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Using Token Incentives to De-Risk Venture Capital Investing for LPs
Venture capital is a high-risk high-reward game.
The vast majority of a fund’s return will typically be generated by several companies in a portfolio of 100 investments. And the vast majority of companies will go to zero, be sold for parts, or become also-rans.
But with the S&P500 offering a predictable but modest 10.5% average return, investors who want to see their money work harder turn to venture funds where the typical annual return sought is 20% or more. Most venture funds aim to generate a 3X return on funds invested after 7 to 10 years.
Whether they do or not is another story, and in the current climate of soaring inflation, fiscal tightening, and economic recession, startup valuations are being marked down, and with them, the projected returns of numerous venture funds.
This is especially true for growth funds that invest late in a startup’s lifecycle, nearing liquidity events such as an IPO or a high-profile private sale. Softbank’s Vision Fund, for example, just posted a record investment loss of 3.5 trillion yen (about $27 billion) for its latest fiscal year — although this is not entirely attributable to market conditions. ahem.
