What Forrest Gump teaches you about venture capital

Forrest Gump teaches us that venture investing is like a box of chocolates, says Matthew Partridge. You never know what you're going to get.

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Forrest Gump is a comedy-drama film based on the 1986 novel by Winston Groom. Forrest Gump (Tom Hanks, pictured) is a nave, kind southerner who gets caught up in key moments in US history, such as teaching Elvis how to dance, and accidentally bringing down Richard Nixon.

Thanks to some good fortune, combined with genuine bravery, Gump becomes a war hero, star table-tennis player, famed marathon runner and multi-millionaire. He also marries his childhood sweetheart Jenny (Robin Wright).

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The key moment

After leaving the army, Gump becomes a shrimp fisherman with Lieutenant Dan Taylor (whose life he saved in Vietnam). They eventually make a fortune from their fishing venture and Lieutenant Dan invests their profits "in some kind of fruit company" which turns out to be Apple. Gump gives half his profits away, but returns are so huge he is still left with a fortune.

Lessons for investors

In real life, the initial "seed" money to set up Apple came from Mike Markkula, who bought a third of the company for $250,000, shortly after it was founded in 1977. By the time the company was floated three years later, his 7.5 millionshares were worth over $203m.

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But venture investing is like a box of chocolates, as Gump might have said "you never know what you're gonna get". You might, like Gump, get a delicious slice of Apple. You might, however, just as well end up stuck with the last coffee cream in the box. Since a high proportion of start-ups fail, most early-stage capital is provided by venture-capital funds, which pool investors' money in a portfolio of fledgling unlisted firms, hoping to make a large profit when they are listed (or bought by other companies) that covers for the flops.

Venture capital can be a lucrative long-term investment. Advisers Cambridge Associates estimates that between 1987 and 2017, venture capital funds had an average net return nearly double that of the stockmarket. But don't expect to make an easy fortune there are large variations in returns between individual funds and over individual years. Over the last ten years, venture capital has lagged the market. And most venture capital funds require a minimum investment of $500,000 or more, although you can get exposure more cheaply by buying shares in listed venture capital trusts.

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