Do Venture-Backed IPOs perform better than the general market?
Yes and no.
To answer this important question, PitchBook developed the “Venture IPO Index”.
Index Methodology: Newly listed companies are included in the Index in the next quarter after their IPOs — thus eliminating the huge first-days trading valuation’s gains which are common nowadays (for instance, BigCommerce’s stock has recently gained 290% on its first day of trading) — and stay included for two years.
In addition, PitchBook has chosen to compare the performance of VC-backed companies against the S&P 500 and the Russell 2000 Growth “to provide one look at a standard measure of the market as well as one index that is a closer approximation to companies with venture backing”.
Bigger is better?
To add the size dimension in the analysis, PitchBook designed two indices: (i) a market-cap-weighted index and (ii) an equal-weighted index. For instance, Uber, with a market cap of over $ 50 billion, would then have a big participation in the market-cap-weighted index and would count as just one (as any other company) in the equal-weighted index.
Let the numbers speak:
Q2 2020 index performance comparison: 1-year; 5-year; 10-year
Market-cap-weighted index: 78.0%; 5.6%; 9.2%
Equal-weighted index: 76.7%; 23.5%; 23.7%
S&P 500: 15.1%; 10.3%; 13.4%
Russell 2000 Growth: 11.4%; 7.1%; 12.1%
1) The equal-weighted index vastly outperforms the market-cap-weighted version over long-term time horizons, indicating that smaller IPOs have driven a substantial amount of sustained performance. The blockbuster IPOs that attract the most media attention and raise the most money usually produce lackluster performance, probably because much of the value has already been factored in by VCs, leaving less opportunity for price appreciation in the public market
2) The equal-weighted index outperforms, by twice as much!, the S&P 500 and the Russell 2000 Growth
If tech Venture-Backed IPOs have been delivering such magnificent returns, just imagine the returns to Late Stage VC investors!