VC Firms’ Profits Used To Be Off-Limits To Everyday Investors. Not Anymore.

VC Firms’ Profits Used To Be Off-Limits To Everyday Investors. Not Anymore.
Andrew Rummer

over 2 years ago4 mins

  • VC firms invest in a whole host of startups, some of which fail and some of which succeed. That makes it tricky to judge a fund until a decade or more has passed.

  • The majority of VC firms only accept money from very wealthy investors, but a growing number allow you to buy shares and gain exposure to their stable of startups.

  • Before you invest, check out the details of the VC firm’s underlying startup investments, and how its current claimed net asset value compares to its stock price.

VC firms invest in a whole host of startups, some of which fail and some of which succeed. That makes it tricky to judge a fund until a decade or more has passed.

The majority of VC firms only accept money from very wealthy investors, but a growing number allow you to buy shares and gain exposure to their stable of startups.

Before you invest, check out the details of the VC firm’s underlying startup investments, and how its current claimed net asset value compares to its stock price.

Mentioned in story

Over the past decade or so, only the ultra-rich have been able to invest money in venture capital (VC) firms’ funds and their stable of high-potential startups. But Forward Partners’ initial public offering this week served as a timely reminder that there are ways for you to get involved – as long as you know where to look. 

How do VC firms work exactly?

The VC business model goes like this: raise a pool of cash from investors, invest that cash across maybe 50-100 different startups, and hope that enough of them provide at least a 10x return to outweigh the dozens that will inevitably fail and go to zero. 

It’s a long-term game, and notoriously tricky to judge a fund's performance until a decade or more has passed – hence why VC investment is generally kept off-limits for supposedly “less sophisticated” investors. 

Why would a VC firm list on the stock market?

Well, for a start, it’s a handy source of cash to fund their startup investments. But since most VCs have found it easy to raise private funds in this low-interest environment, those that go the public route tend to do so in the name of widening access for the likes of you and me. Forward Partners, for example, claims to be “democratizing access to venture capital”.  

Ultimately, funds head where the money is, and the hefty valuations investors are currently willing to pay for publicly traded shares are clearly enticing – even if it means publishing extra information about themselves. 

Which VC firms are already listed?

VC firms have a reputation as elite pools of money raised from wealthy individuals and pension funds, but there are actually a growing number of publicly traded VC firms with shares available to buy for just a few dollars. 

Forward Partners (ticker: FWD), for example, sold $50 million worth of shares at its initial public offering (IPO) on Tuesday, and it’ll begin trading on the London Stock Exchange on July 19th. The IPO allows anyone with a brokerage account to gain exposure to its portfolio of startup investments, including peer-to-peer lender Zopa and millennial plant merchant of choice, Patch

Forward Partners joins rivals like Draper Esprit (ticker: GROW) and Augmentum Fintech (ticker: AUGM) on the London market. Elsewhere, you can find Israeli VC Trendlines trading on the Singapore Stock Exchange with the ticker TTGL and in the US with the ticker TRNLY. 

How do you assess a VC firm’s value?

Putting an exact figure on the current value of a VC’s startup investments is more art than science, but there are some metrics you’ll want to take a look at. 

A VC firm and its accountants will periodically update what they think their investments are worth and report it as net asset value (NAV). In theory, a listed VC’s share price should trade somewhere near its NAV per share. But in practice, it can deviate wildly – trading above the NAV if stock market investors think the VC’s startups have been undervalued, and vice versa. 

The other key number published by some listed VCs is called internal rate of return (IRR) – an estimate of the annualized return the fund has generated for investors. Emphasis on “estimate”: IRR is notoriously easy to fudge since its startup holdings don’t trade publicly. 

As an example, Augmentum – an investor in UK banking upstart Tide – claimed an annualized IRR of 19% in March 2021, and said NAV per share increased by 12% to just over 130 pence. Its shares, though, are currently trading at 151 pence. 

So how can you tell if it’s a good investment?

There are so few listed VCs firms that it’s hard to draw hard conclusions about whether they make good investments compared to the wider stock market. But Augmentum and Draper Esprit have certainly done well recently. 

Since Augmentum hit the stock market in March 2018, its shares have climbed some 50%, while Draper Esprit – which counts Freetrade and Revolut in its portfolio – has nearly doubled. The FTSE All-Share Index of London-listed stocks, meanwhile, has barely increased at all over that time. 

Chart of Augmentum and Draper Esprit shares compared to the FTSE All Share Index.

Ultimately, a VC firm will provide you a return by seeing the value of its startup investments grow. So when you come to pick the listed VC firm for you, you’ll want to look closely at the startups the firm is invested in, how big those stakes are, and when they made the investment. As for working out which firm’s backing the next Facebook, that’s part of the fun… 

Finimize

BECOME A SMARTER INVESTOR

All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

Finimize
© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG