Would You Like Some HONEST Investment Advice?

To be clear, neither of your authors is suggesting that you should invest a large share of your net worth in venture capital. It is inherently a high risk/high reward potential proposition. You shouldn’t invest more in venture capital than you can afford to lose without meaningfully changing your life.

If you are an accredited investor, and most venture capital firms limit their investor rosters to accredited investors due to the strict restrictions in dealing with those who are not accredited investors, you should be able to risk, say, 5% of your net worth without potentially jeopardizing your financial health and future. If you’re not an accredited investor, the SEC limits your venture capital investments anyway, precluding you from taking undue risks in this asset class.

. . . (But) aggregate returns for the (venture capital) asset class have historically been outstanding, and there’s no sign that will change anytime soon.

This is demonstrated well by the Thomson Reuters Venture Capital Research Index, launched in 2012 to replicate the venture capital industry as a whole. Based on that index, venture capital investment has on average returned 19.7% per year since 1996, notwithstanding the 2000 dot-com collapse, versus modest single-digit returns for traditional equities and bonds.

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What It Means to Be an Accredited Investor

The SEC defines an accredited investor as: (1) an individual or couple with net worth, excluding their primary residence, of at least $1 million; or (2) an individual with an income of at least $200,000, or a couple with an income of at least $300,000, for the past two years and with a reasonable expectation of that continuing.

Being an accredited investor means you are well-off . . . not necessarily super-wealthy, but you do have some financial discretion. It also means that you’re allowed to invest in asset classes like venture capital and other private securities that, until recently, non-accredited investors were not allowed to invest in. Recent regulatory developments from the SEC now allow individuals who have not attained accredited investor status to invest in venture capital as well, albeit in very limited amounts.

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Why Returns from Hedge Funds and Private Equity Lag Behind Venture Capital

By the way, if you think you can out-fox the market by hitching your wagon to the hedge fund and activist investor icons, think twice. So much has been written about activist hedge funds and their wealthy leaders – like Carl Icahn, William Ackman, and Barry Rosenstein – that you may have assumed these guys were winning big and that investors in their funds could feel confident of big gains.

Some of the activist hedge funds 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 when so many dollars flowed into their funds, some pretty questionable ideas received investment dollars too. As a result, these funds are not doing so great these days.

. . . Here’s more surprising disappointment. Private equity funds aren’t doing too well these days either. Based on a white paper published by the Center for Economic and Policy Research, private equity funds’ performance advantage relative to the S&P 500 has been shrinking in recent years.

. . . Again, the problem has become too much money chasing after too few good deals.

. . . Importantly, venture capital is the lifeblood of major, fundamental innovation, the key to substantive economic growth. Think about the big business success stories of the past dozen years – Microsoft, Alphabet, Facebook, etc. All were spawned by venture capital investment . . . and there are many more that have not yet gone public and are still operating on their own as well as ventures that were acquired by established companies who recognized and valued their growth potential. As a result, aggregate returns for the asset class have historically been outstanding, and there’s no sign that will change anytime soon.

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What It Takes to be a Successful Venture Capitalist

Successful venture capitalists have intuitive and analytical skills. They must be able to assemble and digest large amounts of data – some precise but some pretty vague and incomplete – and integrate all that information in order to make seriously consequential decisions.

. . . The venture capitalist must often be a skeptic, as he is likely to reject a hundred deal opportunities for every one in which he invests funds. He also must temper the optimistic fervor of the entrepreneur. That’s important at the start in order to negotiate a good deal and then later to foster the entrepreneur’s management discipline and ensure the entrepreneur recognizes key risks and addresses them thoughtfully.

. . . Importantly, the venture capitalist must be highly knowledgeable about business development. That means sometimes being a patient nurturer of growth, but at other times being the impatient, sharp prod pushing the entrepreneur. Most people involved in business creation create just one business in a lifetime; the venture capitalist is involved in building many.

The venture capitalist must be an astute strategist. The ventures in which he invests are inevitably on the cutting edge of markets and technologies, so often those ventures need to make sharp strategic turns as more is learned. The successful venture capitalist must be able to participate in driving the venture’s strategic path.

Perhaps surprisingly, the successful venture capitalist must sometimes display exceptional operating acumen as well. While in most cases the venture capitalist will not get heavily involved in portfolio companies’ day-to-day operations, there are times when the VC must step in, right an errant venture ship, and spearhead the turnaround of a venture that still has valuable potential but has lost its way.

There aren’t many individuals who have all these tendencies and skills.

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Why Institutions Love Venture Capital

On average (venture capital) returns are terrific. That’s why most sophisticated pensions and endowments have come to the conclusion that allocating a portion of their total portfolio to venture capital (and other private equity investments, particularly when private equity funds were doing better) makes sense. Yale University’s endowment, often held up as a standard of investment excellence, has generated nearly a 30% average annual return on its venture capital and private equity investments since 1973. Their commitment is so great that the university has invested in a large satellite campus, west of Yale’s hallowed downtown New Haven, Connecticut campus, dedicated largely to scientific and technological research, has actively fostered entrepreneurial development in in its graduate business school, and has invested with thriving venture capital firms which have sprouted right in New Haven.

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How Venture Capital Can Help You Avoid Investment Mistakes

Too many investors “vote” repeatedly. They don’t practice the buy-and-hold discipline espoused by Mr. Buffet. On an average day, 3-4 billion shares change hands in NYSE composite trading. Even worse, too many investors rush in following market run-ups and then sell in a panic as prices plunge. In the midst of some recent volatility, small investors have even lost small fortunes simply waiting minutes for trades to be executed. High speed traders rely on split second moves.

