Laws of Attraction: Can a Conservative Investor Love Venture Capital?

A Conservative Value Investor Takes a Risk with Venture Capital

A few years ago, my Harvard Business School classmate, Len Batterson, reached out to me to pitch his venture capital firm. I’d never considered investing in venture capital(VC), but the background material he shared was intriguing. The funds he has led have had a great track record, delivering an average annual return of 28% over the past 30+ years.

Can a conservative investor love venture capital, too? In a word, absolutely. Case in point: I’m a conservative value investor—a “belt-and-suspenders” type. I like value stocks and dividends. I manage asset allocation carefully and don’t look for windfalls. For me, good enough is indeed good enough.

So why have I invested in venture capital? Sound inconsistent? I don’t think so.

Let’s Back up a Bit: A Background on This Conservative Investor

I’m in my 70s, semi-retired, and an accredited investor based on our net worth. So comfortable, but we’re not rich enough to get hit by the Federal Estate Tax. That is unless we get very lucky or Congress reduces the exemption level.

As an analytic and strategic type-investor, asset allocation is important. Despite a conservative nature, investing some money in more aggressive growth vehicles is essential.

I discussed the VC opportunity with my financial adviser. Since he was with a major brokerage firm at the time, he could not make any money selling such an investment. Despite that, he encouraged our jumping in. He felt our asset allocation was too conservative and urged us to be more aggressive.

Venture capital fit the bill. According to the Cambridge Associates Global Venture Capital Index, top firms delivered annual rates of around 25%. In comparison, the industry generated average annual returns of 15% from 2010 to 2020, peaking at a record-breaking 74.9% in 2021. While VC has struggled in the past two years, with its internal rate of return slumping to -7.6%, Nasdaq and other experts are looking to 2024 to be a rebound year.

Our Asset Allocation Needed Alternative Investment Help

Venture capital is an alternative investment. It doesn’t have a strong correlation with stocks or bonds. Adding some venture capital to the investment mix should help smooth the ups and downs of stock and bond portfolios. That should reduce total portfolio risk, despite the riskiness of each venture capital deal, as long as it is diversified enough within this asset class.

After our initial modest investment, our adviser suggested we invest more. That would enable greater venture capital diversification, and we have followed his advice.

Conservative Value Orientation and Venture Capital Risks

As I continue to cling to my conservative value orientation, I will provide some cautions:

• Venture capital is not liquid.
• Don’t invest money into a VC fund that you may need in the next five to seven years.
• Don’t invest money in venture capital that you can’t afford to lose.

While historical returns are terrific, and there’s no reason they won’t return to their steady average rate of return, venture capital is risky. The Wall Street Journal reported several years ago that roughly three-quarters of ventures fail. On average, though, the big winners more than offset the losers. I never invest more than 5% of my net worth in venture capital. That will be diversified across several deals offered by firms I trust. I am a conservative investor.

Implementing a Value Strategy in Venture Capital

For a conservative investor, I trust Batterson’s approach to venture capital. It represents a value approach to this aggressive asset class that fits my nature.

His team does a lot of homework and invests only in deals with exceptional potential. They won’t all be winners, but his team’s long-term batting average—37% of his deals have made money—is double the industry average.

The team focuses on early-stage deals before valuations are bid up in later-stage deals. That means lower venture valuations and an opportunity for higher returns. The team also focuses on opportunities in the Midwest. The Midwest has fewer venture capital firms and fewer investor dollars chasing deals than Silicon Valley or other venture capital hot spots. That, too, means lower venture valuations and so better deals.

In an article for Crain’s Cleveland, experienced entrepreneur, investor, and founder of Facet Wealth, Patrick McKenna said, “From an investor perspective, investing in the U.S. heartland is a bit like investing in emerging markets,” McKenna said. “You know what you get in (Silicon Valley). You get some good returns. The heartland is a bit more volatile with lower prices but higher upside.”

That’s how I maintain my value orientation as a staunch investment conservative, even in the often wild world of venture capital investing.

We think you’ll also like:

1. Beginner’s Guide to Capital Investments and Returns
2. The Fine Print on Investing and Venture Capital 
3. Beware Venture Capital Unicorns—Risks Look Greater Than Potential Rewards

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Tech Talk: Current Opportunities for Investing 
2. Real Estate Investing 101
3. Earning Green by Investing Green: Dialogue on the Overall Due Diligence

This is an updated version of an article originally published on August 27, 2020.]

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