Memo 7: The Perils of Early-Stage Tech Investing
Editor’s note: This memo is the first in a three-part Harvesting Alpha series on capital allocation.
It examines the enduring allure and the frequent disappointment of early-stage technology investing. In particular, it explores why even sophisticated investors struggle in this asset class, how incentives and structure matter more than intellectual property, and when venture capital exposure may, or may not, be appropriate.
Subsequent memos will place venture capital within a lifecycle framework and examine how portfolios can fail quietly through correlation, liquidity mismatches, and timing risk.
A case study: brilliance without a business
Early in my venture capital career, we evaluated a potential investment to be spun out of a leading MEMS (micro‑electromechanical systems) research group at one of London’s most prestigious universities. The science was impressive. The researchers were undeniably talented. The laboratory output was world‑class.
Yet when the discussion turned to commercialisation, the business model broke down. The scientists had no coherent platform strategy, no unified vision linking the innovations, and no credible path from one-off products to scalable (and saleable) business.
These engineers desperately wanted to start a business, however, what became clear was that they were actually wanting to learn how to become businesspeople, using our investor capital as tuition fees! In effect, they wanted to do an MBA by trial and error, funded by others.
We declined the opportunity. Not because the science lacked merit, but because scientific excellence alone does not create a viable business.
What elite venture capitalists actually do differently
Later in my career, during my time in venture capital and private equity, I was fortunate to visit several offices of ARCH Venture Partners in the United States, one of the most successful deep‑tech and life sciences venture firms globally, with deep roots in the University of Chicago’s technology transfer ecosystem.
ARCH Venture Partners has been an early backer of a number of companies that are now household names in modern biotechnology and health technology. These include
Illumina, whose DNA sequencing platforms underpin much of modern genomics; Alnylam Pharmaceuticals, a pioneer in RNA interference-based therapeutics; GRAIL, a leader in multi-cancer early detection through blood-based screening; and newer platform businesses such as Denali Therapeutics, Sana Biotechnology, and Beam Therapeutics, which sit at the frontier of genetic and cell-based medicine.
What matters about these examples is not their eventual valuations, but the common pattern behind them.
Several consistent lessons emerged from my time with ARCH and examining how they operate and lessons learned.
First, incentives dominate outcomes. Academic founders are rarely motivated primarily by financial return. Their incentives are aligned to research output, publications, laboratory expansion, and scientific impact. Successful venture investors explicitly price this reality.
Second, true technological validation comes from peers, not promoters. ARCH routinely seeks input from competing researchers and industry scientists, often those best positioned to be skeptical, before committing capital.
Third, platforms outperform products. ARCH favours technologies that enable multiple downstream products and applications, rather than single‑asset companies dependent on one commercial outcome.
Finally, elite venture investors rarely invest alone. Co‑investment with other highly specialised funds deepens diligence, reduces blind spots, and builds long‑term reciprocal deal flow.
The mathematics of venture outcomes
Venture capital returns are not evenly distributed. They follow a ‘power-law’, meaning outcomes are dominated by a very small number of extreme winners.
In practical terms, a typical venture portfolio of ten investments often looks something like this:
1 or 2 investments generate the vast majority of returns.
3 or 4 produce modest outcomes, perhaps returning capital or a small multiple.
The remainder fail outright and are written off.
This pattern is not an exaggeration. It is a structural feature of the asset class. [1]
The implication is uncomfortable but important. Venture returns are not driven by being “right more often than wrong.” They are driven by owning the few rare outliers that work spectacularly well and owning them in sufficient size to matter.
For individual investors, this structure creates a structural disadvantage. Without broad diversification and access to outlier successes, the probability of permanent capital loss is high.
Investing in venture funds: the selection paradox
Recognising the challenges of direct early-stage investing, many investors sensibly turn to venture capital funds instead. In theory, this offers diversification, professional selection, and access to opportunities that would otherwise be unavailable.
Yet this introduces a different problem. Even experienced venture capitalists struggle to identify which early-stage companies will become meaningful winners. Outcomes are driven by rare, unpredictable successes rather than consistent incremental gains. If picking the right companies is difficult for specialists working full-time in the market, selecting the right venture funds becomes a second-order challenge.
Historical data suggests that only a minority of venture funds generate strong outperformance and persistence across fund vintages is far from guaranteed. For private investors, this makes fund selection as critical as asset selection and often just as opaque.
None of this means venture funds should be avoided. It does mean that manager selection, access, and portfolio sizing matter far more than the narrative surrounding any individual fund. Venture capital rewards exposure and patience, not precision.
Time horizons and life-stage alignment
Early-stage technology investing places unusually high demands on time. Capital is often committed for many years, liquidity is uncertain, and outcomes can hinge on factors well outside an investor’s control.
For investors in their thirties and forties, this can still be workable. With time on their side, modest and well-diversified venture exposure can sit alongside other assets as part of a long-term wealth-building journey. Setbacks can be absorbed, and the occasional success has time to compound.
As investors move closer to retirement, the same exposure can feel very different. Long lock-ups, uncertain exit timing, and limited ability to redeploy capital may clash with a growing need for flexibility and predictability. Nothing about the asset class has changed, but the investor’s constraints have.
This is not a judgement on venture capital. It is simply a reminder that assets should serve the investor’s stage of life, not the other way around.
Ego, signalling, and the cost of being early
It is also worth pausing to ask a more personal question: why does early-stage technology investing appeal to us so strongly?
For some, the motivation is thoughtful and deliberate: a desire to support innovation, participate in long-term growth, and allocate capital patiently. In those cases, venture investing may have a role.
For others, the attraction is more subtle. Being “early” can feel validating. It can signal insight, access, or sophistication. But venture capital is an unforgiving arena for these motivations. The asset class does not reliably reward intelligence, effort, or conviction, instead it rewards exposure to rare outcomes over long periods of time.
When early-stage investing becomes a way to express identity rather than manage risk, the line between investing and speculation quietly blurs.
Capital allocation, at its best, is not about being right. It is about aligning incentives, structure, risk, and time.
Closing reflections
There is a time and place for early‑stage technology investing. But it demands humility, patience, and structural discipline. Without these, investors may find themselves funding education rather than outcomes. Venture capital and early‑stage opportunities promise more than returns. They offer intellectual stimulation, the appeal of backing innovation, and the psychological reward of being ‘early’. These motivations are deeply human however they can be costly if not examined carefully.
The next memo will place venture capital within a broader lifecycle framework, examining where it belongs, where it does not, and how capital can be aligned more intelligently with objectives.
Selected references
1. Hall, B. H., & Woodward, S. E. (2010). The burden of the non‑diversifiable risk of entrepreneurship. American Economic Review.
2. Lerner, J., Nanda, R., & Schoar, A. (2016). The consequences of entrepreneurial finance. Review of Financial Studies.
3. Korteweg, A., & Sorensen, M. (2010). Risk and return characteristics of venture capital‑backed entrepreneurial companies. Review of Financial Studies.
4. Gompers, P., Kaplan, S., & Mukharlyamov, V. (2016). What do private equity firms say they do? Journal of Financial Economics.
[1] Sahlman, W. A. (1990). The Structure and Governance of Venture-Capital Organizations. Journal of Financial Economics.