The writing is on the wall for the public markets. The forward returns investors should expect from investing in publicly traded securities will be — to put it generously — below recent trend lines. Same is true for later stage Private Equity, and if the performance of the recent ‘Unicorn’ IPOs are an indication, later stage venture capital as well.
As a result, the big firms are exploring alternatives strategies beyond their core business — even going down market to do it.
Morgan Stanley going down market and buying ETrade, Franklin consolidating assets and buying Legg Mason, and don’t forget Goldman becoming a bank and now offering consumer products.
All this while the interests in ESG & Impact investing is accelerating among the wealthiest families in the world.
The greatest opportunity to capture excess risk-adjusted returns is always in those markets that are the least efficient. The least over bought.
Today, that is in early stage venture, likely outside of the 4 most active venture markets; Silicon Valley, Boston, NYC & LA.
So the question is less about ‘what’s next’, or even ‘where’. It is more about ‘how’ — how can the $Ts that cares about how they make money, actually deploy that capital with rigor, and capture alpha, particularly in the venture asset class?
Need for Venture 2.0
As Prof. Tom Nicholas of Harvard Business School commented in his book ‘VC An American History’,
“The fact that partners’ talent matters most is an important ﬁnding, and is consistent with the fact that the VC industry has been remarkably devoid of organizational innovation (emphasis provided) since Draper Gaither and Anderson was founded as a limited partnership in 1959.” pg 311
It’s also striking when you look at this Crunchbase infographic that covers where capital is flowing in the FinTech space. There is nothing referencing the venture industry itself having any investment in innovation.
What’s Next — Institutional Rigor & Impact
For a peak, take a look at ‘Venture 2.0’ and drill down on the linked research. Or take a look at the white papers in Institutional Investors Journal of Private Equity addressing what’s next — at least in the venture asset class.
As one of our Board Members/investors said, who himself ran and sold a FinTech research tool to Credit Suisse for $100M: ‘This is how investors can, should, and will invest in the venture asset class’.
The future is here, capital will flow where it is treated best, and ESG/Impact has to be part of the total return.
As Albert Einstein so famously said:
‘We cannot solve our problems with the same thinking we used when we created them.’