As a continuation of my post “Análise Espectral de Investimentos no Espaço Privado”, here I list the ten main reasons I think the asset class Late Stage VCis and will continue to be a winner.
1. Superstar startups are staying private longer
As recently as 2008, the year of the last financial crisis, the average lifetime of companies that IPOed was 6.5 years. Now the private lifetime increased to 11 years.
The investment implication is a shift of the value creation phase from public to private markets, meaning that everyday investors will benefit less from post-IPO growth.
2. Late stage effortlessly combines innovation with high impact
Startup companies with low risk / proven technologies will usually compete in low impact (niche or slower growth) markets. Impressive returns are rarely on their realm.
Startup companies promising high impact (i.e., huge untapped markets) usually have significant technology risks, even when the technology “seems to work”. Early on in their life spans, these transformational companies usually haven’t had time to go through many iterative / improvement technological cycles; unpleasant surprises can hit.
When you replace early with late stage, the technology is already tested and iterated. Late stage smoothly combines technological breakthrough with high impact.
3. Pareto’s law
As expected from Pareto’s law, a small number of startups, 4%, end up driving 64% of the returns.
That’s why 1st tier investors are so focused on network effects, technology differentiation, a 10X consumer experience, etc. These are the foundational drivers that catapult humongous returns.
The chances of a late stage investment to be in Pareto’s top bracket are obviously much higher, as well as the late stage investors’ ability to still grab a good chunk of the upside.
4. Outliers’ (or Malcolm Gladwell’s) effect
The best VC funds don’t seem to be better at avoiding failing startups. It’s not about the downside. Instead, data shows that a “good” 2-3x fund and an “excellent” >5x fund lose money about the same % of the time.
However, for an excellent fund, its winners are much, much bigger than everyone else’s. It’s all about upside!
A late stage thoroughly thought approach has the potential to cherry pick the outliers across the excellent funds.
5. J-curve smoother
Early stage VC funds usually have a pronounced ten-year J-curve; the “lemons” ripe early and the winners take time to emerge.
Late stage VC funds, on the other hand, do not hold the J’s belly, since they have a faster turnaround and hardly carry sour fruits.
6. Barbell asymmetry
Nassim Taleb coined this name.
We invested in Airbnb. The chance of a write-off is almost null. The worst thing that can happen is to have temporally bought “expensive” Airbnb shares. We can gladly seat on them and wait for a market mood swing.
However, if Airbnb successfully IPOes, we can obtain pretty good gains. Ask that to Spotify’s late stage investors.
The best investments hold an asymmetric profile, and there are few of them, if you do not make options trading your full-time profession.
7. Alpha hitchhiking
Sequoia, Founders Fund, Kleiner Perkins, DST, Andreessen Horowitz, NEA, Accel, Bessemer and a few others are the alpha generators funds in the VC industry.
In the late stage venue we will be able to activate their brands and intellectual prowess.
8. Financing & Timing, hand & hand
“The real fortunes in this country have been made by people who have been right about the business they invested in, and not right about the timing of the stock market” – Warren Buffett
The funnel to become a late stage is tight and tough. Late stage companies carry the DNA to become great companies. Since they have good seeds and cash — financing is not anymore a problem for them; they are not leveraged and some are even EBIT positive –, they can choose the IPO timing; they know that investors will always cue.
9. Differential access
More than 50% of the US families own stocks, either directly or as part of a fund.
Very few people directly own shares of late stage companies.
Late stage represents a unique opportunity to buy before the faceless mass. That’s a huge advantage!
10. Strategic selling as important as IPO
US non-financial companies hold more than $ 1.8 trillion in cash that is screaming for game changing (i.e., late stage) opportunities.
Do contrast the results of recent late stage IPOs (often published at Inclito’s newsletter) with the performance of your bank’s designed and managed funds.
You can easily become an Alpha, do not get satisfied with a better than benchmark performance.
Inclito seeks for late stage ventures with high gray mass density per (plenty of) allotted capital.