There is ample evidence that the share of total wealth in America held by the wealthiest Americans continues to grow – one reason for this is access. When someone has net worth in excess of $100 million, the investment opportunities afforded to them include easy access to early stage venture deals, the nation’s top venture capital firms, and high-performing hedge funds. Those with nine-digit net worth or greater are not limited to the usual slate of mutual funds, bonds, ETFs, and other products available to average investors. Wealth buys access.
Investment in American entrepreneurs is the single most effective wealth producer the world has ever known. American entrepreneurs solve the world’s big problems and generate tremendous profits doing so. Want affordable health care? Pick an entrepreneur. Want to improve education? Pick an entrepreneur. Want to create jobs? Pick an entrepreneur. The resilience of our global economy comes from customers eager for better answers, entrepreneurs bold enough to think differently, and investors willing to fund new ventures. Entrepreneurs make America great. Investing in entrepreneurs makes the wealthiest Americans even wealthier. iSelect broadens access to investment opportunities that previously were only open to the super rich.
This week it was announced that Chinese private equity firm CSC Group invested $400 million in AngelList. CSC Group’s investment represents the largest ever reserve of funds earmarked for early stage startups. In fact, the Wall Street Journal posits it may even represent the largest-ever investment by a Chinese private equity firm in a U.S. fund. CSC Group wanted to invest more, but AngelList’s focus did not offer enough capacity for a larger deal.
Smart investors like CSC Group know if they invest in just one venture they will lose – but investing in a diversified portfolio of 20, 30, or more ventures achieves annual compounded returns greater than 20%. Research and fund performance represented by the Kauffman Foundation, Cambridge Associates, and 500 Startups all reach the same conclusion.
CSC Group’s landmark investment was no surprise to iSelect. That perhaps the largest ever Chinese private equity deal is focused on a broad portfolio of early stage startups further validates the value-creating potential of American entrepreneurship and the portfolio theory that iSelect advocates. For iSelect, the CSC Group investment makes a lot of sense: entrepreneurs energize the world economy and the smartest investors want in at the earliest stages, capturing value before a company goes public. Investing early allows investors to double down later once the winners in their portfolio emerge.
Modern portfolio theory teaches us that, by investing in more than one stock, an investor can reap the benefits of diversification – chief among them, a reduction in the riskiness of the portfolio. The same applies to early stage investing: when funding 20 early stage ventures, investors have a 99% chance of at least recouping their investment. At 50 investments, the chances of at least doubling their investment soar to 97%. And at 500, investors have a 96% chance of at least tripling their money.
While AngelList is a great storefront for syndicating startup investment, Kauffman Foundation data clearly shows that success also requires extensive diligence and industry expertise. Further, the assets underpinning the venture must still be fundamentally valuable and the company’s progress monitored diligently.
Silicon Valley cultivates software, IT, media and entertainment ventures – and AngelList does a great job of finding and funding these companies. But what about everything else? How can investors tap into the rest of America’s unique innovation engine? After all, not every big company is built in Silicon Valley.
We estimate there is a shortfall of almost $8 billion per year in venture investment in the U.S. It’s not that these ventures are too risky; Kauffman Foundation, et al. show how to minimize this risk through diversification. The shortfall exists because it’s too hard for private individuals, wealth managers, and institutional investors to find, vet, and manage these investments.
Tools are need to bring accredited and institutional investment to early stage ventures in Chicago, Cleveland, Denver, Houston, Indianapolis, St. Louis… and many more places. Why? Because that’s where new ventures in other industries exist. Investors should focus on ventures that cure cancer, fight fibrosis, improve agriculture, reduce costs of energy efficiency, streamline telecommunications, increase enterprise security, wrangle with logistics, and create new retail solutions. In all cases investors should focus on firms that are customer focused and led by seasoned entrepreneurs. Want to invest in next generation agriculture companies, it better be in St. Louis. Want to find the smartest energy entrepreneurs? It’s a good idea to look in Houston. In short, investors should focus on need-to-have, not nice-to-have, opportunities. They should invest alongside regional venture capitalists led by successful entrepreneurs and always with proven expertise. Investors should diversify investment across companies and industries, because that’s the way to achieve higher risk-adjusted returns. They should invest outside Silicon Valley because these locations offer cheaper operating costs, proximity to customers, excellent talent, rational valuations, and strong exit opportunities. Just ask First Round Capital, who found their portfolio companies based outside technology hubs performed better than their coastal peers.
We live in an age with unprecedentedly new and novel ways to access deals. CSC Group’s investment in AngelList is further proof for these alternative routes to funding. China knows its future depends on American innovation. US Innovation is not limited to Silicon Valley. Investing in American entrepreneurs provides great returns, and changes the world for the better.