E408: HarbourVest: Why Venture Capital Is Chasing Trillion-Dollar Companies
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What is the main topic discussed in this episode?
Today, we're joined by one of the world's largest private investor. HarborVest manages over $160 billion. We discuss why venture capital is strictly a power law business, how HarborVest identifies exceptional investments, what they learned from investing into SpaceX, and where they see the next generation of outliers. Without further ado, here's my conversation with Scott.
When it comes to the power law and venture capital, how important is it? It's everything. It's the business model. I have this conversation with investors all the time who look at venture capital the same way they look at their public market portfolio or their private equity portfolio. They have a hard time getting their head around the losses, but the reality is it's the wins that drive all the performance. And I think as you and I both know, those wins are very concentrated.
It's not the wrong intuition if you're a private equity investor, a private credit investor. You should be thinking about that downside.
That's right. But we use the word shooting the moon, venture capitalists shooting the moon, and you've got to play your deck, your hand the right way, right?
I've heard multiple people say that some of the best portfolios actually had significantly more losses than the average portfolio. Is that true?
I think every great portfolio looks like that. I recently created a theoretical portfolio that uses both our data and third-party data, extended it back two decades. I think 15,000 companies, 15 billion of cost basis. And the reality is of those 15,000 companies, one company returned 10% of the entire value, three X portfolio on that 15 billion. 10 companies returned a third of all the value, and the top 10% of the companies returned 90% of the value. That's the assumption, right? That's the business model.
As a venture capitalist, what do you do when you hear these kind of numbers?
I just accept it. I realize that is the model, but in order to win, I think you need to be thoughtful about where you concentrate your capital, how you diversify your capital, how you not only make investment decisions, but also how you make divestment decisions.
Why does HarbourVest say venture capital is a power-law business?
What do you mean by divestment decisions?
We all talk about the origination and the original investment, but And the way venture capital and private markets in general have evolved over the years is there are points of exit that you can take that are not your traditional exit. It's not the M&A event or the IPO. We've seen the secondary market evolve and that's created liquidity decisions, sell decisions for investors that own positions in some of these market defining companies. And getting that decision right or wrong is consequential.
And you invest into some of the top venture capital funds in the world. How do you advise that they use the secondary market in order to divest from some of their positions?
There are mechanics that are in place because of how this industry has been built that trigger decisions around liquidity. The reality is most venture funds are 10-year closed-end drawdown funds. So if you own an amazing asset, but you're getting to the end of the life of your fund... If a natural liquidity event is not there for you to take, I think you need to create one. And that's where you might tap into the secondary market to do it.
Nearly $3 trillion is locked up in venture funds that have gone over their 10-year limit. So essentially, they've expired their funds, and now there's $3 trillion sitting around. what options do venture capital funds have in terms of getting liquidity?
So this is where I think that the innovation around the secondary market has been critical and important, and it's become kind of a tool and fundamental to venture and venture capital. You now have an opportunity to continue to hold your interest that sits in a fund that's now past its 10 year term, but either wrap up the fund that has a 10 year term and move your interest into a new vehicle or give your investors the opportunity to take a liquidity event or stay in the fund and extend the life of the fund.
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Chapters
4 chapters
1
What is the main topic discussed in this episode?
0:00–2:09
2
Why does HarbourVest say venture capital is a power-law business?
2:09–11:08
3
How have secondary markets changed liquidity and divestment options for VCs?
11:08–24:30
4
What lessons did HarbourVest learn from investing in SpaceX and other outliers?
24:30–45:55
Speakers
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