The Importance of Consistency and Repeatability in Venture | AWM Insights #158
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Episode Summary
As we wrap up our series on Private Markets and Venture Capital specifically, it’s important to highlight why Venture has been so impactful in building multigenerational wealth.
Historically, Venture Capital as an asset class has had remarkable returns due to its positioning on the cutting edge of innovation.
Returns always come from and with risk, but the long period of illiquidity, uneven returns, and the J curve that is usually witnessed can be risk factors that are mitigated with a strong financial structure and a systematic, consistent, and repeatable approach.
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Episode Highlights:
0:00 Intro
0:50 Why has Venture been such a powerful asset class for building multigenerational wealth?
3:46 Why does your Venture allocation need to be systematic and repeatable?
7:23 How do we set our Venture Portfolio up for success?
9:16 Why do consistency and diversification help us capture higher expected returns?
11:00 Text us!
+ Read the Transcript
Brandon Averill (00:03): All right, well we're back again for another episode here and this isn't going to be the last time you hear us talk about the private markets that I can, I'm not going to say guarantee on the air. Well I guess I just did, but I can guarantee it won't be the last time that we talk about it. But what we are going to do is we're kind of coming to the end of a little bit of a series here talking about how we build portfolios on the private side, how they're implemented for you guys that are listening, why you should be interested in investing in private markets, specifically venture, why everybody doesn't participate.
(00:36): We've talked about how we really approach building out the portfolio somewhat in detail with our portfolio construction. And we just thought it might be good to really come back and do a little recap for you guys, put it all into one episode, hopefully distill it down with some bullet points.
(00:53): So Justin, I'll kind of turn over to you. Maybe give us a little bit of a summary as to why do we get so excited? Why do we think that investing in private markets, specifically venture, is such a big part of a multi-generational wealth story for these families that are listening?
Justin Dyer (01:12): The short answer is it is... It has been, we got to choose our compliance words correctly here, has been the asset class with the greatest performance, hands down really over the last, over generation let's call it. It is a relatively young asset class when you compare it to others. But there's been a long enough history that gives us confidence that it will continue going forward, it should continue going forward.
(01:39): And if nothing else, has the strong potential or great potential to accelerate. Technology is not going anywhere. Venture capital is very commonly associated with the innovation economy and I think there's good reason for that association. But yeah, why venture? It is the highest expected returning asset class that has been in existence to date really. There's some nuance to that, which is what we've covered and I think we'll touch on briefly today too in this summary.
Brandon Averill (02:12): And I think, right, it's a very inefficient market. We talk about the public markets, it's very difficult. Information is available to everybody, the same information's available to everybody, the private markets, that's a whole different ball of wax. And that's why we think you can really have the opportunity for those outsized potential gains. And then historically, like you mentioned, it's certainly the most compelling place that if you're willing to accept some of the risks that do exist, you're betting on the innovation economy, you're making a bet on the future that we're going to continue to progress, which I think is a pretty safe bet these days.
(02:51): And then there's an opportunity really for impact and influence and also being a part of a community. So for clients that are listening to this, as you know, you're in a really unique spot and you have the opportunity to interact with a lot of people that are doing really amazing, cool things in the world. And by participating in this part of the investment universe, it opens all of that up for new experiences for you.
(03:17): So kind of jumping over, okay, great, we have highest expected returns and I get to participate in the innovation economy. I get to be around all these amazing people that are building really cool, innovative things. Why doesn't everybody take part in this deal? We've covered this, but maybe give us a little summary here for why we think that not everybody can, and probably even more importantly not... Why everybody should not take part in this.
Justin Dyer (03:47): Totally. Well, I'd say point number one is liquidity. So this is an illiquid asset class. In quick summary, that's the ability to take an asset, whatever it may be, this computer you could even say, and turn it into cash. Venture and private markets in general, but venture specifically, it's a long-term asset class. It takes a long time for an investment to mature and get to a point where it makes sense to liquidate it. That could be it's acquired, it goes public, et cetera.
(04:18): Another big point that we really focus on is one's financial structure. Do you have the adequate means? Do you have the appropriate protective reserve in place to participate over a number of different years. We're going to touch on systematic approaches and that's critical when it comes to this approach. And so I think those two pieces combined really are at least are why we think there's a big barrier to entry.
(04:49): A big piece of it is that systematic approach as well. If you don't have the right financial structure and you can't really take that systematic approach, you're really kind of just almost like shooting in the dark. I mean there's a family office we work with and they've had a bad experience with venture because they were just taking rifle shots at it, not doing deal by deals, which is an extreme version of rifle shooting this asset class. But it was one fund here, two funds here, really a very small number of investment opportunities that just didn't work out.
