Venture capital can be a daunting asset class to analyze. If you are familiar with private equity, you are probably used to judging a company based on detailed financial modeling. With venture capital deals, the numbers and parameters you have for mature companies just don’t exist yet. That doesn’t mean that you can’t conduct a thorough analysis of a company before investing. What it does mean is that you need to have a formal and disciplined process for due diligence that is tailored specifically to early stage companies and startups.
If you are looking into venture capital as an investment opportunity, you are likely aware of other options like private equity and real estate. While these alternative asset classes share some similarities (illiquidity, long investment holding periods), there are distinct differences in structure and investment strategy that are important to consider as you dive into venture capital investing.
One major challenge when investing in venture capital is to remember to stay patient when facing a timeline that could take years to see positive cash flows. This illiquidity is mainly due to the amount of time it takes a startup to go public or even get acquired.
In venture capital, returns follow the Pareto principle - 80% of the returns come from 20% of the investments. Early-stage venture capital firms have often been attractive to investors, providing lower valuations with the opportunity to obtain significant equity ownership in portfolio companies.
In today's Topic of the Month, we take a deeper dive into the numbers posted for a couple investments prior to their IPOs and acquisitions.
How do you positively involve members of an upcoming generation, varying in age and interest levels, in the family office?
There is an often a huge barrier to involving the next generation in the family office or investment business. Incorporating venture capital as a key facet of one's investment strategy engages and informs younger family members to become more involved in the business and leads to a smoother transition in the future.
The venture capital industry has been a catalyst for innovation and job creation in the United States and around the world. Over the last couple of decades, venture investments in innovative companies have been instrumental in providing insights into public market trends and future public equity investment opportunities.
With the acceleration of innovation and availability of capital, the longevity of successful companies has never been shorter. In 1964, the average tenure of companies in the S&P 500 was approximately 33 years. As of 2016, that number has decreased to 24 years, and S&P 500 forecasts the average shrinking further to just 12 years by 2027.
The boom in single-family investment offices is being fueled not only by the tremendous worldwide increase in private wealth, but also by the desire of families to acquire independence and have more say in the decision-making than they currently have.
Different ‘flavors’ of family investment offices exist today – some are ‘single-family’ offices investing on behalf of one wealthy household and its descendants, while others might aggregate the wealth of ‘multi-family’ clients. These structures are typically set up to manage inter-generational wealth creation and management, with some more legally elaborate and structured than others that rely on the decision of (typically) one principal.