Venture Portfolio Optimizer model

Underlying assumptions and outcomes

Equitybee's VPO (Venture Portfolio Optimizer) Model is a proprietary rules-based model designing investment strategies with broadly diversified access to the venture ecosystem. Powered by Monte Carlo simulations, the model provides an ideal venture portfolio size (120+ companies) and mix (mostly late-stage) to optimize exposure to the startup industry’s high growth potential, while minimizing downside risk. This innovative approach unlocks a passive, largely diversified investment concept for venture markets, notorious for its opaque and uneven information environment.

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Investment thesis

1) Looking at Venture Capital (VC) as an asset class, the top-quartile VCs have outperformed public equities (represented by the NASDAQ Composite Index®) over the last ~20 years achieving 20.9% IRR¹ . A model built on portfolio companies backed by top-quartile VCs has the potential to outperform the Nasdaq.

¹ Source: Pitchbook, Yahoo Finance as of Q3 2023. VC performance by vintage; Nasdaq performance adjusted for vintage year comparison. Past performance is not indicative of future success.

2) Research shows that larger portfolios (at least 100 holdings), have a higher probability of outperforming portfolios with fewer holdings, while also having a lower dispersion of returns (as measured by standard deviation). This aligns with our findings upon running simulations with varying-size portfolios.

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*Source: Power Laws in Venture Portfolio Construction.

3) By leveraging the fundamental structural advantage afforded by Equitybee’s existing offerings (i.e., investment access to startups via funding employee stock options), the Model assumes (i) access to nearly any startup company, (ii) deeply discounted entry prices w/ downside risk mitigation, (iii) the necessary infrastructure to source qualifying deal flow, and (iv) seamless deployment of capital at scale.

Proprietary Multi-trial Simulation Model

Methodology

Utilization of Extensive Data

The VPO model incorporates data from over 10,500 VC-backed exit events, covering nearly two-thirds of the U.S. VC-backed ecosystem² between 1999 and 2022. This comprehensive data enables the model to perform robust, historically informed simulations, thereby enhancing its reliability.

² Source: Equitybee research based on Crunchbase data

Sophisticated “Monte Carlo” Simulation Approach

To assess the probability of a variety of outcomes, we randomly generated 20,000 individual portfolios across a spectrum of market conditions. This extensive testing allows us to refine investment strategies, tailoring the portfolio mix and assumptions with greater precision.

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Model Assumptions

The following assumptions when building the model:

Number of investments = 120+

Based on our proprietary model and 20,000 iterations, larger portfolios tend to (1) increase the likelihood of generating higher returns and (2) decrease the dispersion of returns.

Investment Period = up to 24 months

(which is less than half the typical duration of traditional VC portfolios)

Fund life = 5 years

(which is half the typical duration of traditional VC funds)

Portfolio construction

Upon simulating model returns generated by different combinations of portfolio mixes across different company stages (i.e., Series A, B, C, etc.), it became clear that the Optimal Portfolio Mix³ is underweight early-stage and overweight mid-to-late stage investments.

The Optimal Portfolio mix strikes a balance between maximizing growth while minimizing losses, which, in turn, translates into (1) a higher likelihood of generating higher returns and (2) a lower dispersion of returns.

³ The Optimal Portfolio Mix is defined as one that maximizes returns and minimizes dispersion (i.e., standard deviation of returns).

Market Data

Data points

10,500 VC-backed exit events in the U.S

Timeframe

Between 1999 and 2022

Data covered

4.6k+ startup companies (~66% of the US VC-backed ecosystem⁴)

⁴ Source: Crunchbase

View model outcome results

The Venture Portfolio Optimizer is provided by Equitybee Advisors, LLC. Equitybee Advisors is an exempt reporting adviser, providing investment advisory services solely to private funds. Investing involves risk, including the risk of loss. Indexes and the Venture Portfolio Optimizer are unmanaged; one cannot invest directly in an index or model. Return data represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Equitybee is not affiliated or associated with, or endorsed by, any of the companies mentioned herein and the information included has not been checked or confirmed in any way by the same companies. All service- or trademarks are the property of their respective owners.