25 Years of Outperformance: A Comparative Analysis of US Venture Capital vs. the S&P 500
Over the last quarter century, the US economy has seen immense innovation, volatility, and transformation—particularly within the technology and startup ecosystems. Venture capital has played a crucial role in this story, backing many of the world’s most successful companies from their earliest stages. Meanwhile, public market benchmarks like the S&P 500 have offered broad exposure to U.S. corporate performance. But how have these two asset classes stacked up against each other over a 25-year horizon?
Using data from Cambridge Associates, this analysis explores the performance differential between US Venture Capital and the S&P 500 across multiple timeframes and methodologies. The results are striking: venture capital not only significantly outperformed the public markets, but the power of compounding made the difference exponential over time.
Methodology
Two methodologies were used to assess the performance of private equity and venture capital investments relative to public equity markets:
AACR (Average Annual Compound Return): Measures the return as if capital had been continuously compounded, directly comparing venture capital returns to a buy-and-hold strategy in the S&P 500.
mPME (Modified Public Market Equivalent): This approach matches the timing and size of venture capital fund cash flows to hypothetical investments in the S&P 500, effectively correcting for the "J-curve" and uneven capital deployment typical in VC. This makes it a more apples-to-apples comparison of capital efficiency and return.
By layering these methods, Cambridge Associates paints a fuller picture of venture capital’s relative performance, adjusting for both return timing and capital pacing.
Performance Over 25 Years
With a 25-year lens, US Venture Capital delivered a 14.3% compound annual growth rate (CAGR) compared to 7.4% for the S&P 500. When extrapolated into dollar terms from a $1,000 initial investment, the results are dramatic:
An investment in venture capital yielded nearly 5x more than the same investment in the S&P 500 over 25 years.
Shorter-Term Performance
Venture capital’s dominance isn’t confined to the long term. Even in shorter horizons:
10-Year AACR: VC (14.8%) vs. S&P 500 (10.3%)
15-Year AACR: VC (12.3%) vs. S&P 500 (8.4%)
20-Year AACR: VC (14.3%) vs. S&P 500 (7.7%)
The gap in performance consistently widens with time, emphasizing the compounding advantage of higher long-term growth rates.
mPME Performance Comparison
The mPME method, which more accurately mirrors capital deployment timing, shows similar trends. For instance:
Nasdaq Constructed mPME 20-Year Return: 12.6%
CA US Venture Capital 20-Year Return: 12.3%
Despite the inherent risk and illiquidity, venture capital still compares favorably—even against a tech-heavy benchmark like the Nasdaq.
Why Does Venture Capital Outperform?
Several factors contribute to VC’s long-term outperformance:
Access to Innovation: Venture capital enables exposure to transformative companies long before IPO, when much of the value appreciation occurs.
Inefficiency in Private Markets: The lack of immediate mark-to-market pricing allows for more fundamental investing and less speculation-driven volatility.
Asymmetric Returns: A small number of breakout startups drive the majority of gains, offering exponential upside not typically available in public equities.
Operational Involvement: VCs often take board seats and play an active role in shaping outcomes, potentially improving portfolio company success rates.
Opportunity Cost of Avoiding Venture Capital
The chart visualizes more than just return—it reveals the opportunity cost of not allocating to venture capital. An investor who committed $1,000 to the S&P 500 in 1999 would have just under $6,000 by 2024. The same investment in US venture capital? Over $28,000.
That 4.74x differential is not just a number—it’s a signal. For institutions, family offices, and high-net-worth individuals with long investment horizons, not allocating at least a portion of the portfolio to venture capital could represent a significant foregone opportunity.
Considerations & Caveats
While the long-term returns are compelling, venture capital is not a universally suitable investment for every investor:
Illiquidity: Funds often lock up capital for 10+ years.
High Dispersion: The average is driven by top quartile funds. Median performance may underwhelm.
Manager Selection: Returns are concentrated among a small group of elite managers—access matters.
J-Curve: Early negative returns followed by gains can be psychologically and operationally challenging.
These caveats underscore the importance of careful diligence, diversified fund-of-fund models, or accessing top-tier VCs through secondary or managed vehicles.
Implications for Asset Allocators
For institutional investors, family offices, and sophisticated retail participants, this 25-year study supports the thesis that venture capital belongs as a core part of a diversified long-term portfolio. While public markets offer liquidity and stability, venture provides unmatched exposure to growth.
Key allocation strategies may include:
Core-Satellite Approach: Use venture capital as a high-growth satellite to a core of liquid, lower-risk assets.
Vintage Year Diversification: Spread commitments over time to manage cyclicality.
Fund-of-Funds or Secondaries: Gain diversified exposure and reduce access risk.
Pension or Retirement Vehicle Integration: For long-dated capital like pensions or defined benefit plans, venture capital can be a compelling return-enhancer.
Final Takeaway
The data tells a clear story: over the past 25 years, US venture capital has massively outperformed the S&P 500. With a CAGR of 14.3% versus 7.4%, the compounding effects over time resulted in a 4.74x outperformance on an initial $1,000 investment.
This retrospective is more than a look in the rear-view mirror—it’s a call to action. If the next 25 years of innovation are anything like the last, access to venture capital isn’t just an advantage. It may be essential for outperforming traditional asset classes. Thanks to Steve Kim for his analysis.