more than a quarter of a billion dollars.
Today, I’ll explain what’s going on here…
And reveal how it can help any investor, including you, get positioned to earn a bundle.
Traditional VC Makes Untraditional Move
Charles River Ventures (“CRV”) is a Boston-based venture-capital firm. Founded in 1970 to commercialize research out of MIT, it’s one of the oldest venture funds in the U.S.
Like all venture firms, CRV raises money from a variety of investors, then invests it into a portfolio of private startups in hopes of generating big returns.
But this week, the firm is doing something unusual. It’s returning its investors’ money.
Let’s see why.
Late-Stage Startups vs. Early-Stage Startups
In 2022, CRV raised $500 million to invest in a specific type of startup: late-stage startups.
Late-stage startups are still private companies. They don’t trade on a stock exchange. But they tend to be proven businesses that are already generating significant revenues. They already have considerable traction.
This traction makes them less risky to invest in than early-stage startups. But as investors, we pay a price for this lowered risk: lower expected returns!
You see, late-stage startups often have sky-high valuations. As just one example, a private AI startup called OpenAI just raised money at a $157 billion valuation. That makes it 50% more valuable than Intel — and it hasn’t even gone public yet!
The problem is that “buying high” like this, when valuations are already so rich, can limit your profit potential. (This is why Crowdability focuses on early-stage startups — their valuations are still low, so they have the biggest profit potential. More on this in a moment.)
This limited profit potential is a big reason why, just two years after raising $500 million in capital, CRV is returning more than half of it — $275 million — to its investors.
CRV realized that many of the late-stage startups it wanted to invest in were raising funds at valuations that would cap its profit potential. For example, if you invest in a startup that’s valued at $10 billion, it would need to be acquired or go public at a value of $100 billion for you to make 10x your money. (10x is the target for all of our startup investments.)
When they calculated the likelihood of making great returns from these late-stage deals, CRV’s partners decided they should bail. As Saar Gur, one of CRV’s partners said, “The data just [didn’t] support [investing in late-stage deals].”
That’s not to say that CRV is abandoning startup investing...
On the contrary, it’s eager to do more startup investing. But now it’s adopting a different strategy — one you might already be familiar with…
The Early Bird Gets the Profits — From 10x to 750x to 2,000x
The same year it raised $500 million for its late-stage fund, CRV raised a billion dollars for its early-stage fund.
As you learned a moment ago, early-stage startups have lower valuations — and, therefore, far higher profit potential.
To put it into perspective, consider this:
In 2009, a fund called Digital Sky Technologies invested in Facebook when it was a late-stage startup. At that point, it was valued at ten billion dollars. So when Facebook IPO’d three years later at a $104 billion valuation, Digital Sky pocketed 10x its money. Not bad.
But a venture firm called Accel Partners invested in Facebook at a far earlier stage — when it was valued at just $100 million. When Facebook IPO’d, Accel made 750x its money. It turned a twelve-million-dollar investment into nine billion dollars.
And if you’d invested in Facebook even earlier, like angel investor Peter Thiel?
Thiel made 2,000x his money. That’s enough to turn $5k into $10 million.
Give Yourself a High-Five
During a recent meeting, CRV’s partners explained their decision to scale back their late-stage investing in favor of investing earlier. As Murat Bicer, a CRV partner, told the New York Times, “We got literal high-fives in the meeting.”
As a Crowdability reader, you should be getting some high-fives, too.
You’re already learning about the benefits of investing in startups at their earliest stages — while they’re still on the ground floor, so you can maximize your profit potential.
Looking for deals to invest in?
Check out our weekly “Deals” email, which we send out every Monday at 11am EST. It contains a handful of early-stage startups that are raising capital.
Happy investing!
Best Regards,
Editor
Crowdability.com
