The #1 private venture investment resourceMy fear is that the sincere interest and obvious need to protect investors from these menacing mountebanks will give rise to regulatory overreach…that the earnest interest to reduce the oversight gaps that fraudsters freely operate in will inadvertently impair the ability of small businesses to finance their ventures.
“One of the more sophomoric shibboleths among venture investment evaluation criteria is the fictitious “first-mover advantage” (FMA). The naïve notion, which garnered its groupies during the dot-com delirium, suggests that the first entrant to a market space can fend off the followers and dominate the market for a material period of time. Fueled by VC funding and visions of carried interests, blind faith to this “first-to-market” fallacy financed many blow-outs and busts.”
“Positive assymetric outcomes are defined by the investment’s ability to generate high double-digit or multiples of return on investment, as can be achieved by successful investments in venture capital, private equity or direct (angel) private investment in start-ups, small business, private manufacturing business, private real-estate, private debt, franchises, operating cash-flow businesses, as well as, publicly-traded emerging growth companies and leveraged option strategies or highly-specialized investment strategies such as managed futures.”
Venture Populist was created for angel investors, family offices and investment advisors that seek to enhance their portfolio’s investment returns through allocations to private venture investments.
“Safety, liquidity, income and the probability of positive asymmetric outcomes are the most important criteria in building better investment portfolios.”
[click through for more]
The availability of risk capital for early-stage ventures has proven itself to be remarkably resilient. It has overcome the cycles and uncertainties of our economy, as well as, the myopic tax policies perpetuated by our partisan politics. But I foresee a fresh challenge to the startup ecosystem on the horizon—and it is the direct result of bad brokers, disingenuous dealers, unprincipled promoters and iniquitous issuers. The “bad actors” (to incite regulatory jargon) that I am referring... more
Forbes magazine recently decried the gambling mentality of the VC industry by likening it to “a lottery system where few make unbelievable fortunes while the rest lose someone else’s fortune”. If angel investors hope to avoid the same fate, they should strive to invest their capital (and negotiate their term sheets) in a manner that creates the opportunity for a greater range of investment outcomes than otherwise experienced by their VC counterparts. It is true that the VC business... more
In the State of the Union address earlier this year, President Obama acknowledged that “the true engine of job creation in this country will always be America’s businesses” and, that to spur the economy and job creation “we should start where most new jobs do – in small businesses” prior to declaring that we should “eliminate all capital gains taxes on small business investment”. The result of this effervescent yet evanescent evangelism? Our lawmakers deliberated and subsequently... more
Since 2002, I have been writing a monthly column on the alternative investments for Investment Advisor magazine. A couple of years ago we renamed the column Venture Populist and focused exclusively on issues the issues confronting family offices and angel investors that make direct investments in startups and early-stage private ventures. The column generates frequent inquiries from wealth managers as to what alternative asset classes or investment strategies may provide portfolios with risk-return... more
Last month I spoke on a venture capital panel at an alternative investment conference in Chicago. As the former head of alternative strategies for a well known investment management firm, I saw many old friends and familiar faces among the family offices, wealth managers and investment firms that were attendees and exhibitors. I also picked up on a chilling consensus that was apparent among the conference attendees…that the individual investor that has been fleeing from the public equities... more
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
Jeff Joseph, angel investor, venture catalyst, financier and libertarian-leaning managing partner of Prescient Advisors & Prescient Capital Partners.
