As you read this, venture capital deals are being conceived in quiet corners of coffee shops around the world. Ideas are being shared and capital is being allocated with the hope of finding the so-called ‘unicorns’ of tomorrow: companies with a valuation of over $1bn. On the spectrum of investment styles and opportunities, venture capital is characterised by some of the lowest levels of certainty when it comes to the likely direction, duration and ultimate performance of an investment. In exchange for this lack of clarity (and increase in risk), investors in successful venture capital funds are rewarded with the potential for significantly higher returns.
One of the key attractions of venture capital is that target returns are expressed as a multiple of your investment, not as a percentage return. It is not uncommon for venture capital funds to target a 3x to 5x money multiplier return. A foray into the world of venture capital demands a unique skill set – founders (and those backing them) need to view the world through a fundamentally different lens and understand that the world of tomorrow is likely to look different to the world of today. They must be obsessed with solving problems in large addressable markets, the fruits of which can be scaled exponentially (often through the use of technology).As a reminder of how quickly things can change in the way we live and work, the first iPhone was unveiled in 2007. In just 15 years, our daily lives have come to revolve around a device that fits in our pockets.
The professionals who allocate capital to start-ups are tasked with identifying exceptional founders and then supporting them by providing oversight, guidance and a deep understanding of risks and how to mitigate them. At Westbrooke Alternative Asset Management, our mission is to provide our clients with unique access to a diversified suite of private market investment opportunities (or alternatives, as they are more generally known) across private debt, hybrid capital, real estate, private equity and venture capital. Although venture capital sits on the higher end of our risk/return matrix, it can be argued that an allocation (even small) to a well-diversified venture capital fund has a place in most investment portfolios. Westbrooke benefits from a unique origination pipeline through a partnership with Errol Damelin. Errol is a successful founder and venture capitalist who is immersed in the global start-up ecosystem. He has invested in some of the fastest-growing companies across the UK, Europe and Israel. One such example is a well-known UK-based fintech business in which Errol oversaw EBITDA growth to over $120m per annum, and which became one of the first UK companies to reach unicorn status. Errol stepped down from an executive position in 2013 to pursue the next phase in his career as an early-stage ‘angel’ investor.
This track record is the foundation of our venture capital efforts in Westbrooke Rhythm, an investment strategy that focuses on providing our clients with exposure to a diversified portfolio of early-stage, disruptive technology focused companies across the developed world. A global platform is important in this space, where the depth of the market and access to capital is significantly more advanced than locally in South Africa.The difficulty in accessing offshore opportunities, coupled with high investment minimums and a very tight-knit investment ecosystem, means that most South Africans are likely to never gain exposure to genuine venture capital investments. Generally, their first opportunity to participate is in much-hyped Nasdaq-listed tech companies that are already trading at very large valuations. As recent global market movements have demonstrated, the best returns in those companies are usually enjoyed by the venture capitalists in the years before the company comes to market. After an IPO (listing on a public exchange), retail investors finally get a bite at a cherry that has mostly been eaten already.
With two Rhythm strategies in operation, our goal is to provide our investors with exposure to venture capital investments at the point where maximum value can be extracted, generally in the early stage or growth stage. We have a proven track record of being able to source deals through our on-the-ground network and deploy capital into opportunities, having executed over 35 investments in aggregate. Although many of our investments are still in their infancy, the results thus far are pleasing. One investment has already achieved unicorn status, while several others are on the path to achieving this in the future. Not every investment works out, of course. In venture capital funds, the statistical concept of the ‘power law’ is important. This means that most of the returns in a venture capital fund are likely to be achieved by a handful of highly successful investments. This creates a buffer for failure in the portfolio, as start-up failure is a pain that is all too familiar for venture capitalists and founders. The exceptional returns offered by the best investments should more than compensate for the ones that didn’t make it.
By spreading the risks adequately and investing in businesses that are highly scalable, our Rhythm strategies offer investors exposure to a world that is foreign to almost all South Africans. This is a pity, as most significant returns in the technology sector often happen years before a listing on a notable stock exchange.
For more information on our funds, examples of portfolio investments and greater insights into how we navigate the world of venture capital on behalf of our clients, click here.
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