Welcome to Big Bets, a special series of "Small Bets" that breaks down later-stage investing concepts.

Big Bets is brought to you by Jamie Melzer and Katie Nowak of HF Scale Partners. HF Scale invests in pre-IPO venture-backed technology companies through primary rounds and secondary transactions.

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Let's start with a risk recap—then a plot twist!

In our first Big Bets, we talked about the concept of risk in investing. We introduced the risk curve and where venture capital sits on the curve.

On the extreme right of the risk curve, venture capital has the widest range of possible outcomes (risk) and the highest potential returns compared to other investments you could make.

Remember that? Great, because today we have a plot twist for you.

Not all venture capital risk is created equal 🤔

To better understand, let’s time travel back to the early days of the industry. Traditional venture capital was what we’d call a cottage industry (super niche). A relatively small number of investors deployed hundreds of millions of dollars a year in total.

Founders like Steve Jobs and Bill Gates built early tech startups out of their garages in Silicon Valley. Early angel investors helped fund the start-up costs until the company was big enough to access other sources of capital, like through an IPO. These early angel investors started institutionalizing their funds so they could back more of these early-stage companies. Funds like Kleiner Perkins, Sequoia, Bessemer, and Accel started out in the 1970s and ’80s, and they’re still big names in venture capital today.

Today, early-stage venture capital looks similar. It has grown dramatically in terms of the number of funds and the amount of capital available to be allocated, but it is still largely the same concept and risk profile as when venture investing started.

We aren’t in the 1980s anymore

At the same time, times have changed, and so has the venture capital landscape. From its humble origins, the industry has ballooned in size, propelled by a combination of low interest rates and quantitative easing, enticing investors to chase higher returns up the risk curve.

The movement of funds up the risk curve means plenty of capital is available to companies in the private markets. They now receive funding from growth equity funds, late-stage venture capital funds, crossover funds, and strategic investors.

Companies don’t need public markets as much as they used to for liquidity.

Companies can stay private for longer

In the mid-2000s, the average venture-backed company went public after 5.5 years with an average valuation of ~$200M. Companies like Amazon and Netflix went public at sub-$500M valuations. (Today, those companies are valued at $1.8T and $244B, respectively—most of which accrued to public market investors.)

Today, venture-backed companies stay private for an average of 13+ years, with valuations averaging ~$3B at IPO. The most notable venture-backed companies (e.g. Uber, Snowflake, Airbnb) IPO’d at valuations of >$30B.

In short, companies staying private for longer means bigger valuations. It also means these companies are derisking in private now instead of in public.

Aging with grace (and less risk)

As a company grows, it inherently de-risks through established revenue, customer retention, margin expansion, and profitability. What we call scaling.

A start-up with $1M in revenue (early stage) looks very different from a company with $100M in revenue (growth stage). Both of those companies look very different from a company with $1B in revenue that has reached profitability (late stage).

So, venture capital now spans a wide range of stages and risk profiles. How do venture capital investors assess the risk and expected returns across these different stages of a company's life cycle?

Glad you asked!

In our next Big Bets, we will break down how early-stage vs growth-stage vs late-stage investors think about returns, risk profiles, and more.

See you next month!

Jamie + Katie

Big Bets is brought to you by Jamie Melzer and Katie Nowak of HF Scale Partners. HF Scale invests in growth and late-stage venture-backed technology companies through primary rounds and secondary transactions. Want to learn more? You can find us here.

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