Seed stage "index fund"

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
invest0
Posts: 57
Joined: Sat Sep 28, 2013 6:54 pm

Seed stage "index fund"

Postby invest0 » Tue Jan 10, 2017 7:11 pm

Had the opportunity to meet Rafe Furst a few months back through some mutual connections. Ended up witnessing a debate between he and a venture capitalist that hand-picks all his investments.

Rafe's premise reminded me a lot of the Boglehead philosophy; basically pointing out that even the best VC firms are actually terrible at reliably predicting winners, and that an passively managed approach that just buys into every single seed-stage round that any VC firm touched would outperform most firms individually. Also, that the popular, later-stage investment rounds, are far inferior in their average returns.

He's given this talk on the topic:

https://www.youtube.com/watch?v=Y6lgjNkYNzM

Got me wondering if some small corner of my asset allocation might deserve something like this. It has the apparent benefits of:

1.) Greater diversification in an AA.
2.) Historically greater returns, apparently.

There are of course, two glaring drawbacks.

1.) Fees are much higher (a "two and twenty" fee structure).
2.) Liquidating is very difficult; basically requires acquisition or IPO.

Would you consider something like this? And, am I overlooking anything key in my appraisal of this situation?

User avatar
happyisland
Posts: 336
Joined: Thu Oct 03, 2013 1:36 pm

Re: Seed stage "index fund"

Postby happyisland » Tue Jan 10, 2017 7:21 pm

invest0 wrote:
There are of course, two glaring drawbacks.

1.) Fees are much higher (a "two and twenty" fee structure).
2.) Liquidating is very difficult; basically requires acquisition or IPO.


In the past I've invested in a few things similar to this, and those two drawbacks are brutal. Especially #2 - I've learned my lesson from illiquid investments and now strongly appreciate the ease and flexibility of the typical index fund portfolio.

User avatar
Phineas J. Whoopee
Posts: 5698
Joined: Sun Dec 18, 2011 6:18 pm

Re: Seed stage "index fund"

Postby Phineas J. Whoopee » Tue Jan 10, 2017 7:23 pm

Is there a link to the index fact sheet by the index publisher?
PJW

lack_ey
Posts: 4727
Joined: Wed Nov 19, 2014 11:55 pm

Re: Seed stage "index fund"

Postby lack_ey » Tue Jan 10, 2017 7:57 pm

Sorry, didn't check the video. Anything in writing available?

Quick question, though, which may have been answered: how do you actually implement a strategy that "just buys into every single seed-stage round that any VC firm touched"? Surely many aren't going to be actually available for any particular entity?

I think this is an area where sampling may matter a good deal. I don't know much about VC but my understanding is that there's actually some performance persistence by managers, at least in part from the famous ones getting access to better deals for various reasons like reputation and how that helps with perceptions.

invest0
Posts: 57
Joined: Sat Sep 28, 2013 6:54 pm

Re: Seed stage "index fund"

Postby invest0 » Tue Jan 10, 2017 10:21 pm

Phineas J. Whoopee wrote:Is there a link to the index fact sheet by the index publisher?
PJW


There are a few seed stage "index funds" out there now. I didn't have a specific fund in mind.

I imagine they each have prospectuses, but none I have access to currently.

I do suspect there would be quite a lot of other attributes that doesn't make them truly "index" at all.. considering that there is no actual index of seed stage companies that I've heard of.
Last edited by invest0 on Wed Jan 11, 2017 2:44 pm, edited 1 time in total.

User avatar
Phineas J. Whoopee
Posts: 5698
Joined: Sun Dec 18, 2011 6:18 pm

Re: Seed stage "index fund"

Postby Phineas J. Whoopee » Wed Jan 11, 2017 12:12 am

invest0 wrote:
Phineas J. Whoopee wrote:Is there a link to the index fact sheet by the index publisher?
PJW
...
I do suspect there would be quite a lot of other attributes that doesn't make them truly "index" at all.. considering that there is actual index of seed stage companies that I've heard of.

It turns out Thomson Reuters publishes venture capital indices.
PJW

User avatar
Taylor Larimore
Advisory Board
Posts: 24967
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Thomson Reuters Private Company Data

Postby Taylor Larimore » Wed Jan 11, 2017 12:39 am

It turns out Thomson Reuters publishes venture capital indices.

I used the link and read this:

The Thomson Reuters Venture Capital Research Index (TR VC Research Index) measures
the aggregate gross returns of the US venture capital industry by tracking the performance of
individual US venture capital-backed private companies, which are not available for public
investment,
using Thomson Reuters Private Company Data and is published quarterly.


Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

User avatar
Phineas J. Whoopee
Posts: 5698
Joined: Sun Dec 18, 2011 6:18 pm

Re: Seed stage "index fund"

Postby Phineas J. Whoopee » Wed Jan 11, 2017 12:50 am

That's what it says alright, Taylor, but I had disparaged the very idea, asked for fact sheets, and then discovered there are some.

