Most Retail Investors Should Steer Clear Of Venture Capital Firms

Over the end few years, there has been increasing pressure to “do the little investors a favor” by allowing them to invest in high-risk assets. This ability was traditionally restricted to people with significant financial resources. It meant they could lose all of their retirement savings without recourse.

These offers are becoming less kind than ways to extract money, one after another. A study has shown that venture capital investors are often poorly managed because they waste money backing companies they should have known would fail.

Retail investors are those in finance who is also known as consumers. Government aid has been extended to them in a significant way. In 2020, the SEC asked retail investors to invest in private equity companies.

Because retail investors wanted a lot more money than the general partners in private equity, the PE firms were all for it. The management fees for PE companies are higher than other investments, averaging 1.5% to 1.75%. Once a target level is achieved, 20% of the additional profits go to them.

Think about it. Investors could put their money into businesses that could buy their employers. Then they could lay off employees to reduce costs and increase returns. They didn’t have to force the company into bankruptcy by greedily taking in as much money as possible.

Just the other week, Senators Kirsten Gilbrand (D-NY), and Cynthia Lummis (R-WY), were on camera with CNBC’s SquawkBox, urging people to invest some hard-earned retirement savings in cryptocurrency. These are the same financial scams that have resulted in many millions of dollars in investment loss lately, with one company after the other falling under the weight of the Ponzi scheme.

Lummis even said that crypto investments should be part of a portfolio of diversified assets and that they should be at the end of the store of the value spectrum.

Technically, zero can be stored.

The second area of interest is regular investors helping to fund venture capital firms. One company has a problem and the chance to make its case on Nasdaq. This stock index is heavy in VC-dependent tech.

The same thing is happening over the globe. The Financial Times last summer stated that UK venture capital firms are now inviting retail investors to support early-stage entrepreneurs. This creates a previously difficult market for private investors and carries unique risks.

The business model poses significant risks. A VC company may hope to earn investment returns on only 10% of its portfolio. However, they will be able to ride along with a hugely successful company. This is why many people are jockeying for a position on Twitter, Facebook, or other social media platforms of choice. They want to be able to have a piece of the big success. A lot of their portfolio will do well, but a good chuck will almost get written off.

Is this structure essential? Diag Davenport is a brilliant Ph.D. student in behavioral science at the University of Chicago Booth School of Business. She just published a working paper that answered the question succinctly.

Are institutional investors efficient at investing? This question is posed by combining a unique dataset of more than 16,000 startups, representing over $9 billion in investments, with machine learning methods to assess early-stage investors’ decisions. Comparing investor decisions to predictions shows that roughly half of assets were predicted to be bad. This is because the algorithm used information available at the time of investment. The expected return on the investment was lower than the options outside. According to my data, these poor investments cost 1000 basis points and total more than $900 million. These choices are rooted in over-reliance on founders’ backgrounds, which I suggest to be a mechanism. These results show that high stakes and firm sophistication do not suffice to make capital allocation decisions efficiently.

His observation is correct. These firms are heavily focused on the backgrounds of founders. Long observation has shown me that they are enmeshed in founders’ stories. This is why Theranos was able to invest $700 million in a company such as Theranos. Elizabeth Holmes’ story was too interesting for them. The sexual connotation of the words is intentional because it’s common in many VC industries.

Half of the VC firms’ investments, on average are unpredictably poor.

It is boring to invest in responsible and efficient ways. It is essential to see the company’s actions and not just its words. To see the returns grow and compound, you need patience and to be willing to wait. Many “experts” and big money people want to take a cut of your funds. There is always risk in investing, but it’s essential to be smart about this risk. Don’t let the money go to yacht payments. You will get a real return on your investment.

- Advertisement -
Avatar photo
Robert Scoble
Robert is the assistant managing editor for HC News, overseeing coverage of markets, companies, strategy and business leaders. Originally from Boston, Scoble began his journalism career in 1997 & now resides outside New York.

Latest articles

Related articles