Maximilian Schroeck, David Mes: Venture Capital’s “J” Curve Becomes A “W”


Bid farewell to the Venture investment “J-curve,” the notion that a venture fund has to suffer through negative returns in the early years before progressively yielding positive returns and generating liquidity in the outlying years. These days, VC funds and their investors have to deal with an even more challenging reality: a “W-curve.”

Venture-backed companies currently average more than eight years from initial VC funding to liquidity event, and many take longer. As short-term economic cycles typically span five to seven years, companies can expect to go through at least one economic downturn before a liquidity event, frequently leading to a W-shaped venture investment curve.

Implications for the VC industry and VC-funded startups are manifold. The combination of economic downturns and reserve-strapped VC funds has thrown a plethora of companies and their financial backers into an illiquid private company purgatory. LPs are growing impatient and frustrated with the resulting W-curve fund valuation seesaws. Further exacerbating this is the large number of illiquid assets in old funds and the resulting fund extension requests at a time when the LPs face liquidity pressures.

The W-curve reality has led GPs toward two diametrically opposed strategies for building and funding private technology companies. On one hand, investors aim to accelerate investment cycles by heavily capitalizing presumed winners in select momentum sectors, forcing market leadership and growth within shorter time frames. On the other hand, capital efficiency is the battle cry. Startup companies get institutional money later and must do more with less to build their businesses, often through outsourcing, business partnerships to access markets and publicly funded R&D.

These strategies ignore a large number of mature venture-funded companies that have solid businesses, but which may be stuck in “less fashionable” sectors than social networking or mobile commerce. These companies are often thinly financed and have survived one or more economic and investment cycles. While some will get rolled up in aggressively funded consolidations, many stand alone, trying to grow and find an exit.

While some of these ventures may have missed the window of opportunity to fundamentally disrupt their target markets, most can be monetized through solid trade sales if infused with a little more capital to maintain technological relevance and expand market presence. In addition to new equity, which typically will allow for additional debt leverage, these companies often require an unlocking of their cap tables and a re-alignment of investor interests to facilitate the path to exit.

While some later-stage, value-oriented investors are starting to take note, this “third way” of venture investing has been pursued mostly by secondary direct VCs, such as Cipio Partners. Arguably, the venture industry lacks a broader set of “turn-around” investors willing to put in the work necessary to unlock the value trapped in aging venture funds, and in the process generate low risk, predictable returns for LPs that have grown weary of venture investing’s W-curve.

(Maximilian Schroeck (pictured top) is a managing partner at Cipio Partners. David Mes (pictured above) is a senior principal at Cipio Partners)

Photos courtesy of Maximilian Schroeck and David Mes.