A New Era Of Venture Capital

A Brief History of Venture Capital

Innovation has powered economic growth over the last thirty years, benefiting investors who have backed waves of disruptive companies. Accordingly, venture capital (VC) has been one of the best performing asset classes in history. The top 25% of venture capital funds outperformed the Nasdaq by 23% from 2005 to 2018, according to an analysis by Morgan Stanley based on data from Cambridge Associates.[1] As returns soared, investors poured billions into the venture asset class, $128 billion in the US alone during 2021.

The early years of venture capital were not easy. Initially called “adventure capital”, high-risk capital was the purview primarily of wealthy families. The American Research and Development Corporation (ARDC) was one of the first structured forays into venture capital. As a public holding company, ARDC raised capital from investors and then backed technology startups capitalizing on WWII-era technological innovations. Its first major win was Digital Equipment Corporation (DEC), which returned $355 million on a $70,000 investment over 14 years. ARDC gave many venture capital legends their big starts.

In 1958, although the Small Business Investment Act paved the way for venture capital firms, investors overlooked Small Business Investment Companies in favor of more common limited partnerships. In 1979, changes to the “prudent-man rule” enabled pension funds to allocate up to 10% of their assets to venture capital, which increased the amount of capital in the ecosystem significantly. 

Early-pioneers, including William Henry Draper III, professionalized the industry, while legends like Arthur Rock of Venrock and Don Valentine of Sequoia popularized it. The post-WWII influx of technology researchers to Silicon Valley combined with the computer culture in the rebellious 1960s offered a fertile environment for startups in San Francisco. During the next few decades, computers, software, and the internet created powerful secular tailwinds for venture capital returns, with Microsoft, Apple and Genentech early winners.

In 1978, the venture capital industry raised $216 million, or ~$1 billion in 2022 dollars, less than several startups recently have raised in growth-stage rounds. Indeed, today many critics are asking whether too much venture capital is chasing too few sustainable opportunities?

Most Investors Are “Short” Venture Capital

According to Sifuentes research, venture capital still is in early days for three reasons: 

1. In 2021, the $128 billion invested in venture capital represented only 0.12% of the capitalization of global public equity markets. In our view, innovation is likely to disrupt and perhaps destroy many of the companies that make up the $105 trillion in global public equity market cap, ceding significant share to startups and venture capital. 
2. According to our research, disruptive innovation will scale from $8 trillion in enterprise value to more than $200 trillion during the next decade. Startups and venture capitalists are likely to capture a significant share of that value creation. 
3. Because the tech and telecom bust in the early 2000s and the Global Financial Crisis in 2008-09 precipitated Sarbanes-Oxley and other regulations that have burdened public companies, startups are choosing to stay private longer than historically has been the case. Previously, many startups raised two to three rounds of venture capital and then went public at ~$100 million valuations. Today, startups like Stripe and SpaceX have raised many private rounds and have scaled to $100+ billion valuations, as shown below. Facilitating liquidity for employees and other shareholders, secondary markets have created even more capacity for venture capital.

Source: Sifuentes Investment Management LLC, 2022 An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail investors.

Source: Sifuentes Investment Management LLC, 2022 In business, a unicorn is a privately held startup company valued at over US$1 billion. The term was first published in 2013, coined by venture capitalist Aileen Lee, choosing the mythical animal to represent the statistical rarity of such successful ventures.

Traditional Venture Capital Models Are Ripe for Change

The two reasons we believe the traditional venture capital model is likely to change are: 

 

1) limited access that favors wealthy individuals and institutional investors, and 2) “short-term” investment time horizons. Traditional venture capital funds cater to accredited or qualified investors who meet significant income and asset thresholds. Often, the minimum investment is $1 million+, and even wealthy individuals meeting the thresholds have trouble gaining access, locking most of the population out of an asset class that we believe will capture trillions in value over the coming decade. Registered investment advisors direct their retail investors to indexes populated increasingly by public companies that we believe are in harm’s way, while institutional investors have access to the disruptors. Moreover, venture capital faces multi-year lockups, precluding the participation of individuals who value liquidity.

More often than not, VC funds also have to sell companies after they go public or at the end of fund lifecycles. Yet, we believe truly disruptive and innovative companies can generate exceptional returns from their startup days in private markets to their maturation in the public markets. Tesla, for example, generated a total return of greater than 10,000,000% from its early-stage Series A funding round in 2004 through 2021, as shown below. In our view, innovation creates moats, like network effects, that widen with scale. According to our research, thanks to artificial intelligence and its important role in the convergence among technologies, the most innovative companies in the world are likely to dominate large markets, generating outsized returns across their private and public market lifecycles.

Source:  Sifuentes Investment Management LLC, 2022 Forecasts are inherently limited and cannot be relied upon. Not a recommendation to buy, sell, or hold any particular security. Past performance is no guarantee of future results.

Occasionally, we surface significant valuation dislocations between the public and private markets. While many traditional venture capitalists have little choice but to invest in private markets and many public market investors have little opportunity to capitalize on the arbitrage opportunities in private markets, Sifuentes Strategy aims to create an innovative investment solution.

The Sifuentes Strategy Fund Is Rethinking VC

Sifuentes Strategy (SS) focuses exclusively on technologically enabled disruptive innovation, not only in our research and investment strategies, but also our products and services. With actively managed, truly transparent equity ETFs, we disrupted the public equity market. Now we seek to disrupt venture capital with the Sifuentes Strategy.

The Sifuentes Strategy Fund is an actively managed, evergreen, crossover fund that invests not only in public and private companies focused on technologically enabled innovation but also, selectively, in other venture capital funds. Importantly, we aim to democratize venture capital, enabling any investor with a minimum of $500 to invest in private and public companies that we believe are going to change the way the world works, without encountering qualification or accreditation thresholds. In addition, the Fund offers liquidity up to 5% of NAV (net asset value) on a quarterly basis.

Unlike traditional venture funds, the Sifuentes Strategy does not charge carried interest. We believe that, long term, our 2.75% management fee will be more cost-effective than a fee structure that charges ”2 and 20” (2% management fee, 20% carried interest). Read our full paper on fees.

The Sifuentes Strategy Fund’s investment mandate is similar to our flagship ETF, SS, but expands the opportunity set into the private markets. Like our public equity strategies, our top-down and bottom-up research is the lens through which we screen and select investments. We believe our differentiated value proposition combined with our network of co-investors, public companies, founders, and academics offers access to the most promising private technology companies.

You can learn more about the Sifuentes Strategy Fund at Inalytics, Inc and you can see all risks in the prospectus.