Portfolio Construction in Venture Capital

Lessons from public markets

May 2021. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • A few winners generate most of the venture capital returns
  • Given this asymmetrical return distribution, portfolios should be constructed equally
  • Missing the winners is simply too risky


2020 turned out to be a record year for the venture capital industry, despite the global pandemic. More than 12,000 investments were made into early to late-stage start-ups at a combined value of $166 billion, according to data from PitchBook. 2021 started even better due to the boom in IPOs, SPACs, and direct listings, which created substantial wealth for the founders and business angels of companies like CoinBase or Roblox that went public. Many of these early investors are now thinking of compounding their newly created wealth by becoming venture capitalists themselves.

However, becoming a successful venture capitalist requires more than just having money. Setting up the legal structures is relatively straightforward, but access to deals is critical for achieving returns better than what the stock market offers. Fortunately, having created or made money by investing in start-ups that became public companies, which is often the ultimate dream when building a business in a garage, makes such first-time venture capitalists attractive to the next generation of founders (read Venture Capital: Worth Venturing Into?).

Another challenge is to create a sound asset allocation framework. Investments in start-ups can be weighted by the venture capitalist’s conviction, or equally. In practice, it is also a function of the deal flow and the financing requirements of start-ups.

There is no data on venture capital investments publicly available that allows analyzing these two allocation frameworks, but we can use public markets data to do so. It will not be an apples-for-apples comparison, but it will hopefully provide food for further thoughts. In this research note, we will muse on how to optimally construct a venture capital portfolio. 


We will use US-based biotech stocks as proxies for venture capital investments. These stocks are highly risky and many of them go into bankruptcy