Second-Order Effects of Publicly Traded Venture Capital Vehicles
In One Up on Wall Street, renowned portfolio manager Peter Lynch famously advised the everyday investor to “invest in what they know.” Lynch advocated for the idea that the common man could make a killing by simply paying attention to the products transforming the world around them and investing behind those beliefs. And he was right. For instance, Apple and Microsoft both went public in 1986. Both are now multi-trillion dollar companies, with 99.95% of that value being created after each company IPOed. Individuals who used the products and subsequently sought to own a piece of those companies have performed phenomenally well.
Core to Variant’s mission has always been the belief that users should be able to own a piece of the products they know and love. And as we’ve written about, enabling users to own a piece of the products can be a market-driven way to build networks bigger, faster.
That said, outside of crypto networks, “investing in what you know” is currently very difficult. Companies are growing bigger than ever, yet staying private for longer. The vast majority of the economic upside from the businesses building the future is captured by a small group of insiders.
The result is that we’re seeing an abundance of novel attempts to provide retail investors with access to the economic upside in the private companies transforming the world. I’ve previously written about this theme and talked about it here. The reason I’m writing about it yet again is because publicly traded venture capital vehicles (which I’ll refer to as “PTVC”) seem the best attempt yet at solving this clear tension. It’s not every day that you get to watch the real-time development of a new financial innovation!
PTVCs function by giving third party investors exposure to a basket of underlying (typically private) assets. The shares in the fund are publicly listed, not limited by accredited investor restrictions, and highly liquid. PTVCs report quarterly on their positions and asset marks. In the interim, public market investors can speculate on whether the private companies held in the funds will raise rounds at higher valuations, if the PTVC will make additional attractive investments, and more. It’s far from perfect – certainly less attractive to a retail investor than having the actual companies go public earlier in their lifecycles – but PTVCs are a step in the right direction.
Moreover, growth in these vehicles seems inevitable. And by “growth,” I mean both the total dollars allocated to PTVC and the number of PTVC vehicles that arise. If we hold that inevitability assumption to be true, the most interesting question then becomes: what are the second order implications? Here’s a running list of things I could see happening:
We’ll see a lot more of these vehicles emerge. The proof is already in the pudding: similar (albeit not yet publicly traded) venture vehicles that offer exposure for retail investors are starting to pop up. Hopefully competition will drive lower fees for retail and elevate the bar the PTVC managers are held to when underwriting an investment.
Competition is a double edged sword. It’s good in that it acts as a forcing function for better products (for the end consumer, i.e. the retail investor). But that abundance may also have counterintuitive consequences. Private companies – particularly the ones playing major roles in shaping the future of how we work, interact, and spend – may have previously felt pressure to go public, but will now have a variety of vehicles they can point to as being “good enough” for users that want to own a piece of the products.
I anticipate we’ll see better dashboards / data around the NAV (and premium to NAV) of these funds. Transparency is a good thing! It also creates a number of knock-on effects. For instance, there may be opportunities to arbitrage the value of the underlying portfolios, especially if separate PTVCs are invested in the same assets. Or maybe we see IPO pricing become more efficient. The continuous, publicly observable signal about what a broad market of investors thinks a specific private company is worth tells underwriters something concrete about where public demand sits. Less guess work goes into figuring out how the public market may value an upcoming IPO because the semi-private-market vehicles have already pulled forward a lot of that analysis and exposed investor expectations.
We see more robust (synthetic) derivative markets emerge around private companies. There’s now a natural / deeper set of investors who may want to take the short side of major companies (in order to hedge their positions). Previously, it was pretty hard to justify shorting many of these companies because, even if the business may eventually fail, there’s arguably a higher chance they’ll be able to raise a subsequent round of funding.
I’m excited about a world in which there are more ways to get exposure to private assets. People should be able to invest in the companies that are changing how they work, earn, spend, interact, and relax. Everyone wants to own a piece of the future. PTVCs are a shot on goal at creating that reality, and these vehicles seem like they’re here to stay. The fun part is then thinking about what they enable and what comes next.