Читать книгу Building Wealth through Venture Capital - Freeman Kenneth M. - Страница 5

So how can the American Dream of wealth creation continue? The key is, and has always been, major innovation – new technology and new product development that address new needs or meet existing needs dramatically better.

The most successful major companies understand this. Today's Wall Street darlings – companies like Microsoft, Alphabet (the parent of Google), and Facebook – were yesterday's venture capital–funded startups. These companies understand that major innovation must never stop. Look at the publicized innovation efforts of Alphabet (now pursuing self‐driving cars), Tesla owner Elon Musk (racing to commercialize space travel), and the major pharmaceutical and biotech firms creating new cures for diseases that won't go away.

Automotive companies such as Volvo and BMW have established formal venture capital arms. Even marketers of mundane food, household cleaning, and personal care products, such as Unilever, are setting up venture capital arms to fund innovative startups in their fields whose growth prospects they can then nurture with dollars, distribution clout, and management know‐how.

So, a fair question from investors might be, why not just invest in the stocks of these big‐league innovators? We'd never suggest that you not invest in these companies. They've demonstrated the ability over the years to grow their businesses and stockholder value. There is one caveat, though. Their already high share prices have baked in investor expectations of continued healthy growth. Hence, you may earn a respectable return on those stocks, but don't count on breakaway gains.

The biggest wealth creation opportunity – for both entrepreneurs and the investors who back them – is through market‐changing innovation commercialized by new ventures. There are the latest winners, highly valued new ventures you've heard about – Uber, Airbnb, Instagram, Square, and many others. There are also the home runs that aren't household words. We just told you about one in the Preface that enriched many of our Batterson Venture Capital investors, a company called Cleversafe. Cleversafe's revolutionary innovations in data storage turned roughly $100 million in investments (to be clear, only about 4 % from Batterson Venture Capital) into a $1.3 billion sale to IBM. And there are some doubles and triples out there, too, though the biggest money is to be made on the home runs.

As awareness of recent venture home runs has grown, there has been a surge in innovative venture activity. It's no longer limited to Silicon Valley and Boston's Route 128. Venture capital activity is flourishing in New York, Los Angeles, the DC metro area, Austin, and anywhere where creativity, ambition, and the funds to nurture it are found.

Venture incubators and supportive angels are emerging everywhere. Cleversafe is a great example. While people often talk about the Midwest's conservatism and reliance on agriculture and heavy industry, Cleversafe's billion‐dollar+ win was created in Chicago. In fact, Inc. recently reported that Chicago (which is where our funds are based) is now second behind only New York City in the number of fast growing private companies on the Inc. 5000.

The dollar growth in venture capital investment reflects this broadened activity. Venture capital investments in 2015 totaled $59 billion, up 153 % since 2005. Importantly for our readers, for the past couple of years, investments by individuals have caught up with the dollars invested by the big institutions. The rich potential returns from venture capital used to be restricted to an exclusive club of institutions and the mega‐wealthy, but are now becoming “democratized.”

Venture capital returns historically have been handsome, averaging about 12 %/year. That's a lot better than the almost 5 % average return from the S&P 500 over the past 16 years, and almost anything beats today's near‐zero interest rates.

Some venture capital leaders have done even better. The funds we've managed have generated investor returns averaging 28 %/year over the past 30+ years. We've done that even through the dot‐com collapse of 2000 and the broad economic plunge of 2008–09.

Our secret approach in fact isn't really a secret. We've shared it openly in the past, and will share it with you in this book. It takes lots of hard work, screening hundreds and even thousands of venture opportunities to select the few that we believe could grow into billion‐dollar+ home runs. We review at least a hundred ventures for every one in which we invest. We usually get in early, while these ventures still carry low valuations, before others recognize their potential.

The exhaustive screening and due diligence pay great dividends. To be clear, we don't always get it right. But more than 35 % of our investments have delivered some positive return to investors. While that might not sound so great, that's almost double the success rate of the industry in total. (It's like baseball, where a .350 batting average can win the batting title!) And our big winners like Cleversafe (and several others, including our multibillion‐dollar exits for AOL and CyberSource) mean lots of new wealth for our investors.

Before we go further, though, let's be clear. Venture capital investment is not for the faint‐hearted. It is a high‐risk – and potentially high‐reward – opportunity. Most new ventures fail. Just 10 % of venture capital investments deliver the majority of all returns. In this book, we'll try to help you maximize your success odds and manage your risks. We don't believe that any investor should risk losing his or her proverbial shirt in venture capital.

It's a high‐risk, high‐reward potential situation for entrepreneurs, too. It's easier and lots less risky for talented, ambitious individuals to devote their talents to large, well‐capitalized enterprises and make a comfortable living. But for the most ambitious individuals (and often the most talented), many of whom don't want to live under the yoke of corporate direction and are determined to do their own great thing, that is not enough. They seek the gold ring that can be captured only by building their own market‐moving enterprise.

