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EquityZen Covers PreMoney Miami: The Future of Venture Capital

Atish Davda | April 23, 2015


Last month, I had the pleasure of meeting some of the sharpest minds in venture capital at PreMoney Miami organized by 500Startups. The atmosphere was abuzz – with facts, opinions, and everything in between – surrounding the future of venture capital.

VC and its rapid evolution is a topic EquityZen follows closely; not only are we venture/law/tech geeks, but also because thousands of accredited investors on our platform are curious of latest developments in the private technology market.

You will be glad to hear that themes discussed included these among many others:
·      Macro tech investing
·      LPs’ perspective
·      Angels in tech
·      LatAm investors and opportunities
·      Deal access outside of Silicon Valley
·      Early vs. late stage venture

I had the good fortune of sitting down with veteran investors and venerable thought leaders from 500Startups, Andreessen Horowitz, Kauffman Fellows, and other industry leaders. Below are discussions and takeaways from a select few:




Dave McClure (LinkedIn)
Currently: Founder, 500Startups
Previously: Founders Fund, Facebook fbFund, PayPal, Mint.com

Atish Davda: “Bill Gurley opened the gates, and now there is a lot of talk about a bubble in private company valuations. Do you think there is a bubble?”
DMC: “Public P/E [ratios] are way more overvalued than private companies.”
AD: “Is there a place for late stage private companies in the idea tech portfolio?”
DMC: “Anyone with 30% or more of their portfolio in technology is losing returns if [they] don’t invest in late stage private companies.”

Diversification is a fundamental teaching in portfolio management. While most individual investors have a keen eye on their cross-sectional diversification (many investments across the same stage), they may not be as disciplined about cross-stage diversification (investments across various stages of a company’s lifecycle).

Accredited investors have the ability to invest in public and private markets – majority of those reading this article (see accredited investor criteria). They should not bucket their investments simply as “public” and “seed-stage.” There is an entire maturity cycle for a business between the seed stage, when a company is in its diapers, until the IPO, when the company graduates college. By investing in the “K-12 and college years” when companies may be less risky with a lot of return potential ahead of it, individual investors can build a robust portfolio with a variety of investment horizons (and therefore, a diverse set of risk-return profiles).


Scott Kupor (LinkedIn)
Currently: Managing Partner, Andreessen Horowitz
Previously: ECM Taskforce, HP, Opsware, CSFB

SK (from panel): “If you’re going to build your own venture portfolio, build a big one. There’s lots of attrition.”

Early stage venture investment returns follow a power law (see CB Insights article). Simply put, vast majority of investments yield flat or negative returns, and the few that don’t fail, provide most of the returns. When managing an early-stage venture portfolio, SK recommends having a large portfolio, so despite the high failure rates you maximize your chances of having the one or two redeeming winners. Managing a large portfolio of investments as an individual is logistically tricky, but necessary.


Phil Wickham (LinkedIn)
Currently: CEO & President, Kauffman Fellows
Previously: Venture Capital
AD: “How does the Kauffman Fellows Program prepare tomorrow’s visionaries to invest?”
PW: “There is an abundance of ideas to cover. [The program] starts with an entry-level course on investing and follow-up with [basics of] capital formation. This is in addition to other focuses on leadership, conflict resolution and others.”
AD: “Private markets are evolving, from the perspective of the investor and the entrepreneur. How do Kauffman Fellows cope with changing dynamics of investor / entrepreneur / employee liquidity?”
PW: “Fellows are supportive of one another and the ecosystem. They are ready to coach one another. [One important question is:] is this decision a global or local optimization? We screen for Fellows who are ‘aware.’”

In this evolving investing environment, awareness and adaptability is crucial. Kauffman Fellows Program seeks out and trains those leaders who are “aware” and take note of market trends: doubts of a tech bubble, shift in traditional public investors, paradigm shifts in fundraising, breaking mold of tech portfolio management, and more.


Fabrice Grinda (LinkedIn)
Currently: Founder, Beepi
Previously: OLX, McKinsey & Co
AD: “What do you make of all this unicorn talk?”
FG: "It used to be my dream to be CEO of a public company. Now, not so much."
AD: “Many tech firms are staying private much longer these days. Why do you think this is?”
FG: “Companies are staying private longer – it’s not 2000. It’s painful to go public. Sarbanes-Oxley* has complicated things and with cap table limits [for non-employee shareholders] up to 2000 now, it makes sense.”
AD: “Do you see this is as a temporary or permanent shift?”
FG: “It’s a permanent shift. At least, until the IPO gets deregulated.”
AD: “You’re a fan of playing Moneyball not Powerball. Does this apply to late stage companies, too?”
FG: “It’s no longer Powerball at the late stage. It’s no longer about picking, it’s about access. I buy and sell all the time – [there is] nothing wrong with it.”

With regards to late stage investing, Fabrice is referring to secondary markets (when existing shares are purchased) as opposed to primary markets (when company issues new shares for purchase). In late stage companies, it is extremely difficult if not impossible for individual investors to enter in primary markets. They are typically limited to large of venture capital or growth equity funds.

However, it’s important to realize that secondary markets are available to buy and sell equity in large private companies. It may be a good idea to sell some of that seed stage bet that turned out to be right and mature into today’s unicorn. As discussed above, investing in a late stage company can be ideal to diversify the venture portfolio. You can learn more about doing so here.

See full video of Fabrice Grinda and Dave McClure discuss “Trends and Picking Winners” to close out the conference.


Thanks
Many thanks to Kathryn Tompkins and the rest of the crew at 500Startups for making it happen.

Disclaimer
500Startups is an investor in EquityZen, Inc. Hyperlinks to sites outside of our domain do not constitute an approval or endorsement of content on the visited site.



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