What’s Driving The Rise In Venture Capital-Style Investing?

Chairman of the board at Alif Bank and Alif Capital Holdings Limited

Venture capital (VC) investing is not easy and requires in-depth research and knowledge about the industry, a good network of people who can generate deal flow and industry insights. There is no equal and transparent access to the information. Only a small group of people has access to the top funnel of the best deal flow. The deal flows in this industry are asymmetrical, meaning you need to know the right people to be in the right deals, while in the public market, anyone from any place in the world has nearly the same ability to invest.

Yet, several factors are attracting more investors to venture capital investing.

What Makes VC-Style Investing Different?

Here are several key differentiators of VC investing:

• The first is the long-term approach VCs take. As a seasoned investor, I understand that only the long-term approach works, and intraday trading or attempts to time the market because you think you know when to “buy low and sell high” cannot work consistently. While in public markets you always have a temptation to sell early, in VC investing, you marry the company, and investments are pretty much illiquid.

• The second is the personal touch. As a VC investor, you can add value with your network and experience that can help grow the business. You also get a chance to support a mission in which you personally believe. 

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• Third, as VC investments are much more time consuming, you tend to have fewer deals and more time to think and learn more about the business as an investor, not a trader.

The above help explain why VC investors can outperform the market. In my experience, these investors can get 5x-10x multiple on invested capital, but it generally takes at least seven to 10 years. This philosophy differs from the “get-rich-quick” mentality I’ve seen from many impatient crypto investors and Reddit traders.

Silicon Valley And The JOBS Act

Silicon Valley plays an integral part in the history of modern venture capital, and interestingly enough, it emerged and grew from the symbiosis of good universities, talented people, a spirit of freedom, military technologies and government funding.

A lot of people believe it all started with the “Traitorous Eight,” who used to work for the first private company producing computer processors or microchips. The eight employees decided to leave their employer and set up their own businesses, including Gordon Moore and Robert Noyce, who in 1968 founded Intel. Other members of the group helped found AMD, Nvidia and venture fund Kleiner Perkins.

The “PayPal Mafia” is another group of talented people who left their employer and started their own businesses. This group has helped to shape the modern Silicon Valley venture capital industry. A group of mainly Stanford University attendees, who worked at PayPal during its early days, they went on to found companies that are now household names, such as Tesla, LinkedIn, YouTube, Palantir, Affirm, SpaceX and Yelp. They also actively invested.

The “don” of the PayPal Mafia, Peter Thiel, also started a VC firm, Founders Fund. He became the first external investor of Facebook when he acquired a 10.2% stake for $500,000 in August 2004. He was also early investor in Airbnb, Yelp, Asana, Lyft and others.

In 2012, President Barack Obama relaxed the rules for funding private companies via legislation known as the JOBS Act, and that consequently had a significant impact on the VC industry. Later-stage tech companies were no longer required to register with the Securities and Exchange Commission and report unless they had at least 2,000 shareholders (or at least 500 non-accredited shareholders). This meant that startups were allowed to stay private for longer if they wanted to. Late-stage financing rounds were big enough for large private equity firms to enter the VC space. IPO rules were also relaxed for startups with under $1 billion per year in revenue, meaning companies can go public more easily.

All of this resulted in significant growth for the VC industry. In 2010, the value of U.S. VC investments was around $26 billion. In 2020, VCs invested five times that amount, and the industry is growing globally.

Applying A VC Approach To The Public Markets

There is a VC approach in investing that you can apply to public markets, and some VC firms also run public market strategy. For example, the currently most active VC firm, Tiger Global, also runs a public markets pool.

As mentioned earlier, top-tier VC deals are accessible only to a small group of funds and private investors, and in that sense, it is still an asymmetrical market. You need to know the right people to get into the right deals, or you need to invest a lot in your reputation as a smart money VC investor.

However, I believe that public market investors who do not have access to the VC deal flow can still use a “VC-style” investment approach. Using such an approach, an investor would focus on the following when deciding to invest:

1. A company’s founder, team background and motivation.

2. Total addressable market, product-market fit and growth metrics.

3. Customer engagement and quality of cohorts.

4. The company’s current investor base and early round investors.

When you invest in growth, I believe these factors are much more important than discounted cash flow modeling, revenue multiples, price-to-earnings ratio or dividend yield, or debt-to-equity ratio.

This article is not investment advice. Author does not hold any long or short positions in the abovementioned companies.


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