The J-Curve in venture capital. What is it?

Hello friends, and welcome to The Unsophisticated Investor! Brought to you by Scott & Rob, the founders of PitchedIt!

If you want to be one of the first to get access to some of the most exclusive private market investment opportunities in Europe, join our limited waitlist now.

Now, let’s get into it 👇

This week we’re diving into a fundamental concept in private markets: the J-Curve.

If venture capital (VC) is new to you, this is a term you’ll hear quite often, and understanding it will help you navigate the ups and downs of your private market investment journey…particularly the emotions! The J-Curve can be quite unnerving when first experienced but it’s a perfectly normal pattern that returns follow in VC, and other private market asset classes. 

So, what exactly is the J-Curve? Well, imagine a graph that starts low, dips even lower, and then takes a steep upward turn. The shape created resembles the letter “J” and fittingly describes the typical pattern of returns seen in many VC investments. Below is a humorous (but accurate) illustration of what a typical J-Curve looks like.

Phase 1: Negative returns

In the early years of building a VC investment portfolio, returns are usually negative. This is the period when you start investing your capital. Because VC investments are inherently risky, many companies in your portfolio will begin to falter or even fail. This is what leads to the initial losses, representing the bottom of the J-Curve. Typically, this period of negative performance spans about three to four years from when you start investing.

Phase 2: Stabilisation

After the initial decline we spoke about above, your portfolio should begin to stabilise. This happens because the companies that you invested in start to grow and become increasingly more valuable. As these companies continue to perform better, the overall returns on your portfolio start to improve. At this point the J-Curve starts to flatten out and eventually momentum begins to shift upwards.

Phase 3: Positive returns

The most interesting part of the J-Curve is, of course, the upswing. As you begin to exit your positions in the more valuable portfolio companies at a profit, your returns start to climb. This is when you start to see the positive returns you’ve been waiting for. The patience pays off and the returns can often be quite substantial, which we spoke about a couple of weeks ago. (The potentially unlimited upside of venture capital).

Why it matters

Understanding the J-Curve is absolutely critical for anybody who invests in VC. If you don’t, you’ll be in for a shock when you see the initial dip in your portfolio’s performance! The J-Curve emphasises the importance of patience, diversification, and long-term thinking. The initial negative returns can be unnerving, but understanding that this is a typical pattern can help you set realistic return expectations and prevent you from panicking prematurely.

Having a firm grasp of the concept will ultimately help you better appreciate the strategy behind VC investments and the value creation process that can lead to significant returns. Returns that have the potential to vastly outperform those found in public markets.

It’s important to note the J-Curve isn't a guarantee of returns. Every investment is unique and its performance will depend on a number of factors: strength of the management team, go-to-market efficiency, market conditions, etc. The J-Curve simply provides a useful framework for understanding the typical performance of VC investments over time.

What we’ve been working on at PitchedIt

• Lot’s of work on tracking portfolio metrics 🔎

• Improvements to projected returns charts 📈

• Finalising deal creation, evaluation and completion features 🛠️

• We’re speaking with some niche influencers who are passionate about investing to build our first affiliate partnerships 🤝

• More progress on some big brand updates 🤐

The Unsophisticated Investor is brought to you by Scott & Rob, the founders of PitchedIt. We’re both sick of private markets being a playground exclusive to the ultra-wealthy so we started a company to challenge the status-quo. PitchedIt’s singular focus is to unlock private markets for Millennial and Gen Z retail investors and help them build wealth through the highest performing private market opportunities.

Scott & Rob
PitchedIt Co-Founders