If entrepreneurs are the rock stars of the business world, venture capitalists are the promoters whose funding gets them onto the big stage. Huge brands we all know – from Apple to Zoom – would not have gone public without venture capital fueling their growth. Investors who get in on the early stages of the corporate lifecycle may stand to multiply their investments handsomely.
Locked out of the blue zone?
Most of us have unfortunately been locked out of opportunities to invest in the thousands of entrepreneurial companies with the potential for hugely outsized gains from their sales or IPOs. That leaves individual investors having to concentrate almost entirely on publicly traded stocks, missing out of the front end of the lifecycle — companies backed by venture capital.
GOOD NEWS: While you may never have the means to become a venture capitalist, there’s a way to access to this high reward potential. Read on to find out how. (Hint: it's called LDVIX.)
Who invests in Venture Capital?
Typically, three parties participate in a venture capital (VC) deal.
Investors put up the money. Often considered “limited partners,” they fall into two broad camps:
Institutional investors, like college endowments, charitable organizations, governments, etc. who manage money for long-term growth.
High net worth individuals or family offices. They are accredited investors with sizable income and wealth, high risk tolerance and the ability to withstand long lock-up periods of their funds. They are also permitted to trade in illiquid securities.
Venture capital funds pool investor money in one fund to seek private equity stakes in companies. Venture capitalists pick the companies for the portfolio. Using a combination of analytical, business management and other relevant skills, they find and nurture high growth opportunities. These are some of the smartest, forward-thinking people with a knack for spotting future trends and successful businesses. They understand the high risks involved and aim to diversify their investments to mitigate risks. Think Shark Tank.
Private companies receive funding and guidance from the VC fund. These are start-ups and small- to medium-sized enterprises with strong growth potential that need cash to implement their business plan.
If the company successfully grows, it can eventually go public or attract a buyer. The VC fund then gets it share of the proceeds, takes its fees from the transaction, and returns the rest to the limited partners. Returns range from zilch to multiples of the original investment.
Other paths exist to own equity in a private company. Before seeking VC money, start-ups often get an initial injection of cash from individual “angel” investors and may go through rounds of seed capital raised from other sources.
What barriers shut individuals out of Venture Capital?
Historically, the traditional VC investing model only invites an exclusive club of investors. Consider the membership requirements.
Institutional and accredited investors only.
What's the minimum investment?
Starts around $1,000,000 and is often much higher.
How long is the investment?
7-10 year lock-up period.
What does it cost?
Typically there is a 2% management fee year over year, plus 20% of the capital gains go to the venture capital fund managers.
The average investor has had no access to VC funds for good reasons. Venture capital carries huge risks and investors must be able to withstand heavy losses. When young companies fail, entire multi-year investments can evaporate in a flash.
As former Shark Tank star Chris Sacca warns “Early-stage companies rarely succeed… don't invest money that you can't afford to lose.” Markets Insider
VC fund portfolios bet on relatively few companies, lacking the diversification you might find in a mutual fund or ETF. Also, no two VC managers will experience the same results, and there is no guarantee that past success will repeat itself.
Why do institutional investors love Venture Capital?
It’s remarkable to compare the differences between the portfolios of institutional and individual investors. Take the Yale Endowment, long revered as the gold standard for smart investing. Observe Yale’s 2021 allocation of nearly a quarter of its assets to venture capital and only 2.5% in U.S. equities.
The Yale Endowment turned the traditional formula of 60% stocks and 40% fixed income on its head, devoting nearly 3/4th of its allocation to alternative investment strategies in pursuit of growth and income independent of the broad markets.
How do you measure Venture Capital’s performance?
Unlike public companies, private businesses do not disclose their financials and don’t have tickers that quantify their daily value. Even so, benchmarks for the venture capital universe do exist.
Remember these letters: T-R-V-C-I. The industry’s first-ever investable venture capital index. (And this ticker: L-D-V-I-X.)
Thomson Reuters solved for this lack of information by tapping into its vast research database of financial information it receives from VC-backed companies. It aggregates otherwise hard-to-find data from upwards of 9,000 VC-backed companies to calculate the overall valuations and sector breakdown of these private firms. Too bad there is no way to directly invest in the companies in this exclusive database – after all, they are private companies, and no one will invite you to the equity table.
