If venture capital is the key to riding the Data Supercycle, then early-stage venture is the sweet spot to focus the allocation. In this post, we’ll examine why focusing on seed and early-stage startup investments (as opposed to late-stage or “growth” rounds) is a savvy strategy in a period of rapid innovation. The logic is simple: when a transformative wave is gathering, the biggest leaps in value accrue to those who get in at the ground floor of new ventures.
First, let’s clarify terms. “Early-stage” typically refers to funding young companies in their formative years – think pre-seed, seed, or Series A, where businesses are still proving their product-market fit. “Growth-stage” or late-stage investing (Series B, C, D, pre-IPO rounds, etc.) involves putting money into companies that have already scaled significantly and are closer to exit. Both have roles in a portfolio, but in a supercycle scenario, early-stage holds distinct advantages:
- Greater Potential for Outsized Returns: Early-stage investments, by nature, come in when valuations are low and uncertainty is high – exactly when upside is greatest. If you invest in a startup valued at $10 million and it becomes a $1 billion company, that’s a 100x return. Those opportunities are abundant in the early phases of a tech supercycle, when thousands of experiments are underway in garages and labs. By contrast, growth-stage deals might get in at valuations of say $500 million hoping to exit at $5 billion – a 10x at best, often much less by the time dilution and high entry prices are factored in. Some of the most spectacular venture returns in history have come from investing at very low entry valuations in what turned out to be transformative companies. The Data Supercycle will produce similar stories.
- Less Competition and More Differentiation: In the current environment, growth-stage opportunities have become competitive commodities. By the time a startup is a “hot” late-stage prospect, dozens of large funds, hedge funds, or even sovereign wealth funds are often vying to invest. This competition drives up valuations sharply (diminishing future returns) and often turns later funding rounds into mere capital deployment exercises rather than value discovery. We saw this vividly in 2020-2021 when mega-funds were pouring money into any unicorn at high prices – the result was many growth deals that delivered mediocre returns or even losses once the market corrected. Early-stage, conversely, is where venture investors differentiate themselves by sourcing unique deals and adding value. It’s less crowded (in terms of capital per deal) and alpha – the ability to beat the market – is higher. The best early-stage investors can identify promising founders and technologies before they become obvious, allowing entry at sensible valuations.
- Resilience in Downturns and Exits Flexibility: A perhaps counterintuitive point: early-stage portfolios can be more resilient in tough markets than late-stage ones. Why? Early bets have long runways and low initial costs; if a recession hits, those startups can hunker down and pivot without the pressure of an imminent IPO or overhang of a sky-high valuation needing justification. Late-stage companies, in contrast, might face a “valuation overhang” problem – if they raised at $5 billion and can’t go public above that due to a market dip, they’re stuck or may require painful down-rounds. Early-stage companies have more options (including being acquired at modest sizes which can still yield excellent returns for seed investors). In fact, data from 2024 shows that early-stage venture was more insulated than late-stage during the market slowdown: a majority of exits were modest (<$100M) acquisitions, which continued even when IPO markets were closed. Early backers still profited from these smaller exits. Meanwhile, many late-stage “unicorns” have been stuck in limbo, unable to go public or exit at their last-round valuation. Additionally, early-stage venture funds typically deploy capital over years and can pace investments when markets are more favorable.
- Alignment with the Innovation Timeline: During a supercycle, the most groundbreaking innovations start small. Novel applications of new technology – whether a new AI model, a novel data platform, or a paradigm-shifting biotech – often emerge from tiny startups focused on a specific sector or industry. By engaging at an early stage, investors can support and shape these applications from inception. Think of early venture money as the nutrient that helps nascent applications blossom. By the time a company is late-stage, the core innovation is already realized and it’s mostly about execution scaling – important, but the rate of innovation (and thus valuation step-ups) slows.
Of course, early-stage investing is higher risk deal by deal – many startups fail and return nothing. It requires patience (often 7-10 years to see full results) and skill in picking winners. However, when a supercycle tide is rising, the overall odds improve.
For family offices, the takeaway is to lean into early-stage opportunities as part of your venture allocation. This might involve investing in specialist seed funds, participating in angel or seed rounds directly (if you have the expertise and access to the best deals), or backing venture firms with a track record in early-stage company building. It means accepting a bit more short-term volatility in exchange for long-term asymmetrical returns. One might allocate a portion of the venture budget specifically to seed-focused managers or deals, and a different portion to later stage deals. But the emphasis, in a supercycle, should tilt toward the origin of innovation.
Finally, early-stage investing isn’t just about money – it can be an exciting way for family offices to engage with cutting-edge innovation. Many families enjoy interacting with founders, learning about frontier technologies, and even contributing expertise or connections. It’s a way to keep the family’s knowledge base evolving alongside the world, and engaging the next generation of family stewards. The process can be both financially and intellectually rewarding.
In the next installment, we’ll explore another critical dimension: who should manage these early-stage and venture investments. Specifically, we’ll make the case for nimble emerging funds as ideal partners in a supercycle – those boutique venture firms that have the agility and hunger to surf the supercycle (and often, the focus on selling the “picks and shovels” that support a gold rush). These emerging managers frequently outperform their larger peers, and in a supercycle environment, their flexibility can be a major asset. Let’s dive into why smaller is often better in venture.