As we come out of the worst pandemic in 100 years, investors are looking for unprecedented opportunities to find growth. Many traditional avenues for investment have become frothy and over-bought so family offices, investment banks, and institutional investors are looking for optimal returns and diversification in both the short and long term. Elementz is often asked why Venture Capital and why now? Here are some reasons why Venture Capital is one of the best investments right now.
Just as a refresher, here’s how venture capital works. Venture Capital firms invest in start-ups when they are young – let’s call it early stage, privately owned, and when they have a lower valuation. The investment has a chance of becoming more valuable over time if the company grows, gains customers, increases revenue, and maybe even goes public or is acquired. The larger a venture portfolio, the greater the odds of potential gains and reducing risk. Most venture-backed companies will either fail or reach most a modest level of success. But there a few big winners — those returning 10x, 100x, 1000x — which produce most of the returns for an entire portfolio and can make up for numerous losers. That is why it is critical to invest in a venture portfolio of approximately 40-50 companies or more to give oneself a strong chance of investing in those winners. Early investors in tech companies like Zoom, Coinbase, Honey, and Snowflake saw 6000x and 3000x-9000x return on their initial investments respectively. Obviously, these are the outliers but the opportunities are there.
So why invest and why now? Here are 5 reasons:
- Venture Capital rounds out a diversified portfolio
Public markets and real estate traditionally dominate a family office and high net worth’s investment portfolios. However, there has been a shift over the last decades towards alternative investments including venture capital. Venture Capital returns have historically been strong and only loosely correlated with stock returns. When looking for diversification and maximizing future returns, Ventrue Capital is a smart addition to a portfolio.
- Venture Capital is diversified itself
You may hear the story of an investor who has put seed capital into a startup or several startups only to find out later that the startup has not been able to grow and scale as hoped. Even with due diligence, it’s incredibly difficult to get the returns at the early stage. Being able to spread that risk over a larger pool of startup investments can guarantee a much greater potential for stronger returns.
- The amount of public vs private markets
First of all, there are approximately 44,000 public companies listed on the NYSE and NASDAQ. Compare that with 450,000 private companies across the USA alone. As more venture-backed companies delay their IPO or don’t go public at all, Venture Capital is an increasingly attractive market option for long-term, accredited investors looking to access the value created in the private markets.
Secondly, most companies experience their “hyper-growth” while still private (i.e. pre-IPO). Slack, Lyft, and Uber are just a few examples of companies with stellar private market growth and lackluster IPOs. Also, today, it’s not uncommon for companies to go public with valuations ranging from a billion to tens of billions. Waiting until the IPO to invest, can be a challenging way to make money. An investor has missed out on all that value creation between the low price and the IPO price. Being able to invest early and exit at a later round or through acquisition can be the best way to get multiple returns. Elementz considers all these options for exit including an IPO.
- Investing in Technology & Innovation
Technology and innovation are driving the future at a rapid pace and Elementz Ventures has its focus on software technology-backed start-ups and businesses enabled by software technologies. If investors want to find “what’s next” then Venture Capital is the avenue to that goal and if it’s software technology then consider Elementz. This sector is filled with brilliant founders who are game-changers, utilizing high-tech innovations, and products that are disrupting the current marketplace. The innovation that these startups produce does not have to be bleeding-edge but it needs to disrupt a marketplace; it could be complimentary or a small iteration that takes that market to a new level. For example, think about what Zoom has done with their video conferencing solution when for years the existing players like Skype, WebEx, and Google Meet have failed to innovate and dominate the market in the way that Zoom has. Zoom is an iteration of a well-proven model previously dominated by traditional players.
- Timing is everything
Everyone knows that timing is everything and at this juncture in time, there are an unprecedented number of technology startups and the ability to fund them through Venture Capital taking place in 2021, in fact, according to the latest Crunchbase numbers, in the first quarter of 2021, global venture investments reached $125 billion, a 50 percent increase quarter over quarter and a whopping 94 percent increase year over year.1 Early-stage funding, in particular, experienced a surge in the first quarter of 2021, with $35.5 billion in funding, a 45 percent quarter-over-quarter increase, and a jump of 63 percent year over year. This record in early-stage funding was in part attributed to an increase in rounds over $100 million, but not solely.
Elementz Ventures is on target to source and invest in some of the top early-stage software-backed startups N. America and SE/E Asia with its new fund and emerging managers. With a proprietary sourcing process and experience in portfolio management, they serve as an excellent strategic alternative investment.