What the Future Looks Like: Top Trends in 2016 Startup Investing
Alexander Pack

I think the angel/early stage venture industry itself could be added to this list.

The traditional funding model of lengthy (and highly subjective) due diligence process, personal biases and focused portfolios will continue to evolve to more portfolio manager-like processes, even deploying some of the best practices from the public markets.

This historical model has defined the angel groups and other startup funding activities, and is due for an evolutionary improvement, applying technology, discipline, and ‘best practices’ to shape this evolution past the club-like environment today.

Some of the public market ‘best practices’ coming to the private markets soon:

  • Standardize reporting from startups: think Value Line…
  • Objective performance metrics: think ‘the’ Value Line…
  • Basic portfolio management practices: non-systematic (company specific) risk has not been addressed properly. It will be….
  • Smart Beta investing: broadly diversified (index-like) portfolios that get exposure to the (beta) asset class, but with an efficient filtering done based on specific (back-tested and objective) metrics.
  • Concern with ‘after-tax’ returns: as more angel (and family office) investors become aware of the existing tax laws that lower the after-tax risk and raise the after-tax returns for (individual tax payer) angel investors, there will be an increasing awareness that use of these tax laws alone lowers the equity risk-premium on the asset class (presuming portfolios are constructed vs. rifle shoot/pray practiced today) and moves the efficient frontier up and to the left.

For portfolio managers, these are blocking and tackling practices.

Investors, and the entrepreneurial funding mechanism, will benefit from the experience of the public markets.

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