Mastering the venture playbook: Five key success factors – and how to apply them today
For institutional investors, venture’s return potential is best accessed through early-stage exposure, a focus on quality density, smart diversification, and disciplined investing across cycles.
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Key takeaways:
- Venture capital is arguably more important than ever in the current market.
- Venture performance has been strong over the long-term – and the coming years could provide strong vintages in which to invest.
- Investors need to be able to spot the red flags of hype cycles and exuberance that can inflate valuations in specific periods and within specific segments.
Schroders Capital believes there is a playbook of five key factors for investors:
- Focusing on earlier-stage rounds.
- Building exposure around a core of high-quality funds and managers.
- Enhancing direct exposure via secondaries and co-investments.
- Diversifying smartly across managers, sectors and geographies.
- Maintaining discipline and investing through the cycle.
- The current market could yield attractive opportunities to execute on this playbook.
Why venture matters
In today’s volatile and uncertain world, venture capital matters more than ever. It plays a critical role in driving innovation and economic growth. Moreover, in an era of rapid technological advancement and disruption, innovation is increasingly multi-polar and is happening at an unprecedented pace in a number of top hubs around the world. This creates diverse and compelling opportunities for investors.
In short, venture provides access to the growth success stories of tomorrow – high-potential companies that are not accessible in public markets. Over the long term, this has consistently translated into strong returns.
The Cambridge Associates Venture Capital Index, which measures annualised returns across the market and compares these to public market equivalents, has outperformed the S&P 500 and Russell 2000 index over 10, 15 and 20-year time horizons, only dipping slightly over a 25-year horizon that captures returns during the dotcom bust. Against the MSCI Europe it has outperformed over all long-term horizons.
Venture returns have been less stellar over recent, shorter time horizons, reflecting a boom in 2021-2022 driven by exuberance related to Covid-era tech and biotech investments, which gave way to a major dip in later-stage valuations in subsequent years. This correction has contributed to an attractive, less inflated entry point for venture investors today.
Venture performance has been strong over the long term
Past performance is not a guide to future performance and may not be repeated. Source: Cambridge Associates, March 2025. Underlying data from Cambridge Associates, Frank Russell Company, MSCI, S&P Dow Jones Indices and Thomson Reuters Datastream. Venture Capital Index is a horizon calculation based on data compiled from 3,356 venture capital funds, including fully liquidated partnerships, formed between 1981 and 2025, and is net of fees, expenses, and carried interest. All public market indices shown are CA Modified Public Market Equivalent (mPME) calculations, which replicates private investment performance under public market conditions. The public index’s shares are purchased and sold according to the private fund cash flow schedule, with distributions calculated in the same proportion as the private fund.
In an effort to capture this return potential, venture has become an integral part of institutional portfolios. Indeed, large institutional investors typically allocate between 20–25% of their private equity programme to venture capital.
The coming years may provide strong vintage years for investors to deploy to venture capital, with potential for a rebound in deal activity, recovering valuations, and improving exit markets. In particular, the debut of advanced AI systems like ChatGPT in late 2022 has unleashed a new wave of innovation and investor excitement in artificial intelligence (AI).
At the same time, venture firms themselves are navigating a more selective fundraising market amid a tighter liquidity environment. Investors have become more cautious due to broader portfolio markdowns and liquidity constraints, leading to a 33% year-over-year drop in new venture capital raised by funds in the first half of 2025.
We believe this dynamic – abundant innovation and potential investment opportunities on one hand, and constrained capital supply (certainly outside of key themes such as AI – more on this later) on the other – is the headline story in venture today, making investing in the segment a particularly attractive proposition.
Five success factors for institutional investors
We believe there is a playbook of five critical success factors for institutional investors allocating to venture capital to maximise potential to capture outsized returns, while mitigating risks.
1. Prioritise early-stage and emerging themes
Seed and Series A rounds typically offer lower and more stable entry valuations (see charts below), greater innovation exposure, and stronger long-term return potential. Success in these earlier-stage segments depends on continually identifying and backing the next waves of disruption early, not backing yesterday’s winners.
Early-stage valuations are materially lower than later-stage
Greater stability in valuations for early-stage vs late-stage rounds
Past performance is not a guide to future performance and may not be repeated. Source: PitchBook Data, Inc. as of 23 August 2025, Schroders Capital, 2025. Figure 5 shows change in pre-money valuations, rebased to Q3 2020.
2. Concentrate on quality density
A critical driver of venture outcomes is the quality of the venture managers and deals an investor can access. The venture market’s return distribution is heavily skewed: top-tier funds consistently outperform, and they are often the ones backing the eventual breakout companies of new innovation waves.
