What is a big gain to you? Doubling your money, maybe even tripling it?
For Venture Capital (VC) investors, this is chump change. These trends spotters try to make thousands of percent on their investment.
To make such huge returns, they invest in companies before they’re even listed on a stock exchange. Essentially, they are the source of funds for early companies that can’t secure a bank loan.
Of course the other reason they try to make extraordinary returns is because of their win rate. Picking well-established companies that will grow earnings into the future is sometimes hard. Imagine trying to guess if a company starting from ground zero will become uber-successful?
It’s why VC investors try to spread their bets. They might have money in eight different start-ups at any one time. Sure, more than half might not go anywhere. But the one that is successful more than makes up for the losing bets. Or that’s the idea, anyway.
Of course, to make such amazing returns, VC investors need to have a good notion of which ideas and products will be profitable in the near future. I like to think of them as short-term trend spotters.
For example, artificial intelligence (AI) and driverless car technology continues to grow in popularity. Automakers and others are merging or buying small tech start-up developing revolutionary technology.
However, according to Joe Lonsdale of VC firm 8VC, ride sharing and AI are not long the hot VC investment.
The hottest investment in Silicon Valley
According to Lonsdale, biosciences are now the hottest thing in Silicon Valley. As reported by the Australian Financial Review:
‘He (Lonsdale) classifies companies such as Uber and rival ride-sharing company Lyft as being in the same category as public companies, which have returns that a venture capitalist would not sneeze at.
‘”One of the key questions you have to ask as an investor in Silicon Valley is: what’s possible now that was not possible five years ago?” he says.
‘”It’s like the edge of the ecosystem where you’re helping it evolve, helping explore new ideas. When there are big breakthroughs in the world you get very big companies coming out of that change.”
‘Lonsdale says investing in ride sharing before the advent of the smartphone did not make sense. But if you are investing in ride sharing now you are not going to make 100 times your money.
‘These comments reflect the mindset of someone steeped in the culture of a place that has produced companies worth more than the GDP of many nation states.
‘If you think a great investment means doubling or tripling your money, then think again.’
For the moment, 8VC is solely focused on biosciences. According to Lonsdale, that’s where there will be the really big venture investment wins.
‘In our opinion one of the very biggest changes in the last five years is a lot of the biological sciences have turned into information problems,’ Lonsdasays.
‘There’s a lot of new breakthroughs. Sequencing has become very cheap, writing Dle NA has become very cheap and gene editing has become really accurate and inexpensive.
‘…One way to think about it is that for the most of the last few billion years on Earth, the main battles have been between bacteria and bacteriophages or viruses that attack bacteria.
‘So, there’s all this evolution that happened at that level in that battle.
‘The most important evolution in the kind of weapons of war for bacteria were the catenin protein along with this strand of RNA to go and look for viruses that match.
‘What it does is allow you to go and edit genes. This is a really big breakthrough in the scientific community. It’s being used by hundreds … of institutions now to research and test and explore.’
As retail investors, we’re excluded from funding rounds which VC firms exclusively play in. However, that doesn’t mean we can’t achieve great returns investing in the smaller end of the market. To get started, check out these top three small-cap stocks trade on the ASX right now.
Junior Analyst, Money Morning