After they've started up by borrowing from credit cards and home equity lines and then tapping into supportive and hopefully well‐heeled family and friends, they need to find the even‐bigger funds to continue on. As startups succeed, their capital needs to realize their full potential grow sharply.

It's often said that venture successes inevitably take twice as long and require three times as many dollars as the entrepreneur expected. So he or she had better know what they're doing, and go after funds from the right sources – those who can provide the needed dollars today, as well as help in accessing the dollars they'll likely need later, along with the advice and professional help that may be even more critical to their ultimate success.

While this book was written to help both the investor and the entrepreneur learn what they need to know to succeed today, it should remain helpful for many years to come. Sure, like the economy and other markets in general, the venture capital playing field will change over time, just as it has always been changing and evolving. Nevertheless, the fundamentals will still apply.

Very simply, the venture capital marketplace exists to bring together: (1) investors willing to accept considerable risk in exchange for potential exceptional return on investment, and (2) entrepreneurs whose innovative developments are characterized by considerable uncertainty and risk as well as potential for outstanding wealth creation.

For anyone who thinks the greatest innovations are behind us and questions how much is still left to “invent,” we say thank you for leaving the wealth opportunity from future innovations in the hands of those of us who can still dream and think big. Humankind's ever‐increasing expectations and aspirations will inevitably motivate continued innovation. Add to that the needs resulting from natural resource constraints, climate change, and other environmental concerns, which we believe will drive even more innovation than we can imagine.

Here is a list of a dozen categories we believe will be huge opportunity areas for future innovation and new wealth creation, and we're betting there will be even more:

1. Advanced materials

2. Artificial intelligence

3. Big data and predictive analytics

4. Biological computers

5. Biomedical

6. The conquest of aging

7. The genome

8. Immunology

9. The Internet of Things and of Everything

10. Nanotechnology

11. Robotics

12. Virtual reality

Changes in the venture capital playing field will also contribute to making the coming years good ones for venture capital investors and great ones for entrepreneurs.

As we mentioned earlier, the accessibility of venture capital investment opportunities is becoming democratized. Today there are roughly a half million individual venture capital investors in the United States alone, and that number should expand dramatically in the coming years.

Recently launched online venture capital portals have opened investment access to America's estimated 10 million accredited investors (i.e., individuals and couples with net worth, excluding the value of their primary residence, of $1 million or more, as well as individuals with annual income of $200,000+ or couples with annual income of $300,000+). Further, the JOBS (Jumpstart Our Business Startups) Act allows venture capital firms to advertise to these accredited investors.

On top of that, regulations implementing Title III of the JOBS Act, enacted by the SEC in the spring of 2016, open venture capital investment access, albeit with tight limitations, to the rest of America, too. These JOBS Act provisions should increase substantially the availability of venture capital investment dollars. What a great time to be an aspiring entrepreneur!

Entrepreneurs will be helped further by advances in software and Internet technology already behind us, which have brought down the costs of initial startup requirements. Lower‐cost startups are ideal for many online venture capital portals, even those restricted to accredited investors. These online portals typically set much lower minimum investment requirements than the more traditional firms, and so tend to invest fewer dollars in each of their deals. The new online portals open to non‐accredited investors, which are further limited by the SEC as to how much they can invest in a single deal, are also particularly well suited to startups with lower early capital needs.

Ironically, more traditional venture capital firms like ours, which only allow investments from accredited investors and, even though accessible online, set a higher minimum investment requirement (our new firm, VCapital, has a minimum individual investment requirement of $25,000), welcome these new firms that are democratizing the industry. Frankly, they are so new relative to the typical lead time from investment to return that it's too soon to say how well they will do for investors (more on that later).

Nevertheless, for us, the ability of a venture to attract a large number of these firms' smaller investors represents valuable market intelligence, demonstrating early concept appeal. It's somewhat like virtual market research. If the venture goes on to show progress and has greater subsequent funding needs for expansion, we may be more likely to invest. We may not get in quite as early, but the risk when we do get in (which will likely still be early in the venture's growth) will probably be less, too – an acceptable tradeoff.

Notwithstanding possibly lower initial startup funding needs, most ventures with considerable potential will have increasing funding needs as they progress. In some cases, particularly in fields dealing with information technology, the importance of speed to market may require quite sizeable later‐stage investments in order to accelerate expansion. In other fields, such as pharmaceuticals and biotechnology, later‐stage FDA testing requirements carry extremely large costs. The risks even at these later stages are still inappropriate for banks or most alternative lenders, requiring a venture capitalist's perspective and risk tolerance.

Putting all this together, it looks like we are actually just now entering the golden age of venture capital for individual investors and the entrepreneurs whose dreams they will be able to fund and then benefit from financially. This book is written for both groups – individual investors and entrepreneurs – to help guide them along the path to potential wealth.