As a rule of thumb, an institutional programme might build a “core-satellite” mix: a core comprising 10–15 established, top-tier venture firms globally, combined with a few carefully chosen emerging managers that have distinctive expertise or access.
3. Access outstanding companies through multiple avenues
Investing via secondaries and co-investments can increase concentrated exposure to the most promising and fastest-growing start-ups, and enhance the overall efficiency of deployment. Each avenue serves a distinct but complementary role in the portfolio – but must be approached selectivity, and with a cautious eye on cyclical dynamics.
4. Diversify smartly
“Smart diversification” in venture capital operates on multiple levels: number of investments, variety of sectors and themes, range of managers, and geographical spread. The goal is to avoid heavy concentration in any single company, fund, sector or location that could turn out poorly, and to increase the chances of identifying the big winners wherever they arise.
5. Stay disciplined through cycles
Venture is a long-term, inherently cyclical asset class, making it easy for investors to be swept up by waves of euphoria or fear. Discipline is therefore key – but, crucially, the form that discipline takes varies by investment type.
- Fund commitments (primaries): For primary fund investments, which are inherently diversified, the key is to deploy capital across vintages in a consistent manner.
- Secondaries and co‑investments (directs): Being cognisant of where we are in the cycle matters much more for direct investments, given that these are more concentrated. At times of frenzy, investors might reserve dry powder – and at some points in the cycle, it might be beneficial to be a seller rather than a buyer of secondaries.
Making a venture programme successful today
To build a successful venture investment programme today, institutional investors should apply the above playbook in a nuanced way, seizing the unique opportunities of the moment while being alert to risks that have arisen from the recent cycle.
1. Stay early-stage
The “boom-bust” cycle of the past few years has reset the playing field advantageously for new investments. Specifically, we believe the best opportunities continue to be found in earlier stages; valuations for late-stage rounds have come down significantly from 2021 highs, but are once again rising.
2. Capitalise on opportunities to add quality…
Concurrently, investors must navigate a challenging fundraising and liquidity climate. In common with wider market trends, US venture fundraising in 2023 fell to about $67 billion – the lowest in six years – and this retrenchment has continued through 2024 and into 2025 (see chart), weighing more on emerging and mid-tier managers. Leading franchises remain access-restricted, though LPs may see occasional openings.
Venture and growth fundraising has remained subdued
Past performance is not a guide to future performance and may not be repeated. Source: Preqin Pro. Data as of 5 August 2025, Schroders Capital, 2025. Includes closed funds only. Data grouped by the year in which the fund held its final close. Fund count includes funds with undisclosed final close fund size. The views shared are those of Schroders Capital and may not be verified. There can be no assurance that any objective or intended outcome will be achieved.
Therefore, a venture programme should lean into maintaining or expanding commitments to quality GPs, even as others pull back. This might involve re-upping with existing managers at similar or higher levels, and being ready to step into any allocation gaps left by more constrained LPs.
LPs should also remain open to adding emerging managers, but as noted earlier extreme selectivity and deep due diligence remain paramount.
3. … and to double-down on high potential opportunities
The current secondary market can help lift programme returns, but it requires caution. Reports point to a large overhang of assets from liquidity-driven sellers, often at double-digit discounts. Meanwhile, late-stage valuations – especially in AI and driven by non-traditional capital sources – have risen again.
This mix makes outcomes more uneven and calls for strict price discipline, careful bottom-up diligence, and close review of valuations and terms before investing in secondaries.
On the co-investment side, conditions are supportive, but the same caution applies: price discipline, bottom-up diligence, and close review of valuations and terms – round structure, preference stack, dilution, and governance – are essential prior to committing.
4. Continue to diversify smartly
Maintaining geographic and sector diversification remains important in the current environment. Meanwhile, sector dynamics are diverging. AI is booming and other technology segments continue to benefit from durable secular tailwinds; on the other hand, biotechnology and life sciences have experienced a marked slowdown in funding and valuations (see chart), creating contrarian entry points into a segment supported by long-term growth drivers and healthy exit routes.
Biotech VC market cooled further, opening contrarian opportunities
5. Remain disciplined
Discipline is the thread that connects this playbook. With late-stage valuations – particularly in AI – rising while fundraising and exit indicators remain mixed, the appropriate stance is steady, programmatic deployment with a clear pacing framework.
For late-stage exposure, accessed via co-investments or secondaries, investors should seek to avoid situations where valuations reflect inflated euphoria or sit materially ahead of fundamentals, proceeding only where pricing and terms are appropriate for risk.
Click below to read the full, detailed analysis containing further insights into our playbook themes and how to apply them in the current market.
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