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Running a 31-fold gain in pursuit of a 100-bagger [Members]
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Crikey. I thought shorting Covid was heady. I am not in your league, bud 😉 Respect and props though, and the best of British luck to ya!
Interesting article, I try to equate VC investing to horse racing and going for the 100/1 horse, unlikely to return any profit individually but over a certain amount of races there’s surely one in there. I have previous had VCT/EIS investments that over time including the tax relief have underperformed a simple global tracker, sometimes the tax tail does seem to wag the dog.
Having pitched to and worked with a few VCs, agree that the power law is how they see it. And its a fine line for them to succeed in this as the portfolios may not be lucky enough to capture that 1 in 100 (more like 1000) big winner. However there’s a strong element of self fulfilling prophecy – the criteria set (next years Unicorns only need apply) by definition increases the effect or alpha in your graph. A half or increasingly more of the capital is ‘wasted’, and is steered away from more capital intensive or slower to market developments. So if this is how we choose to deploy seed capital then we will end up with a lot of apps and services, things made of atoms not so much.
It is similar to index investing: if you own `all’ the stocks, then you’ll own the really big winner(s), which (hopefully) win big enough to more than cancel out owning the losers too.
@ermine — Well I revealed many years ago that I’m in this for the love of the game not the money. It’s only money! 😉 Moguls is my safe space to talk about my adventures with a more sophisticated audience, without risking leading the unwary astray.
With that said it’s worth remembering that the initial investment was small. And yes, while I’m now risking an annual salary type amount of money by continuing to run this position, as I’ve explained in the piece that’s a feature not a bug. It’s more sensible than it seems, in the round, I believe.
The biggest risks with VC investing — in terms of the company surviving — come when the companies are small not once the snowball is really rolling. Of course it could all still go wrong — and there’s much more at stake — but I need to benefit as fully as I can from a few of these big snowballs to make the overall game worthwhile.
@The Adviser — There’s no doubt the tax relief is important. If somebody is investing solely for tax relief then I think they’re probably making a mistake, although with sufficient funds and exhausted alternative shelters (ISA/SIPP/CGT allowances and perhaps VCTs) maybe not if approached in a sensible fashion.
As for returns versus a world tracker, yes my experience is about the same so far (after reliefs, and ignoring the glaring issue of the fact that I can’t actually access most of this money so it’s clearly not comparable to the instant access of a global tracker, albeit potentially with tax consequences).
Whether I’ll do better overall will depend on how far my handful of multi-baggers ultimately run. Five-baggers aren’t going to cut it.
With that said global trackers have had a stellar run for 10-15 years and quashed pretty much everything. Can it continue indefinitely?
@Calculus — Agreed, you see this ‘fine line’ show up in the ‘winner takes most’ returns of top VC funds, where the best quartile (perhaps even decile) capture a very disproportionate share of the returns. At that end of the business there are ‘lollapalooza’ effects too, as the best new companies want to run with the best VCs, for the logo, for their perceived operational value-add, and for their networks.
In contrast we little guys face adverse selection and other issues. However I’d argue some of that can be offset by the fact that there’s a rational case for consumer brands trying to get an ‘army’ of cheap promoters via an early crowdfunding round. (See my investment in Knoops, or certain fintech startups).
I get the impression that crowdfunders overpay, too. That’s bad for our returns, but it is potentially another reason why a decent firm might choose this option.
Perhaps in a year or so I’ll revisit this space with a Moguls article fleshing out those thoughts some more. What I personally look for.
For example, these days I massively favour companies with a decent VC firm in the mix, as I think it can make an exit more likely. Albeit their outcomes may be different to ours and it’s no panacea.
E.g. A company I had high hopes for — that had a respected institution on the cap table — exited a few weeks ago on a down valuation. Perhaps it was warranted by trading etc, but I couldn’t help noticing the outcome was money good for the VC fund with its preferential share class. 😐
Yes @TI, have also seen a 10,000 employee stock options grant (‘put this somewhere safe’ said the new CEO) return a cheque for a not life changing $35 once the investors had their preference share class allocations met!
As it happens I’m bootstrapping my current venture for the time being.
The other maxim the VCs use of course is to concentrate on particular sectors – AI, biotech etc. This has influenced my own approach towards equity concentration in the tech indices which I still think is a good option over the long term.
Would be interested to learn more about the alternative funding/investing routes.
“put listed VC..such as Molten Ventures, Chrysalis…”: HL (seemingly) not currently allowing purchase of MV (55% discount to NAV), but Chrysalis (38%) unaffected. “latest investment..into…Knoops”: now up to 20 stores/15 cities. Far cry from Rye original.
@Delta Hedge — Hi 🙂 Yes it’s very random. I own Molten Ventures on one very popular retail platform, and it’s one with a smaller AUM than Hargreaves Lansdown, too.
Knoops is like all these things a bit of a long shot but I think I can see something there, and the backing is impressive. The hike in employer’s NI from 2025 won’t help it or similar firms where staffing is a high share of cost though!
Fascinating to estimate base case odds for the 100x long shots. Deutsch Wealth and Syndicate Room do so above for VC, but the skewness is always extreme. See another example from today’s Market Sentiment Substack below for the most volatile ‘asset’ of all:
https://open.substack.com/pub/marketsentiment/p/the-losers-game
1.7% odds at best. Under ideal assumptions. Quite sobering to think that, even here, it’s less than a one in fifty scenario. If you shoot long shots then you have to use the Kelly criteria to keep in the game long enough to hit the/any target.