I don’t think anyone would argue that investing in early-stage venture capital presents a unique opportunity for high-net-worth individuals and family offices seeking high return potential and the chance to contribute to groundbreaking innovations. While public equities, bonds, and real estate offer stability and diversification, early-stage venture capital has some distinct advantages.

What I see and hear fairly frequently as I talk to high-net-worth individuals and family offices, many of whom are very sophisticated and quite knowledgeable investors, is how many of them don’t embrace venture capital investing because, in my opinion, they have some misconceptions of this asset class. Many of the folks I talk to think of venture investing as extremely risky investing with the potential for, but the improbable likelihood of, high returns. I find this interesting, as it’s not at all what the historical performance data on venture capital funds tells us. Here is what the data says:
 

Historical 20-Year Returns

Source: H.Wong, Venture Economics/NVCA (2002)

 
I like to share the story of the late investor David Swensen, whose investment prowess was legendary. His pioneering approach to managing the Yale endowment made him one of the world’s most renowned and influential institutional investors. David figured out while managing Yale’s massive endowment, beginning in the 1980s, that Yale was seeing their highest returns from alternative investments (i.e., private equity, real estate, and venture capital) but that it was only a small percentage of their overall asset allocation.

To David, this didn’t make any sense, especially when it came to venture capital funds, which consistently outperformed every other asset class. So, he changed Yale’s asset allocation make-up, increasing alternatives to nearly 50% of the endowment with a significant percentage of that going to venture capital and, in doing so, changed the game or investment thesis for Yale and, later, many other followers. After all, why wouldn’t any investor want to put most of their investment dollars into the highest-performing assets?

In the league of elite investors, few can rival the late head of the Yale Endowment. As Chief Investment Officer of this multi-billion dollar portfolio, he delivered top performance over multiple decades, and his investing style influenced an entire industry. Swensen’s innovative and rigorous approach to asset allocation and expanding its range was revered, with others rushing to replicate it. This approach became known as the “Yale Model” and revolutionized endowment investing.

Over the span of three decades, Swensen took the Yale Endowment from $1.3 billion to over $30 billion, averaging over 12% annual returns along the way. So, what lessons can we learn from the legendary investor?
 

The Power of Long-Term Views

From the onset, Swensen understood that an endowment’s long life significantly enhanced its ability to search for yield beyond public markets. By eliminating the constraints of a reactive, short-term approach, Swensen delved into private assets. He realized that private assets like venture capital offered a premium to patient investors that could forgo the need for immediate liquidity. When he started at Yale, the endowment had 75% of its investments in public equities. Seeing higher returns from alternative assets such as private equity, hedge funds, real estate, and natural resources, he aggressively shifted the asset mix.

Superior results followed, and his track record outpaced his peers. Today, public equities are only 16% of Yale’s portfolio, with the bulk of its holdings in venture capital, private equity, hedge funds, and real assets.

Here are some of the advantages of investing in venture capital:

• Potential for Explosive Growth
  Early-stage ventures have the potential to experience exponential growth. Investing in startups at their inception can lead to substantial returns if they succeed, far exceeding the growth potential of established companies in public equities or even private equity.
• Access to Innovation
  Venture capital allows investors to be at the forefront of technological advancements and disruptive innovations. These startups often bring new ideas and solutions to the market, creating entirely new industries or transforming existing ones.
• Diversification and Portfolio Growth
  Including early-stage venture capital funds in a diversified investment portfolio can mitigate risks associated with traditional asset classes like real estate and public equities. It provides exposure to different industries and sectors, reducing dependency on the performance of any single market. Venture capital is a non-correlated asset to the stock market.
• Active Involvement and Impact
  Investing in early-stage ventures isn’t just about financial returns; it’s also about contributing to the growth and success of innovative ideas. Many of our investors at Florida Funders find fulfillment in supporting entrepreneurs and making a tangible impact on society through their investments.
• Potential for Higher Returns
  While high risk accompanies early-stage investments due to the volatility and uncertainty of startups, successful ventures can yield significantly higher returns (10x plus) compared to other asset classes over the long term, and much of the risk can be mitigated by diversification (i.e., investing in a venture fund).
• Early Access to IPOs or Acquisitions
  Successful startups often get acquired or go public, providing investors with opportunities for liquidity events that can yield substantial returns on their initial investments.
• Ability to Influence Growth
  Some of our Florida Funders investors have the opportunity to offer guidance, mentorship, and networking support to the startups they invest in, potentially influencing their growth trajectory and success.
• Adaptability and Resilience
  Successful venture capital investors often possess an adaptable mindset, constantly learning, adapting, and staying informed about emerging trends and disruptive technologies, which can be an advantageous skill in the rapidly changing landscape of early-stage startups.

Definition of Patience When It Comes to Venture Capital Funds

So, you might be wondering, “What are the downsides to investing in early-stage venture funds like Florida Funders?” The most significant one by far is liquidity. Venture fund investing requires patience. Like most venture funds, Florida Funders has a ten-year fund life. This means we will “call” and invest the funds over the first three years of the fund, and then returns (i.e., investor distributions), which are predicated by exits of portfolio companies, will typically begin being paid out around year five and will continue over the subsequent five years. It’s important to keep in mind that your committed dollars to the fund are not tied up for a full ten years because, on the front end, the capital is only called as it is needed, and on the back end, investors will typically start to receive distributions beginning in year five. These are approximations and not guarantees, as outside factors like the IPO and M&A market and the macroeconomy will affect portfolio companies’ timing to exit.

So, is venture capital investing for everyone? The data and evidence are pretty compelling that, for high-net-worth individuals and family offices, the only major downside to allocating some portion of your investable assets to venture is liquidity.

My intent here is simple: to help investors understand why venture capital should be part of your portfolio if you are trying to maximize your portfolio returns. However, as an avid investor myself, my primary attraction to venture capital is the excitement and fulfillment I receive from investing in young, talented, hard-working people chasing their dreams and trying to change the world. In my opinion, it is America’s entrepreneurs/founders that are our real superpower. Because of them, no other country in the world can compete with us when it comes to innovation. What could be more fun than investing in these founders and trying to help them succeed? I believe it’s almost always startups that drive innovation, disrupt industries, and drive job growth. Innovative new technology and implementation will eventually fix our broken healthcare and education systems and allow us to compete with China. Somewhere out there, even as I write this, startups are using AI to work on the cure for cancer, creating some new solution to address sustainability or climate change, or coming up with an answer to some of the world’s other problems. It’s always the startups, typically with some quirky yet passionate founder, that come up with something that changes all of our lives.

At Florida Funders, we are on a mission to find and fund these founders who will solve some significant problems, create high-paying jobs, improve all of our lives in some way, and provide outstanding returns to our investors.

We welcome you to join us on this incredible journey.

With much gratitude,
tom e wallace
Managing Partner, Florida Funders