Venture Populist

Angel and venture investors in startups and early-stage companies frequently have the option to determine the extent to which they intend to contribute intellectual capital, beyond their financial commitments. “Value-added” private venture investors often lend their business skills, resources and rolodex to their interests, helping the company solve tough problems, prioritize objectives, build a great team and even seek out strategic partners and potential customers.   Equally compelling to... more

  In short-sighted efforts to convey the accrued wisdom and tenets of their craft, venture investors occasionally declare their due diligence dogmas by way of the fallacy of false dilemma…a distorted line of reasoning where an outcome must be the result of either of two options. Often referred to as “black and white reasoning”, a false choice is offered up between two scenarios when in fact many more scenarios are probable.   Our false dilemma du jour is; which venture investment in a startup... more

In our previous post (Let It Be) we noted that Senator Chris Dodd’s financial reform bill that is on the way to the House floor contains new provisions that would reduce the number of individual eligible to invest in private ventures. The original draft of the bill would increase the $1 million net worth threshold that defines an “accredited investor”, which in turn determines an individual’s eligibility to invest in exempted private securities offerings under Regulation D of the 1933 Securities... more

Senator Chris Dodd looks determined to leave his last term in office with a dubious legacy – his sponsorship of the Restoring American Financial Stability Act of 2010  which passed the Senate Banking Committee on a party-line vote  on its way to the House floor.   Dodd’s 1,336-page reform bill seeks to address the timely and substantive need to police abusive and unfair terms for mortgages and other financial products, the “systemic risks” inherent in derivatives such as credit default... more

Private venture investors consciously embrace the notion of swapping liquidity and safety of principal in the pursuit of positive asymmetrical outcomes and the higher risk premium associated with venture capital. Against the certainty of uncertain outcomes, the venture investor accepts liquidity and principal risks as the apropos quid pro quo towards achieving high double-digit and triple-digit IRRs on investment.   But, venture investors too willingly accept the notion that their investments outcomes... more

The common and conventional wisdom of venture investing is populated with a myriad of musty and meaningless maxims that do little to develop due diligence deft. The list of utter untruths include little tarradiddles such as the purported prerequisite that a start-up must draft a comprehensive business plan when seeking financing (wrong), or that there must a clearly defined exit strategy (also wrong).   The often cited notion that the entrepreneurs have material amounts of their personal cash... more

  I have noticed that VCs tend to talk to the public and with their peers more about their home runs than their strike outs. Angel investors, on the other hand, prefer to relentlessly revisit their pain—often comparing their battle scars like veteran samurai. Probably because angels put up their own capital. Because they truly do eat their own cooking it’s harder for angels to forget their fallen soufflés.   VCs achieve their highs from the opium of OPM…so even a bad trip is still a free... more

Contrary to conventional cliché, there is very little that is binary about venture investing outcomes. It is not just feast or famine. Rather, outcomes are diverse and asymmetric. You can lose your entire investment, just lose a portion, break even, receive periodic distributions producing double-digit IRRs or achieve exits at 5X, 10X, 20X multiples or greater on your initial investment.   What does appear to be binary is the manner in which prospective investors in private ventures perceive the... more

One of the few commonalities among the thousands of VCs and angel investors is the consensus that the process of identifying an attractive private venture investment is “part art, part science”. The art part speaks to the inherent absence of certainty with respect to any venture’s viability. There are no absolute truths…no bankable checklist to follow that ensures a successful outcome for a private venture investor.   The science part? That’s simply hindsight, which of course is an exact... more

As my career has been largely devoted to the intersection of money management and venture finance, I am no stranger to the independent RIA universe.   I have worked with dozens of wealth managers and family offices that regularly evaluate and allocate to private venture investments. Although they represent a fraction of the RIA universe, they are invariably among the most successful of their peers. These progressive wealth managers represent the primary audience of this blog.     I regularly... more

