Time and cash
The J-curve
Why a portfolio looks worse before it looks better, and how to tell an ordinary J-curve from a portfolio that is genuinely not working.
Plot the value of a venture portfolio against time and the line usually falls before it rises. Fees and early write-offs arrive first; the gains arrive years later. The resulting shape is the J-curve, and it is a structural feature of the asset class rather than a sign of poor selection.
For an angel the curve is shallower than for a fund, because there are no management fees dragging the early years down. It is still there, driven by the timing of failures against the timing of exits: losses resolve in years three to six and successes resolve in years seven to twelve.
The practical importance is psychological. The bottom of the curve is where angels quit, and quitting at the bottom means paying for the losses without collecting the gains.
The shape and its causes
Three things create the curve. Losses resolve faster than wins, because failing takes two to four years and succeeding takes eight to twelve. Early valuations are conservative, because marks are set by the last round rather than by any assessment of progress. And any fees or carry in a syndicated structure are charged before any gains arrive.
The result is a portfolio that shows a declining paper value through the middle years while the underlying position is improving. The companies that will produce the return are quietly compounding and being carried at their last round price, while the ones that failed have been written to zero.
| Year | What has happened | Reported value |
|---|---|---|
| 1-2 | Capital deployed, some up rounds | Around cost or slightly above |
| 3-5 | Failures resolve, winners carried at last round | Below cost — the bottom of the curve |
| 6-8 | First exits, winners raise at higher prices | Recovering |
| 9-12 | The largest positions resolve | The result, whatever it is |
A constructed illustration of the pattern rather than a projection of any actual portfolio.
Telling a J-curve from a failure
Both look the same on a value chart, so the distinction has to come from the underlying companies rather than the number.
A healthy portfolio in the trough has surviving companies that are growing, raising at higher prices from new investors, and reporting regularly. The write-offs are companies that failed, not companies that went quiet. There is at least one position that could plausibly become very large.
A portfolio that is genuinely not working has surviving companies that are flat, raising only from insiders at the same or lower prices, and reporting erratically. Nothing in it has outlier potential. The distinction is usually clear once you look at the companies rather than the total.
Living with it
Do not mark your own portfolio frequently. Private company values are set by financing events that happen every eighteen to twenty-four months, so a quarterly valuation exercise generates anxiety without generating information.
Do keep deploying through the trough. Vintage diversification is one of the few genuinely free improvements available, and stopping in the middle years concentrates your capital in whatever the market was doing when you started.
And judge the portfolio on the surviving companies rather than on the number. In year four the number is a statement about which outcomes have resolved, not about what the portfolio is worth.
In short
What to take away
- Expect the portfolio to look worst in years three to five. That is the structure, not a verdict.
- Judge the trough by the health of the surviving companies, not by the total value.
- Keep investing through the middle years — stopping concentrates your vintage exposure.
- Mark rarely. Frequent valuation of illiquid positions produces anxiety, not information.
From the decoder