To many, venture capital is what is seen in the headlines - unicorns, mega-funds, runaway valuations, and hoodie-clad tech-titans cruising the Valley on scooters. But at its very core, venture capital could not be further from this image. Venture is where capital meets innovation, primarily outside of the headlines, touching every corner of our personal and professional lives: how we eat, communicate, exercise, commute, work, and travel. This makes it a critical asset class for investors with long-term investment horizons, but it also demands deliberate strategy, structure, and process to properly allocate capital and manage risk.
Not every venture deal, however, results in a blockbuster $1B+ IPO. The reality is actually quite to the contrary. Over 90% of 2018 exits came via M&A transactions, of which 83% were sub-$500M [1]. This suggests a deep opportunity set of “sub-unicorns”, putting smaller funds and often, emerging venture managers, at the forefront of the innovation curve and enabling them to stealthily deliver outsized alpha to those who wish to look for opportunities between the cracks in this vital but often fragmented and opaque asset class.
Emerging venture firms, though perhaps not yet household names, are doing the digging and nimbly deploying smaller pools of capital while leveraging strategy, structure, and process to create value through hands-on engagement with entrepreneurs. Data shows this grassroots approach is generating attractive returns relative to larger funds and more established brands. In a recent study completed by Canadian Technology Accelerator, top-quartile venture funds <$249M generated IRR of 39% versus IRR of 33.6% ($250M-$999M funds) and 9.9% ($1B+ funds) [2]. This engaged approach is fully aligned, free enterprise innovation in its purest form. It is also miles away from spray and pray methodology and underscores the criticality of manager selection in the venture asset class.
At Laconia, we live on the outskirts of the land of unicorns (though we are certainly happy to identify one!) where there may not be headlines, but there is exciting opportunity for those willing and able to do the hard work. The moral of the story is there is a land not terribly far away, just on the other side of the forest, inhabited by innovative sub-unicorns that are generating venture returns beyond the headlines. Choose an able guide to help you find the way – you will be glad to have taken the road less traveled.
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[1] Data provided by Pitchbook and the National Venture Capital Associations’ “Venture Monitor”. Data as of 12/31/2018.
[2] Data parameters: 951 venture capital funds, Based in the US and Canada, FY2002 – 2014. Study conducted by the Canadian Trade Accelerator (2019) ctaconnects.com/emerging.