We are currently headed into the greatest acceleration of innovation that mankind has ever known. From AI to robotics to space travel and more, it’s certainly an exciting time to be alive. Venture Capital, the source of investment for “moonshot” disruptive startups, is the tip of the spear when it comes to progress. Companies like Apple, Amazon, Zoom, Tesla, Spotify, Airbnb, Facebook, Twitter, and SpaceX were all funded by Venture Capital. There are hundreds more that have transformed our daily lives, all thanks to the bold risk-takers in Venture Capital.
Although a subset of Private Equity, Venture Capital firms are quite different. Whereas traditional private equity tends to focus on established companies with significant revenue and profits—i.e., good companies that can be made better—Venture Capital typically directs investment to early stage private companies that have little to no revenue, but big potential to disrupt the status quo.
However, investing in startup companies, which are prone to failure, is a high-risk endeavor. It is often said that about one in ten venture investments survives. Therefore, most high-net-worth individuals have an average of 1%–5% of their portfolio in venture capital. Some certainly have more, but others choose to avoid it altogether as the odds of spectacular returns are slim.
Between 2004 and 2016, the top 10 percent of Venture Capital firms generated returns of 34% annually. This was the golden age, the era that gave us the invention of the iPhone, YouTube, Uber, and hundreds of other disruptive tech companies. The bottom 10% of venture firms lost money during this period, with average returns of negative -6.50%. The middle of the pack did not do much better than traditional stocks. The NASDAQ 100, which consists of the largest one hundred tech stocks, generated returns of just over 10 percent annualized while the median return for Venture firms was just over 12 percent (see figure below).
So when considering Venture Capital, one needs to be extremely prudent and fully understand the risks, the track record of the manager etc… At CAZ Investments, we seek partnerships with proven Venture Capital managers and typically look to participate in growth stage companies that are no longer startups and have a better chance at market disruption.
- Today, we are on the cusp of more groundbreaking, life-altering innovation. From artificial intelligence (AI), to robotics, to 3D printing, to astonishing advances in precision healthcare, the future is bright for mankind.
- A true strength of capitalism is that venture investors are willing to take massive risks on visionaries that will improve the quality of life for everyone, not only in America but around the world.
- Most high-net-worth individuals have an average of 1–5 percent of their portfolio in venture capital.
- Between 2004 and 2016, the top 10 percent of venture capital firms generated returns of 34 percent annually. The bottom 10 percent of venture firms lost money during this period, with average returns of -6.50 percent. The middle of the pack did not do much better than traditional stocks.