A New Take on Personal Finance for the Little Guy: Lessons from Venture Capital

One of the fastest growing asset classes is Venture Capital, and for good reason. The tech boom has minted a new class of companies and founders after high profile deals with more money than most would know what to do with. Recently, the Yale Endowment published its latest asset allocation report; and, to the surprise of many, Venture Capital and Private Equity combined accounted for a greater share than domestic equities.

There are two primary causes for Venture Capital’s rise to fame — its symbiosis with the success of the tech sector, and it’s allocation model. The success of the technology sector in recent years can be argued to have benefited Venture Capital for being in the “right place at the right time”, and tech’s revolutionary success by this point has been widely understood and accepted. But the new investing model championed by Venture Capital is lesser known, and should be viewed just as disruptive as the innovation coming from their Silicon Valley startup counterparts. The Venture Capital model of investing includes taking many small, diversified bets, on high risk assets. It’s atypical option value lies in the fact that losses are many, but small, and its wins are few, but staggering. It is not uncommon for a successful VC firm to have investments that yield 100x on the original amount invested. Even if every other investment in the portfolio was a total loss, a firm that can find a 100x gainer better than 1% of the time would see their portfolio make money. Finding a 100x opportunity is easier said than done, but if 100 carefully designed separate and small bets are placed, each with a logical growth thesis capitalizing on new potential trends, then the investor stands a fighting chance.

The problem is, small individual investors don’t have access to Venture Capital funds the way that wealthy investors and institutions do. Not only is it a matter of lack of connections, the concept of an “accredited investor” literally prohibits small investors from allocating a part of their investment portfolio into Venture Capital. However, while small individual investors can’t get access to these private deals themselves, they can still adopt the Venture Capital investing model, to a certain extent. Individual investors can place many small bets on highly risky assets. As the bets are small, in the case of total loss the downside is limited. However, if several of these small bets yield success, then it can be a noncorrelated win for the investor.

Take for example, BitCoin. A bet of only $5 in 2010 would be worth over $70M today. For an investor who allocates 10% of his portfolio to these small, “venture capital” style bets, even one win from a diversified portfolio of bets can be enough to have that segment of his investment portfolio outperform the rest. Hindsight is always 20/20, and surely every investor wishes that he would have put money into BitCoin or Amazon in 2010. However, with a dedicated effort to reserve a portion of investment funds for these types of opportunities, the individual investor can find uncommon gains. More opportunities such as BitCoin will arise, and the investor who is liquid (with a dedicated “bet” fund to boot) will reap the benefits.