(Expansion) – The golden rule of Venture Capital (VC) a few years ago was clear: hit home runs, but what does that mean? Basically, the decision to invest in a company was based on its becoming a unicorn, companies with the capacity for rapid growth, instead of building a portfolio balancing risk; that is, a portfolio of pure potential unicorn against one where unicorns and coexist. In the end, the goal is to generate billionaire profits for all the fund’s stakeholders.
In the way of the unicorns it is assumed that there will be many failures in the invested companies: of 10 companies, 9 fail, but one is a home run; super-returns are built and failures become irrelevant.
To paraphrase Alexander Graham in the article: Every investment you make (a VC) should have the potential to hit a home run. For many, particularly those from traditional financial backgrounds, this way of thinking is disconcerting and counterintuitive.
The conventional financial portfolio management strategy supposes that the yields of the assets are weighted by the risk they imply and the portfolio is built by investing in companies with a high potential for return and a lot of risk and companies with a more limited risk but also a higher return. more modest. In this way, the result is that the portfolio generates its returns in a uniform manner and with a certain level of predictability.
Today things are more complicated. Silicon Valley milestones like Facebook or Tesla generated huge expectations about returns for VC’s. As part of that guild, I can only dream of having the opportunity to get on Facebook in 2004 and see that level of return in 2012… only eight years later.
We all want to find the next giant of digital disruption in time and hit a legendary home run. Since 2012, when Facebook went public breaking all the charts, something like this has not been repeated. Two years earlier, in 2010, it was Tesla’s IPO, and today it is the best ranked company in the last 12 years, with a market cap of . This pair of home runs hasn’t been repeated, but that doesn’t mean it’s over.
True, there hasn’t been another Facebook for 10 years; in this fast paced world it seems like a long drought… IPO’s, even from names like Airbnb, Shopify or Spotify have not even remotely reached the valuations of Meta/Facebook, let alone Google or Amazon.
Returning to the initial question, what investment philosophy is the winner in VC? In my opinion, we are at a moment in history where the past serves to understand the future but not necessarily predict it, technology, consumption patterns, societies are constantly evolving and the possibilities are endless and for this reason we VC’s have to seek break records. It is nice to talk about stable companies, to see entrepreneurs who are happy as camels, but the VC business is not there.
I’ve heard that this “drought” of epic IPOs means that we VCs have to temper our expectations. “Yes, we are going to win, but we are going to win more moderately,” they say. There are serious voices that say that you have to bet on the portfolio, that is, on the batting average before looking for the next Babe Ruth. I differ. The disruption begins, the entry of Web3 is a scenario that many are not seriously looking at, in that space is the next, ultra-unicorn.
We are going through an economic downturn: post-COVID-19 uncertainty, Ukraine, etc., but nobody said that being a VC was for the faint of heart. If you want to be careful, you can go to the Stock Exchange, see records of more than 200 years and make educated decisions there. Being a VC is for visionaries, of course we want to make money, but along the way we want to change the world, decentralize banking, democratize education, universalize communications, colonize Mars. That is not done tempering portfolios.
You have to make educated decisions, you have to invest knowingly and with conviction. This is not a game of roulette. But as Graham puts it: “So the question is: how can you choose your investments wisely to maximize your chances of landing a home run?” In my opinion that is a mixture of art and science. Doing due diligence hand in hand with being good, knowing the people, the team, the ability of an entrepreneur to be a leader and understand the markets and changes.
It may sound dreamy, but no, I can assure you that we have not seen the end of titanic valuations and IPOs like Facebook’s in 2012. on the margins with companies that, yes, maybe they are profitable, have profits, stable growth, but do not have blitzcaling potential, like the unicorns that change the world, the economy and incidentally generate stratospheric profits for those capable of sustaining the change through uncertainty.
Editor’s note: Fabrice Serfati is a Venture Capitalist expert in disruptive businesses in Latam, Managing Director and Partner at IGNIA Fund, mentor of brave and outstanding entrepreneurs. Creator of the #ReadToLead podcast and the Founder’s Book Club. Follow him on and/or on . The opinions published in this column belong exclusively to the author.
