Advertisement

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.

929-Gumo-634
Forrest Gump: venture investing is like a box of chocolates...

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).

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.

Advertisement - Article continues below

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.

Advertisement
Advertisement

Recommended

Great frauds in history: Alexander Fordyce and shorting the East India Company
People

Great frauds in history: Alexander Fordyce and shorting the East India Company

Alexander Fordyce's disastrous shorting of the East India Company led to him bankrupting the private bank in which he was a partner.
12 Aug 2020
Too embarrassed to ask: what is a dividend yield?
Too embarrassed to ask

Too embarrassed to ask: what is a dividend yield?

Learn what a dividend yield is and what it can tell investors about a company in MoneyWeek's latest "too embarrassed to ask” video.
11 Aug 2020
James Montier: valuations are way too high
Investment gurus

James Montier: valuations are way too high

The market is completely discounting the risk to the economy and operating as if there is nothing to worry about, pricing in a V-shaped recovery, says…
10 Aug 2020
Don’t dump your dividends
Income investing

Don’t dump your dividends

This crisis certainly does not prove that taking regular capital gains is safer than relying on natural income from dividends.
10 Aug 2020

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Gold and silver have taken a vicious beating – is the bull market over already?
Gold

Gold and silver have taken a vicious beating – is the bull market over already?

The gold price has tumbled recently, leaving traders nursing losses – just a nasty correction or has the gold bull market run out of steam? Dominic Fr…
12 Aug 2020
Should you take advantage of the UK’s new breed of domestic holidaymakers?
Buy to let

Should you take advantage of the UK’s new breed of domestic holidaymakers?

With Britons choosing to holiday in the UK this year, the owners of the country’s holiday cottages are cleaning up. Should you buy in, too? Merryn? So…
10 Aug 2020