Private investments in venture and early-stage companies are characterized by their potential for positive asymmetrical outcomes (PAO). The risk of losing the entire investment is offset against the potential for high-multiple ROIs. But asymmetric outcomes refers to more than the non-linear relationship between risk and return…it also refers to the appeal of investments where multiple liquidity and exit outcomes are possible.   This is often referred to as optionality…current knowledge of the... more

Our recent proclamations that “MPT failed” have elicited a distinctively binary response from wealth managers and investment advisors. I have both the commendatory and the castigating emails and comment board posts that prove it.   While many IAs responded enthusiastically, a seemingly larger pool of advisors continue to cling desperately to their discredited diversification dogmas hoping that investors may not have noticed the failure of their advisor’s mantras and models even as last... more

 In my last post I introduced an alternative asset-allocation approach for investors that no longer subscribe to the discredited models of traditional (strategic) asset allocation, Modern Portfolio Theory (MPT), Efficient Market Hypothesis and what pedestrians refer to as “buy-and-hold”  investing.   This new portfolio construction approach, Hybrid Portfolio Theory, is a unique and timely portfolio construction methodology that is distinctly disparate from MPT in that it employs two distinct... more

This presentation introducing Hybrid Portfolio Theory was introduced in a 6.17.09 webinar hosted by Investment Advisor magazine and sponsored by Ameritrade that was attended exclusively by investment professionals. The investor’s overall hybrid portfolio benefits by assuring that the vast majority of assets are not exposed to a downright bad wager relative to risk-free or short-term assets, as well as, unpredictable (yet, frequent) black swan events that decimate investor portfolios.         Album:  ... more

  There is a better way to build investment portfolios than the methods presently employed by most investors and advisors.   Perhaps that is hard to imagine seeing as how well we have been served by Modern Portfolio Fallacies and the Efficient Market Hypocrisies, but if you have an open mind, there is a strong chance that these portfolio construction principles will resonate with you…particularly on the heels of what we have learned from the half dozen market meltdowns experienced since ‘87.   I... more

The Black Swan by Nicholas Nassim Taleb holds its own among the most important investment books ever written. In it, Taleb argues persuasively that any sensible long-term strategy in a world dominated by extreme and unpredictable (black swan) events has to accept, and even embrace, that very unpredictability. It is poignant and timely advice for any investor and a must-read for investment professionals. I met Taleb for lunch at Bice in NYC one afternoon about three years ago while I was heading... more

                  Broker Model Needs Repair (Financial Post) “By charging you 1% annually to manage your money, a large portion of your wealth ends up in his or her pocket.”   Financial Advisers Face a Crisis of Confidence (Investment News) “About 80% of affluent investors — that is, those with more than $500,000 in investible assets — are disgusted with their adviser because their adviser is spooked”     Album:   Read All About It, The Newsboys, 1988 AKPC_IDS... more

In prior posts I have taken swipes at traditional asset allocation, buy-and-hold investing, the Efficient Frontier, the Efficient Market Hypothesis and Modern Portfolio Theory (MPT).   Sure, I am trying to be provocative, poke a little at advisor complacency and provoke polemic on the comment boards…but I am also sincere. MPT relies entirely on investment history for investment analysis and conclusions. These tired and discredited methods are rubbish…and have cost investors trillions.   It... more

The May issue of Atlantic Monthly features the cover story, “Why I Fired My Broker“, which mulls the misgivings of middle and upper income Americans contemplating the consequence of their investment advisor relationships. Like so much of the new populist propaganda…it isn’t pretty for advisors. In a video interview about the column, Jeff Goldberg, the article’s author, describes garden-variety vendors of investment advice as, “…these Jiffy Lube kind of places.... more

An opinion poll that is currently posted on Investment News asks advisors, “Do you think the market downturn has created a lost generation of investors?” It is a thought-provoking question as investors of all ages (and ironically, of all risk tolerances) have seen portfolios reduced by as much as one half of their peak value. Have these investors lost a generation of opportunity that they can never recover? The answers tallied thus far are as provocative as the question and may suggest... more