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Early stage venture is risky, but can be the highest returning asset and diversifying to portfolios.
Key Takeaways
- Early-stage venture is risky, but can potentially produce very high returns.
- Funds make many investments, because they expect a lot of their ideas to go to zero. This fund structure is naturally diversified.
- Early-stage venture exposure is diversifying to a portfolio because it provides access to disruptive technology - which could hurt investors' passive exposure to growth, such as through public equities.
Transcript
Hi. I'm Seth Berman. I'm one of the co-founders and general partners of Susa Ventures.
I think the pitch for investing in early-stage is you can get crazy returns. You can get returns that you've only dreamed about on your best nights. I think typically a smaller fund outperforms a larger fund and let's say sub 150 or sub $100 million, typically outperforms a larger fund that's above a billion dollars. And we're not trying to get to you, you know, ten, 20% returns a year. We're trying to get to you 50, 70 100% IRR. There's almost no other asset class that can provide you with this sort of return over the long run.
When we invest in a company we invest in, let's say 35 to 40 companies per fund. It's pretty binary if the company succeeds or not, it either creates value or it doesn't. And I would say, you know, it's really the 15 to 20% of our companies that succeed and actually create value. And then there's 80% that go to zero. So because they're investing at such an early stage yes, we might be getting it at a $20 million valuation and we used to get in and a $10 million valuation, but we're still going to have phenomenal returns if we hit winners. And so we feel confident that our business will continue to thrive. And, our horizon is not over the next 12 to 24 months, it's over the next 10 to 15 years. Because we're early-stage investors, and so it takes 10 to 12 years to really build a world-class company. So we can't think short-term. We can only think long-term.
It's definitely a source of diversification. Early-stage funds tend to invest in a lot of companies. So it's very challenging for you to go out and find these companies on your own and then know exactly which ones you'd want to invest in, get your ownership and then know which ones you want to put more capital into that are working. And so it allows you to get diversification within the early-stage tech ecosystem, but it also allows you to invest in the technology of tomorrow.
So a lot of these tech platforms haven't been built yet. And so there's no public market company that has exposure to them. And so for you to get exposure to them like the biologics and cultivated meat, you have to invest in the early stage to have that exposure. Same thing as if you're investing in DEFI or crypto or, you know, the metaverse. A lot of these companies, you know, just don't exist on the public market. And so if you want to get exposure to them, you have to go to the private markets to get that exposure.
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