Hedge Your Bets with Venture Capital

Activist Hedge Funds

Not Even Activist Hedge Funds Are Winning Big in Recent Years

Professionally Managed, Early-Stage Venture Capital Looks Like a Better Long-Term Choice

In today’s tough investment climate, it’s not easy to find reliable paths to strong long-term growth. So much has been written about activist hedge funds and their wealthy leaders – like Carl Icahn, William Ackman, and Barry Rosenstein – that I assumed these guys were winning big and that investors in their funds could feel confident of big gains. I was surprised to learn that these funds in fact are not doing so great these days. My conclusion: the best path to strong long-term growth is investment in substantive innovation, which to me means early stage venture capital.

The activist hedge funds apparently were big winners years ago, hence their founders’ personal fortunes. However, it looks like there may now be just too many dollars chasing not enough great ideas and so, of necessity, some pretty questionable ideas too.

Based on data from Forbes and The Wall Street Journal, the activist hedge funds have grown dramatically over the past dozen years, from $12 billion in 2003, to $51 billion in 2011, to a stunning $122 billion by the 3rd Quarter of 2015.  The Wall Street Journal, citing an index tracked by Hedge Fund Research Inc., reported that the average activist hedge fund returned just an estimated 1.5% after fees during 2015, versus a 1.4% return for the S&P 500, and that 2015 was the third consecutive year of declining returns.

Forbes.com was even harsher in a November 5, 2015 report, writing that “their ideas aren’t working and some of the companies they all but control are floundering.” As a former Fortune 500 corporate officer, I feel somewhat vindicated personally, as I wondered why the activist leaders, who are undoubtedly smart and diligent, were necessarily that much smarter and more effective than us corporate types. Their heralded strategies often struck me as just moving around the ship’s deck chairs, still leaving the same number of chairs on the same ships.

Based on my 40+ years of experience, the most likely path to significant long-term growth is substantive innovation addressing customers’ real problems, needs, and wants – truly creative destruction and construction, not just moving around the deck chairs. During the 21st century, that has generally meant high tech, whether information technology, biotechnology, or some other substantive technological breakthrough. Yes, sometimes the big winners are just simple marketing ideas that capture and better address consumer needs or emotions, but proprietary technology that delivers truly important benefits is a better bet.

While technological advances are often achieved by major corporations, there is a whole world of startups funded by early stage venture capital investors dedicated to this winning formula. I’d urge caution, though, as there are literally thousands of startups looking for funding, and a number of online “crowdfunding” firms have sprung up recently raising funds for literally dozens if not hundreds of such startups. Such limited discrimination is unlikely to achieve the results savvy investors seek. Just as my career experience taught me that innovative new product development is most productive when managed professionally, beginning with probing market research to hone in on the best opportunities, so too early stage venture capital investing is most productive with similarly professional practices.

I must admit, until 2014 I was not at all into venture capital.  Then, fortunately, I heard from one of my Harvard Business School classmates, Len Batterson, who has pursued a career in early stage venture capital investment. I’m pretty cautious (some accuse me of being a “belt-and-suspenders” type), and so, notwithstanding our Harvard Business School connection, did some careful research on his performance record before even considering investing.

I discovered that his track record has been…and continues to be…remarkable. His success rate – i.e. ventures in which he invested that had a positive return – is around 40%, incredible for early stage venture capital.  Over his 30+ years (he did some other things his first 10 years post- MBA), his funds have averaged annual returns of approximately 29%. And that was before his latest success, the acquisition of Cleversafe by IBM in November, which undoubtedly drove that return rate even higher.  Even his poorest performing fund returned an average annual return from 1989 through 2000 of about 13%.  That’s remarkable consistency. That’s what I look for as an investor who seeks long-term growth but is inherently conservative.

So if you’re looking for long-term growth, and your perspective is truly long-term (say 10 years or so), I’d give Batterson a serious look. His existing fund is Batterson Venture Capital (www.BattersonVC.com). His latest fund, which combines his team’s professional management with online accessibility, convenience, and efficiency, is about to launch.  It is called VCapital (www.VCapital.com).

Add Your Comments