Boom times for Silicon Valley’s elite investors


This year, Robinhood and Coinbase have become the vehicles for a boom in individual investment and speculation, as well as two of the most visible beneficiaries of that boom.

Enormous stock exchange volumes have brought transaction revenues to Robinhood more than four times in the first quarter. The bitcoin boom has had an even bigger impact on Coinbase, inflating trading volume more than 10 times and raising revenues to a staggering $ 1.6bn.

Depending on where you are, this represents either an advance in the empowerment of individual investors, or it is a bubble that will end badly. However, there are no short-term investors who are killing off trading volumes driven by their own enthusiasm.

At the time the average punter had the opportunity to buy shares in Coinbase when it has become public earlier this year, the crypto exchange was already estimated at about $ 76 billion. And Robinhood sponsors are firing on a $ 40 billion valuation from its next initial public offering. Individual investors looking to throw this party are at risk of injury: Coinbase’s stock is 40 percent below where it started trading.

The big winners? The elite group of venture capitalists and other private investors who entered early. Andreessen Horowitz alone owned a stake of more than $ 11 billion when trading on Coinbase began – well over $ 7.7 billion of Accel at the time of Facebook’s IPO, which marked a historic high point for VC.

This summarizes the state of private markets that have come to dominate the financing of the most promising technology companies in their years of high growth. When investment returns are increased, the small circle of really big winners has disproportionate profit.

Investing in Venture itself has been through something of a revolution as new types of investors have found a way and much more “growth” capital has become available – to the point that the term “venture capital” itself has not. so much sense.

These players – rather than public market investors – are now reaping huge returns. Advance was that only a small group of business firms made healthy profits, with the vast majority underperforming the public markets. It has changed.

The company’s average fund created between 2009-2017 generated returns of 10 percentage points per year above the S&P 500, according to Steven Kaplan, a professor at the University of Chicago’s Booth business school. This performance is not unprecedented – yields were higher in the mid-1990s. But at the time, investment in the firm was a much smaller field.

Returns must be put in context. Investors in start-ups have been blocked for years, demanding a premium for illiquidity. Moreover, the surperformance of the most successful funds distorts the framework. But even the median fund beat the S&P 500 by 4-5 percentage points per year.

Although more funds are signaling good returns these days, one of the truisms of corporate investment still remains: Significant gains are still shared among a small group of really big winners. Funds in the top quartile still make about 15-20 percent a year more than those in the second quartile, Kaplan says.

Research that he and others have done recently also shows that the same small group of investment firms keep coming out on top, year after year.

This is partly a testament to his skills in helping build companies. Higher VCs are more valuable to start-ups for their networks than their cash, helping them build talent and find customers.

But it is also more the result of a cycle of self-reinforcement that has rooted early businesses. Having great support from companies like Sequoia Capital or Accel ensures that a start-up will be taken seriously. This creates a strong incentive for more experienced entrepreneurs with the best ideas to look for the best VC brands. For VCs, it’s about the quality of the “business flow” – the investment opportunities that come through the door every morning.

The salsa train won’t be able to run forever. Returns on investment in the firm will almost certainly continue to be highly cyclical, as more capital is attracted and yields are reduced, says Kaplan.

Meanwhile, there are big profits to be made from the VC portfolios built over the last decade. As Coinbase and Robinhood show, individual investment can be frustrating – but behind the scenes, the insiders who own the casino always come out on top.

richard.waters@ft.com



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