Here’s the ingenious solution. Thomson Reuters developed and launched the industry’s first-ever investable VC return tracking index by employing time-tested academic and empirical research toreplicate the overall performance of the VC universe through a portfolio of publicly traded stocks. The key is holding stocks that correspond to the sector breakdowns mentioned earlier. If you want to geek out,read about the methodology.
TheThomson Reuters Venture Capital Index (TRVCI)was launched in 2012 and has become one of the leading indicators of the performance of the broad U.S. venture capital industry. Not just the performance (or lack thereof) of one particular company, but rather the performance of the collective venture capital industry at large.
Actually, investors can access Venture Capital exposure!
The high financial commitment (time, money and fees) and the risks that keep non-accredited investors out of direct venture capital deals aren’t going away any time soon. But if you think about why we all invest – to grow and secure wealth for retirement and other future needs – what ultimately matters is risk-adjusted performance, not the exact way you invest. Do you need to pour money directly into pre-IPO companies to achieve their return profile?
“It’s hard for mutual funds to directly own venture capital or private equity in any size, but it can be done through fund replication, which mimics the aggregate returns of the alternatives.” Barron’s, Making the Case for Liquid Alts 2.0, April 2021
The advent of the Thomson Reuters Venture Capital Index opened a door for individuals to seek to replicate the historically outsized performance generated by venture capital as an asset class.
Only one FUND exists today that tracks the TRVCI index.
No eligibility restrictions
No high minimums
No high fees
No lock-up periods
No single manager or single company risk
Description of Indices
NASDAQ Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange. S&P 500 Index (Standard & Poor's 500 Index) is a market-capitalization-weighted index of the 500 largest publicly-traded companies in the U.S. Thomson Reuters Venture Capital Index (TRVCI) replicates the performance of the Thomson Reuters Venture Capital Research Index through a combination of liquid, publicly listed assets. The Thomson Reuters Venture Capital Research Index tracks the performance of the US venture capital industry through a comprehensive aggregation of venture funded private company values. The index is market cap weighted and published quarterly.
THOMSON REUTERS IS A REGISTERED TRADEMARK OF THOMSON REUTERS AND ITS AFFILIATES.THE AXS THOMSON REUTERS VENTURE CAPITAL RETURN TRACKER FUND (THE “PRODUCT”) IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY THOMSON REUTERS (MARKETS) LLC OR ANY OF ITS SUBSIDIARIES OR AFFILIATES (“THOMSON REUTERS”). THOMSON REUTERS MAKE NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS OF THE PRODUCT(S) OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN SECURITIES GENERALLY OR IN THE PRODUCT(S) PARTICULARLY OR THE ABILITY OF THE THOMSON REUTERS VENTURE CAPITAL INDEX (THE “INDEX”) TO TRACK GENERAL MARKET PERFORMANCE. THOMSON REUTERS’ ONLY RELATIONSHIP TO THE PRODUCTS(S) AND AXS INVESTMENTS (THE “LICENSEE”) IS THE LICENSING OF THE INDEX, WHICH IS DETERMINED, COMPOSED AND CALCULATED BY THOMSON REUTERS OR ITS LICENSORS WITHOUT REGARD TO THE LICENSEE OR THE PRODUCT(S). THOMSON REUTERS HAS NO OBLIGATION TO TAKE THE NEEDS OF THE LICENSEE OR THE OWNERS OF THE PRODUCT(S) INTO CONSIDERATION IN CONNECTION WITH THE FOREGOING. THOMSON REUTERS IS NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN THE DETERMINATION OF THE TIMING OF, PRICES AT, OR QUANTITIES OF THE PRODUCT(S) TO BE ISSUED OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH THE PRODUCT(S) IS TO BE CONVERTED INTO CASH. THOMSON REUTERS HAS NO OBLIGATION OR LIABILITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR TRADING OF THE PRODUCT(S).
THOMSON REUTERS DOES NOT GUARANTEE THE QUALITY, ACCURACY AND/OR THE COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED THEREIN. THOMSON REUTERS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT(S), OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. THOMSON REUTERS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THOMSON REUTERS HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Author: Greg Bassuk
Greg Bassuk is Chief Executive Officer of AXS Investments. Mr. Bassuk is a longtime financial services, asset management and alternative investments executive with a distinguished track record of building successful businesses.