Random investment in startups performs better than Dragons’ Den

Research puts venture capitalists in a dim light, as spreading investments gets better returns than choosing growth companies

Investing in a random group of fast-growing firms could secure better returns than companies backed by the famous Dragons’ Den entrepreneurs.

Publicly reported investments made by Dragons’ Den celebrity judges – including Deborah Meaden, Peter Jones and Theo Paphitis – in 2011 and 2012 grew at an average rate of 16 per cent up to this year, according to online investment platform Syndicate Room.

However, if the dragons had invested in every UK startup which either raised seed or venture capital in 2011 – a group of 506 companies — they would have seen average growth of 29 per cent per year to 2018.

This 28 per cent figure also outperforms the average returns made by venture capitalists who invested in companies within the group.

Analysis of investments made in 2011 within the group showed that only 38 per cent of UK VCs outperformed the wider group as a whole. This suggests that most venture capitalists would be better off picking their investments at random, rather than trying to pick the ones they think will succeed.

Syndicate Room co-founder Tom Britton said: “This research further highlights the importance of diversification – it’s one of the most powerful tools any startup investor can use.”

An investor who backed the group with £10,000 eight years ago would have made £72,800 in the years since, the research showed.

Britton added: “But what has surprised us most are the returns that our simulation of 30 plus completely blind investments often produced.

“Just like exchange-traded funds and index funds made public markets accessible, I’m really excited to see the profound effects that radical startup diversification will have on the venture capital industry.”

Given that a large and broad group of startups outperforms the Dragons and most venture capitalists, Syndicate Room says that a startup index fund would be the answer to investors’ prayers. However, because achieving access to the whole startup market or even a perfectly random selection is impossible, Syndicate Rooms suggests co-investing with networks of startup investors.

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