Not available for public investment does not necessarily mean somebody operating under accredited investor rules with respect to their customers can't set up a venture capital fund and sell shares, and if they like, pay to license the right to use an index, in this case presumably from Thomson Reuters.

Bloomberg recently bought the former Barclays indices, which formerly formerly were the Lehman indices. One of its competitors was already in that business, so why not?

PJW

User avatar
Taylor Larimore
Advisory Board
Posts: 24967
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Seed stage "index fund"

Postby Taylor Larimore » Wed Jan 11, 2017 9:58 am

Phineas J. Whoopee wrote:That's what it says alright, Taylor, but I had disparaged the very idea, asked for fact sheets, and then discovered there are some.

Not available for public investment does not necessarily mean somebody operating under accredited investor rules with respect to their customers can't set up a venture capital fund and sell shares, and if they like, pay to license the right to use an index, in this case presumably from Thomson Reuters.

Bloomberg recently bought the former Barclays indices, which formerly formerly were the Lehman indices. One of its competitors was already in that business, so why not?


Phineas J. Whoopee:

Because putting money into venture capital is more akin to speculating than investing. Loss rates (money never recovered) run about 50%.

http://www.forbes.com/sites/brucebooth/ ... e34e134408

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

User avatar
Phineas J. Whoopee
Posts: 5698
Joined: Sun Dec 18, 2011 6:18 pm

Re: Seed stage "index fund"

Postby Phineas J. Whoopee » Wed Jan 11, 2017 3:30 pm

Taylor Larimore wrote:
Phineas J. Whoopee wrote:That's what it says alright, Taylor, but I had disparaged the very idea, asked for fact sheets, and then discovered there are some.

Not available for public investment does not necessarily mean somebody operating under accredited investor rules with respect to their customers can't set up a venture capital fund and sell shares, and if they like, pay to license the right to use an index, in this case presumably from Thomson Reuters.

Bloomberg recently bought the former Barclays indices, which formerly formerly were the Lehman indices. One of its competitors was already in that business, so why not?


Phineas J. Whoopee:

Because putting money into venture capital is more akin to speculating than investing. Loss rates (money never recovered) run about 50%.

http://www.forbes.com/sites/brucebooth/ ... e34e134408

Best wishes.
Taylor

Hi Taylor,

I agree with you about the foolishness of individual investing in venture capital, but my words must have been unclear. My why not referred to Bloomberg and Thomson Reuters becoming index publishers, not to individuals entering the VC world.

The subject of the post was the existence of VC indices at all, which I had doubted, not that anybody should invest in a VC index fund, even if it turns out one is available.

I hope I've not again given a misleading impression. Just to be sure:

1) I do not advocate individuals investing in venture capital;

2) I doubted, but no longer do because I found some, the existence of venture capital indices;

3) I remarked on two financial data publishers becoming index publishers as well;

4) The thread was about the existence of a venture capital index fund, not the wisdom of investing in it; and

5) Lest there be any misunderstanding, I do not advocate individuals investing in venture capital.

If I've still been unclear, please let me know and I'll try again.

PJW

lack_ey
Posts: 4727
Joined: Wed Nov 19, 2014 11:55 pm

Re: Seed stage "index fund"

Postby lack_ey » Wed Jan 11, 2017 4:02 pm

There are indexes for all kinds of things, though in some of these categories it may not be particularly easy for an index to accurately capture the market. Furthermore, the indexes are probably more for benchmarking than anything investable (in the sense of a fund or money manager being able to replicate the holdings or characteristics of the index and effectively follow the index as an investment strategy in the sense that an S&P 500 index fund uses the S&P 500 index as a guide of what to hold).

User avatar
Taylor Larimore
Advisory Board
Posts: 24967
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Seed stage "index fund"

Postby Taylor Larimore » Wed Jan 11, 2017 4:20 pm

If I've still been unclear, please let me know and I'll try again.

PJW:

Now I get it. I'm a slow learner.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

invest0
Posts: 57
Joined: Sat Sep 28, 2013 6:54 pm

Re: Seed stage "index fund"

Postby invest0 » Wed Jan 11, 2017 6:03 pm

Phineas J. Whoopee wrote:4) The thread was about the existence of a venture capital index fund, not the wisdom of investing in it


Actually, I was curious to get expert takes on the latter; have just been here quietly enjoying the conversation. :)

They do indeed exist, at least by some definition; I'm aware of at least two that claim to be seed-stage index funds that you can invest in (have seen such offerings from CrowdFunder and RightSide Capital).

There were a few key advantages and a few pretty glaring drawbacks. I was (above all) curious if I missed important factors in those two lists.


Return to “Investing - Theory, News & General”

Who is online

Users browsing this forum: Arch, Bracket, cdrwok, johnra, JRB22, matto, Sailor36, willing2try, Yellowstone, zaboomafoozarg and 54 guests