(05:23): And without having a systematic, repeatable process, you're probably, you're just kind of playing with luck really at the end of the day. So I think those in aggregation are some big reasons why one shouldn't, or people don't really participate in venture.
Brandon Averill (05:39): And we use this analogy when we're talking throughout the episodes, but government does a decent job putting some thresholds in place to get access to this. But really where you want to find yourself, if you listen to the episode, anybody listening about this kind of concept, you don't want to just be at the private country club. You don't want to just meet the government requirements, which is becoming a qualified purchaser. You actually want to be invited into this community. You want to be a big part of it. And that takes a lot more than just the dollar amounts. But certainly the dollar amounts are a great start in what you're talking about from a financial structure standpoint. Having 5 million or more, being a qualified purchaser, that's a great starting point. Then you need to build on that and you need to actually have the ability to go play at Augusta versus the local club.
(06:34): And so I think that's a great way. And then the financial structure, like you said, I mean that's probably the place we see miss the most. And that leads to deal by deal rifle shooting and really people having no context to even evaluate whether they've been successful or not-
Justin Dyer (06:52): Yeah, that's a big one.
Brandon Averill (06:53): Is another big part of it. And you can't know that without the financial structure and having expected expectations for all these asset classes. And so maybe that leading on, and where we can wrap up, is a little summary about how we don't want to go deal by deal, or rifle shoot and we want to make sure financial structures are completely in place. You mentioned being consistently in market, you've mentioned being systematic. Maybe give us a little wrap up here as to when we actually get a client to this position, we want them to participate, how do we quickly summarize the wrap up and build out?
Justin Dyer (07:27): So bringing this all together, it is critical we have that systematic approach. You look at the returns that we referenced at the start of this conversation, it is the highest performing asset class, or it has been. In order to set ourselves up for success in capturing that there's no guarantee. So we have to really thoughtfully build the portfolio around it and have that systematic, consistent approach year in and year out.
(07:53): So what does that look like? We want diversification across managers. So funds of various types, of various focus. And years, vintage years is what it's called. Our typical goal is roughly a minimum of 5% or five-year vintage participation. And then it kind of starts to recycle upon itself. Roughly speaking, that's how we start constructing an overall portfolio implementation process for our clients.
(08:22): Within that, we have an emphasis on the earlier stage side of things. So seed type investing, it's a little bit higher risk, but if we can be very thoughtful and diligent and get diversification there, we have a high confidence that that's going to drive a lot of this outperformance. We then round that out with a little bit of a later stage focus, more of the established venture capital managers, kind of the name brands that focus in that later stage. That gives us a little bit more predictability.
(08:50): And then we do have a little piece that's somewhat opportunistic. Very, very small. Sometimes that goes into direct companies, other times it goes into more unique creative funds that might be more tactical in a given market environment. And broadly speaking, you put all that together and then we repeat that each and every year, it gives us a really, really, really high confidence that we should capture these higher expected returns.
Brandon Averill (09:17): And I think a good analogy, again, go back to this episode because we go through it a lot more, but it's like, we'll stick with the baseball analogy. It's building out your franchise, your organization. You're going to take some from the draft, you're going to try to sign some guys in free agency. You're going to obviously go through [inaudible 00:09:34] process with the guys that have come up through your program. And that's really a great analogy for how we think about building out the portfolio.
(09:41): And the other part of it is that consistency aspect. If you're consistent, let's say you're a team that's consistently in the free agent market, people know you're going to show up, et cetera. I might be going a stretch here, but you have the opportunity. The agents know like, "Hey, guess what, if I've got a top end player, the Yankees are probably, the Dodgers are probably always in the mix." They're always going to have capital, they're always going to go try to get the best player. Whereas if you're trying to figure out like, "Hey, is this the year that the Diamondbacks might sign somebody?" It takes a little bit more effort. And so there's a huge advantage for us to be consistently in the market, be very systematic, just allows for you to have more and more opportunities.
(10:23): And again, the sports analogy, but it allows you also to gain what those expected returns might be, rather than trying to figure out on what day Mike Trout may hit a home run or what day Shane McClanahan may punch out 15. You're taking the body of work over time and it just provides for a much greater investment experience.
(10:45): So hopefully this is a good summary for anybody that hasn't dug into the episodes where we go a little deeper. I encourage you to do so. I think you'll get a tremendous value out of that. So until next time, own your wealth, make an impact, and always be a pro.