Venture capital investment, on the other hand, is far less susceptible to short-term price and valuation fickleness. It is long-term by nature, not intended for short-term trading, so you’re unlikely to shoot yourself in the foot like you can do in the publicly traded securities markets. Its values are based more on a venture’s long-term financial valuation rather than on short-term market vagaries.

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How to Do Good AND Do Well at the Same Time

Often the best investments are those where the entrepreneur is way out on the leading edge of the possible. These break-out deals are generally priced right, with low early valuations/share price, and yet have the potential to disrupt or reinvent existing businesses and sometimes even entire industries.

These break-out developments represent potential opportunities for big profits while also often addressing a major problem or existing challenge to the health and welfare of our society. Solving big problems with disruptive innovation is the way to both riches and honor.

Northfield Laboratories, started just outside of Chicago in Northfield, Illinois, was such a company. In the mid-1980’s, the AIDS epidemic was ravaging society, threatening to move into the mainstream as a serious pandemic. It needed to be contained. It was determined that one major source of transmission was blood transfusions. An “artificial blood” was needed that would be totally sterile and guaranteed free of AIDS or other blood-borne diseases, could be used for any patient without having to match blood types, and could be priced competitively to current blood transfusions.

About a decade earlier, unaware of the AIDS epidemic to come, a U.S. Navy doctor and surgeon in Vietnam saw many soldiers and sailors die on the battlefield because there was not such a product, particularly one that would not require matching blood types. Such a product would be invaluable for urgent battlefield emergency care.

When the doctor returned from the war, he was determined to create such a life-saving blood product. He went to work, recruiting several researchers, funding product development through government and defense grants, and moving the development well along into animal trials. The emergence of the AIDS crisis gave the project even greater urgency.

The nascent team came to the attention of one of this book’s authors while I was a venture capital investor at the Allstate Insurance Company. . . . The Allstate Venture Capital Division would on occasion roll the dice on potentially break-away investments, particularly when there could also be a significant societal benefit. Northfield Laboratories was such an investment opportunity.

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VCapital New Investment Opportunities Webinar

VCapital is currently raising funds for two new investment opportunities: Camras Vision, a company which has developed a new device to treat Glaucoma, and The Padcaster, a company which has developed products to turn smartphones and tablets into mobile video production studios.

On November 15, 2017, at 2:00 PM CST, we will be hosting a webinar where the CEOs for each of the companies will be presenting. Please join us for this informative meeting on these two new opportunities.

Please register for VCapital New Investment Opportunities on Nov 15, 2017 2:00 PM CST at:

https://attendee.gotowebinar.com/register/661033374267671297

After registering, you will receive a confirmation email containing information about joining the webinar.
Sincerely,

Leonard Batterson
(312) 203-6820
lbatterson@vcapital.com

Jim Vaughan
(312) 450-4363
jvaughan@vcapital.com

How Venture Capital’s Riches Are Becoming Available to More of Us

Changes in the venture capital playing field will also contribute to making the coming years good ones for venture capital investors and great ones for entrepreneurs.

As we mentioned earlier, the accessibility of venture capital investment opportunities is becoming democratized. Today there are roughly a half million individual venture capital investors in the US alone, and that number should expand dramatically in the coming years.

Recently launched online venture capital portals have opened investment access to America’s estimated 10 million accredited investors (i.e. individuals and couples with net worth, excluding the value of their primary residence, of $1 million or more, as well as individuals with annual income of $200,000+ or couples with annual income of $300,000+). Further, the JOBS (Jumpstart Our Business Start-ups) Act allows venture capital firms to advertise to these accredited investors.

On top of that, regulations implementing Title III of the JOBS Act, enacted by the SEC in the spring of 2016, open venture capital investment access, albeit with tight limitations, to the rest of America too. These JOBS Act provisions should increase substantially the availability of venture capital investment dollars. What a great time to be an aspiring entrepreneur!

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You Can Find Great Venture Capital Investment Opportunities in Chicago

The Chicago area is a great illustration of the need for the right environment and what can happen when the entrepreneurial eco-system is built.

. . . Since the entrepreneurially challenged days in Chicago, many flowers have bloomed. In addition to the tech incubator 1871, run by visionary Chicago entrepreneur Howard Tullman, which now houses over 400 digital start-ups, a second large tech incubator, called Matter, has also emerged. Housed in the Merchandise Mart (built by retail pioneer Marshall Field), it supports about 200 start-ups focused on life sciences and biomedical. The major universities now all have courses in entrepreneurship, business plan competitions, associated venture capital investment firms often funded by university alumni, tech accelerators, and mentor and coaching programs. VC funds have also emerged for minorities, women, military vets and just about anyone with a good idea.

There is now substantial venture capital funding available in Chicago, and also coming in from both coasts and all around the country, as Chicago becomes more widely known as a center for tech and other innovation. Up until now, the start-ups spawned have been somewhat more modest, but Cleversafe, the first billion dollar Chicago-founded tech company funded by Chicago-based individual investors and VCs, has moved this city into the big leagues. The 80+ millionaires minted through IBM’s recent acquisition of Cleversafe are now reinvesting their gains in new Chicago-area start-ups — the virtuous cycle.

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