Financial Dynamics of VC Funds- “the J curve”
In this brief, we wish to address a phenomenon in the industry known as “the J curve” - a term commonly used to describe the tendency for investors in closed-end funds to experience negative returns in the early years of a fund's life, particularly with primary (newly formed) fund investments.
In more detail- when a VC is launched, it takes time(2-3y) to screen and invest in promising startups. During this period, the fund is incurring expenses such as salaries, legal fees, and due diligence costs before generating any returns or value rise in the portfolio companies.
Additionally, the startups the fund invests in take time to mature and become profitable. However, once these startups begin to take off, the fund's returns will increase, represented by the upward slope of the J curve.
The good news about theDOCK Navigator II fund is that following the seed round in Wisor, and more notably the follow-up round in Harbor lab (which will be reflected in the next unaudited H1 2023 report), we anticipate better behavior than average with the “short leg of the J-Curve.”