Follow me @samirkaji for my thoughts on the venture market, with a focus on the continued evolution of the VC landscape.
It has now been four months since I left a 20+ year career in venture banking to start Allocate. While still early, we are making good progress and are excited to go live in the coming months.
In the meantime, I wanted to provide a quick update on what we are up to these days. As I have written about extensively over the years, the venture asset class has matured dramatically over the prior decade as mass fragmentation across stages, regions, sectors, and investment models have emerged throughout the ecosystem.
However, despite the growth of the number of exceptional managers that have formed over the last ten-fifteen years, venture remains the least efficient as it relates to capital formation and allocations.
This inefficiency is partly attributable to the natural and understandable misalignment of institutional allocator business models to the vast majority of fund managers. While the number of family offices, high net worth individuals, and independent wealth advisors has increased and are excellent sources of capital, there continues to be a clear two-way access issue between them and fund managers (more on this below).
We have been looking to help solve this for many years, and our mission today is to make venture capital more accessible.
Before I provide how we plan to do that (and check out our landing website for more details, including FAQ’s), here are the main observations that helped shape our company view:
1) Venture as an asset category will continue to mature, fragment, and the top 1–2 quartiles of funds will provide strong return outcomes for investors.
Conventional wisdom has been that only the top quartile funds provide a Public Market Equivalent (PME) of over 1.0, but a recent report by the National Bureau of Economic Research refutes that claim.
While recent return data is undoubtedly somewhat inflated and attributable to the current bull market valuations, a compelling counterpoint exists. The innovation industry is still in early expansionary days, and it’s become harder to make any logical case that the scale of tech and life sciences companies (and exit outcomes) won’t continue to be step-function up from prior eras.
Additionally, with the introduction of smaller, collaborative players, the dispersion of returns from an outlier outcome is much more widely distributed than what we’ve seen in the past (where such outcomes would only provide significant benefit to a small handful of funds that invested early).
2) Private retail wealth has grown significantly, and individuals and families have permanently shifted their asset allocation strategies.
Today, there are an estimated 8,000–11,000 family offices globally, with nearly 16MM Accredited Investors. Mirroring the approaches of institutional investors, retail investors have increasingly turned to privates and alternatives as a way to generate non-correlated alpha within their portfolios. The days where a 60/40 asset allocation strategy (public equity/fixed income) as the basic standard is gone and has given way to 60/30/10 or 50/30/20, with alternatives playing a more significant role in retail investor portfolios. As a fun fact on the institutional side, Yale’s endowment has a 22.5% asset allocation target to venture capital.
Additionally, we are currently amidst the largest generational wealth transfer ever, with the average age of those controlling wealth dropping every year. This note is important as it has created a larger pool of investors who have been raised in the current digital age. These investors understand the unique opportunity that private market investing provides and the benefit of adding venture to their portfolios (and the unlikelihood of companies like Amazon going public at sub-$1B market caps).
3) While many great platforms like Icapital, Republic, AngelList, and others have come to market to help investors access alternative asset classes, investing *successfully* and responsibly into great venture fund managers today remains significantly tricky for several reasons, notably:
1) Venture is a relationship business, and access to the most promising and successful managers often requires years of relationship building.
2) Check size minimums. Because of the administrative pain of managing small checks and SEC rules around maximum LP limits, funds often have minimums for LPs in the $500K-$5MM+ range. For investors that aren’t at the highest level of wealth levels nor have a deep understanding of the space, investing responsibly in venture funds is impossible or impractical when considering risk and diversification.
3) In such a fragmented market, discovering and assessing venture capital fund managers is difficult for institutional LPs and nearly impossible to do for non-institutional investors. Non-institutional investors rarely have the time, staffing, or domain expertise to create programmatic ways for manager discovery and selection. This is even harder when thinking about newer fund managers with limited track records.
The inaccessibility to the entire private wealth sector also presents an issue for fund managers who often must rely on institutional capital to scale or try their best to efficiently navigate the opaque network of family offices and individuals to raise funds (which often leads to fundraising cycles of 18 months or more. Making things even more difficult for managers is that many institutions are already overwhelmed with current portfolios, and in some cases, are culling portfolios. And unlike the growing private wealth market, there are not many new institutions forming to add to the overall supply of institutional capital.
So what does Allocate do? We offer a solution that breaks down the friction points for investors and fund managers by allowing retail investors to access highly vetted and researched venture capital fund and co-investment opportunities. The platform provides investors with an end-to-end digital experience spanning from curation, subscription, closing, and all post-investment tracking and reporting in one place.
Because we aggregate investor capital through feeder vehicles (think SPV), investors* can find and invest in high-quality and thoroughly vetted funds on our platform at significantly smaller check sizes, without any extra layer of carried interest performance fees.
*Subject to investor qualifications, look-through considerations, or other applicable securities rules.
For fund managers approved to be on the platform, Allocate offers all the benefits of institutional capital by aggregating investor interest into a single pooled vehicle, with only one LP to manage. Additionally, we provide a no-cost avenue to efficiently reach the retail sector without the hassle and time typically coming with sourcing and managing capital from this group.
We’re excited about our journey to make venture capital a more accessible asset class. Thanks for all that have supported us over the years, and while we are heads down in development, we look forward to keeping everyone updated on our progress. We are now accepting investors for our pending beta launch at Allocate.co.