Venture Capital for Private Investors–Part 1 of 3: Greater Access

Consistent with our mantra of delivering contemporary solutions to sophisticated investors, SWS Partners is continuously developing expanded opportunities for our clients. To do so, we have prioritized staying abreast of changing trends and demographics. The confluence of these factors has led us to spending more time and attention on venture capital investing. We simply define venture capital investing as investments in high growth, private companies, or those that are not listed on an exchange, such as the New York Stock Exchange or NASDAQ. Peloton, SoFi, Instacart, SpaceX, and Airbnb are common examples that fit this definition.

Historically, private investors had limited access to these types of investments because they did not have access to the venture capital firms funding these companies. This was due to high minimum investment requirements, which typically priced out investors that were not large pension plans, foundations, or endowments, for example.  However, access has been expanded through our favorite form of economic disruption: automation. As with many corners of the investing world, access is being democratized, and barriers to entry reduced, through the application of cloud-based technology platforms which dramatically increase the flow and capitalization of information.

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Our friends at AngelList are at the forefront of developing a technology platform—always an SWS favorite—which allows investors to access individual deal flow or a separately managed portfolio that is constructed to provide access to best of bread investors.  The ability to make a number of venture investments at an early stage is critical to building venture investing muscle memory, especially when one does not have significant experience with the asset class.

We generally think that getting in early and staying in longer is a key driver of success for venture investing. As Abe Othman points out in his excellent blog post, it takes a top-quartile VC fund to outperform the early-stage venture market. Translation: if you’re going to make venture investments, get in early, make a number of investments, and stay in for the long haul.

Software companies, in particular, are increasingly reaching $10 billion in value without going public. Dropbox and Airbnb are relevant examples. By investing early, investors have the best opportunity to gain access at a lower buy in and to benefit from potentially enormous value creation.

Ultimately, we think venture capital can be a meaningful portfolio diversifier and wealth creation vehicle for private investors. However, it requires a deeper level of due diligence, not to mention the fortitude necessary to stomach the companies that fail to live up to their promise. Furthermore, individual investors need to be aware of how macroeconomic trends can uniquely impact venture investing.

Our next blog post in this series will detail the macroeconomics of venture investing.