Maggie Sprenger and Peter Ackerson share their insights into risk, evaluating tech, and return distributions
Peter Ackerson I am Peter Ackerson, and I'm a general partner at Audere Capital.
Maggie Sprenger Hi, I'm Maggie Sprenger. I'm a general partner at Audere Capital. We invest into early-stage technology companies focused on the intersection of national security and priority, deep tech, and VC, of course.
Peter Ackerson When you look at venture as an asset class, and you think about where the risk lies, you also want to be thinking about who the managers are and what the general valuation levels are. One of the biggest risks, candidly, is that any time you see technologies that on their surface are intellectually accessible or that sound incredibly fascinating, you have to take a step back and put a critical lens. For instance, with artificial intelligence, there is an enormous amount of buzz and a lot of hype, and it becomes easy to be distracted from business fundamentals.
So, when you look at AI, you have to consider what it will turn into, who will profit off of different types of intelligence, and which business models will be effective over the long term, as opposed to simply being effective at raising capital and getting headlines. Those are some of the risks. You have to be really careful and make sure that the investors you are partnering with and the venture firms you are potentially putting capital into are not simply chasing headlines and not just chasing technology for technology's sake.
Maggie Sprenger One of the benefits of being portfolio managers versus doing direct investments is that we get to de-risk each company by having it wrapped into the portfolio. I'm long on funds in general because I think that company risk, macro risk, vertical risk can all be hedged by being thoughtful about portfolio construction. It's actually something that we've obsessed about because of our goal in de-risking each LP dollar relative to the risk of each company.
Peter Ackerson The joke when I was in enterprise software used to be that the world is full of unsold software, and the world is also full of groundbreaking technologies that are widely adopted and never made a nickel for anybody. That's not an uncommon occurrence. Simply because the technology is fascinating or is at the front edge of capabilities does not necessarily mean it will translate effectively into a business, let alone into a business that, over time, increases in value.
I think that's a hidden risk that a lot of people don't necessarily think of. You can think of any technology and look at things from, you know, the one I love that's silly but funny is I have no idea if the guy who invented the remote control ever made a cent from having done so. There are lots of things that we use every day that are profound. For example, LiDAR technology and autopilot technology in cars are groundbreaking, but it's not necessarily obvious which entrepreneur or which company will, by default become incredibly valuable simply because they have that technology.
Maggie Sprenger I think there are a lot of preconceived notions of the risk in this asset class, which are not unfounded. This is risky, which is why the portfolio construction element is so critically important. When we think about this asset class, it's really important to remember power law. Most assets, most distributions look like that classic, beautiful bell curve, right? The mean and the median are relatively close together; it takes a lot of energy to drive something down either side of that curve. Power law is what early stage adheres to, and it has this high death rate, right? We have a lot of companies that do fail, and then we have outlier behavior.
And it's the only asset class I know of where regression to the mean is a good thing because it potentially can be 22% for that early stage. Now the important part to pay attention to is this death rate. The other thing that you can remember about this is qualified small business stock QSBS tax code. It sounds really unexciting, except for the fact that it allows you to shelter up to ten times the original investment from federal tax. So that combined with power law, means that this has the capacity for potentially incredible returns. That's why working with managers who really understand the asset class and building a really thoughtful portfolio is critically important. But that long tail is what keeps us really excited about this work and keeps us continually investing into this work.