As alternative investments (think anything besides publicly traded stocks, bonds, or REITs) pour into the retail market, many investors gaze longingly at venture capital.
Why wouldn’t I want to be part of the next Tesla, Uber, SpaceX, or Google?
After all, the stories are intoxicating: garage startups morphing into global behemoths, fueled by brainy founders, sleepless nights, and Silicon Valley swagger (or lack thereof). Shows like Silicon Valley glamorize the idea of “moving fast and breaking things,” turning the proverbial nerds into cultural legends.
And what great stories they are. A cocktail of fantasy novel, sweat, endless keyboard clacking, and stock options—ending with the genius on the mountaintop.
Not Just a Numbers Game, A Lottery with Brutal Odds
It’s tempting to think venture is just a numbers game. But venture capital is a lottery. And not a scratch-off at your corner store…it’s the Powerball, with winners drawn from a very small, very select pool.
Talk to any seasoned VC, and they’ll tell you: one winner has to pay for all the losers.
Miss that one, and the fund craters. Miss twice, and you may never be heard from again.
The winning Powerball tickets—those early allocations in companies that truly break out—are hoarded by the same top-tier managers, again and again.
We’re talking Sequoia, Andreessen Horowitz, Ribbit, Kleiner Perkins, Benchmark, Accel. Institutions from the Saudi Public Investment Fund to Morgan Stanley to Yale’s Endowment to yes, even firms like Root, are lined up, hats in hand, to get a slice.
And why? Because everyone knows the odds are grim. Yet for the vast majority that are shut out, there are plenty of other doors around the block. Many emerging managers and copycats speak the language, talk the talk, and whisper of special situations, wizkids, and paradigm shifts.
The Customer’s Yachts?
For every starry-eyed new fund promising to become the next a16z, the math is favorable—for them, not for you:
- GPs (general partners, the fund managers) will still collect management fees, win or lose.
- LPs (limited partners, the investors), on the other hand, are largely betting on hope…and hope, as they say, both springs eternal and is not a strategy.
If you’re reading this, I’ll venture a bet that you’re not getting on the cap table at a top-tier firm. So, there are two important questions:
- What exactly am I expecting here?
- Is it worth the illiquidity, the mental bandwidth, the fees, and the opportunity cost if I can’t invest with the best?
And if you’re thinking, “Wait! My advisor said we can access the best ___ manager in the country, I might be the exception here,” I’ll leave you with this from the movie Rounders:
“If you can’t spot the sucker in your first half hour at the [poker] table, then you are the sucker.”
At this point, any advisor whose value proposition is “manager access” just isn’t gonna cut it.
Before Writing the Check, Remember…
Venture capital is a winner-take-all game. Top funds hoard the best deals, and you’re kidding yourself if you think you’ll get access.
If you can’t access the top-tier, be brutally honest. Are you chasing a Powerball ticket at the corner store?
Remember: GPs will scratch a living no matter what; LPs take the real risk. Management fees keep the lights on even in bad years.
Opportunity cost matters. That locked-up capital could be compounding elsewhere.The lotto isn’t going to deliver the portfolio returns you’re hoping for. You don’t need venture capital in your portfolio to build serious wealth. We can hit singles and doubles for the rest of our investing lives and still end up in the hall of fame. Sure, the home run grabs headlines, but not if you strike out swinging for the fences along the way.
CONSIDER
I recently returned from a week hiking in Colorado, my eighth adventure in the Rockies. Yet this time, my sense of gratitude for the mountains felt much deeper.
The vastness, the serenity, the solitude, the energy that comes from being there—it all stirred and settled differently this time.
“In the mountains, you are sometimes invited, sometimes tolerated, and sometimes told to go home.” – Fred Beckey
“Climb the mountain not to plant your flag, but to embrace the challenge, enjoy the air, and behold the view. Climb it so you can see the world, not so the world can see you.” – David McCullough Jr.
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Let’s get after it this week!
Brooks
Brooks Palmer, CFP® is Head of Investments at Root where he helps identify, evaluate, and implement investment solutions tailored to clients’ needs. In Full-Court Press, he breaks down what’s happening in the markets—cutting through the noise and jargon—while connecting it to Root’s core investment tenets so you can make the most of your money and your life!
Advisory services are offered through Root Financial Partners, LLC, an SEC registered investment adviser. This content is intended for informational and educational purposes only and should not be construed as personalized investment advice or a recommendation to buy or sell any security. This is general commentary, not a guarantee of future results. Any forward-looking statements, including expectations about market returns, are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future performance. Past performance is not indicative of future results.