A Trillion-Dollar Wealth Transfer is About to Hit Wall Street (Part 1)
A $1-trillion wealth transfer is about to hit Wall Street.
Private venture capital (VC), the go-to funding source for decades’ worth of technology-based startups – including Google (GOOG), Medtronic (MDT), Intel (INTC) and even Apple (AAPL) – is about to be supplanted by public venture capital.
What does that mean for everyday investors like us?
It means that scooping up early profits from the most compelling (and potentially disruptive) technology companies will no longer be exclusive to well-heeled insiders and institutions.
We won’t have to wait for venture capital firms to flip these companies onto the public market via IPOs for our chance to profit. Which, I might add, they’ve done to the tune of $824 billion since 1985, according to data from the National Venture Capital Association (NVCA).
We’re still in the embryonic stage of this transformation. But once it kicks in, we’ll finally be able to grab a piece of the action. From the very start.
Public Venture: The Next Big Thing
How can I be so sure that public venture is the next big thing? It’s simple, really…
Insiders already concede that the traditional VC model is broken.
A May 2012 report by a major VC investor, the Ewing Marion Kauffman Foundation, leaves no room for misinterpretation.
After analyzing its 20-year history of VC investing, it found that its returns “haven’t significantly outperformed the public market since the late 1990s, and, since 1997, less cash has been returned to investors than has been invested in VC.”
Or, more specifically, after accounting for fees, the majority of its funds (62 out of 100) failed to outperform investing in the stock market.
And those that did outperform (20 out of 100 funds) didn’t exactly impress. The threshold to qualify as an “outperformer” was just three percentage points more per year than the returns of the stock market.
I’m sorry. But three percentage points hardly seem like fair compensation for giving up liquidity for more than a decade, in some cases.
The foundation’s ultimate conclusion? Again, the “model is broken.”
I’ll say so. And other hard evidence confirms it, too.
For example, the number of VC funds raising capital each year is declining – down 3% in the last year and 18% since 2008.
The amount of money raised by VC firms has been on a downward slope lately, too. As NVCA President, Mark Heesen, says, the industry has been “below $25 billion each year since 2009, a size that many believe to be optimal for successful investing and maximizing returns.”
So longtime VC investors aren’t just saying the model is broken. They’re acting like it’s broken, as well, by investing considerably less.
Feed Me, Seymour!
On the other hand, while institutions are becoming increasingly reluctant to fund startups, everyday investors can’t get enough. Case in point: the success of crowdfunding companies like Kickstarter.
In you’re unfamiliar with the concept, crowdfunding involves everyday individuals banding together to financially support people, startups, organizations, or movements.
Kickstarter’s platform alone has raised more than $450 million – from about three million people funding over 35,000 projects – since its launch less than five years ago.
And the total crowdfunding market size almost doubled last year, to $2.8 billion, according to research firm, Massolution.
Clearly, the public possesses an appetite for providing capital to support the right ideas.
And they’re about to gain access to many more opportunities. In fact, it’s literally guaranteed, thanks to recent changes in regulations.
In tomorrow’s column, I’ll provide all the details and, more importantly, how we can start positioning ourselves to profit from the coming public venture boom.
So stay tuned.
Ahead of the tape,