Investors have a renewed focus on portfolio construction, prioritizing entry prices and sufficiently diligencing deals.

According to Pitchbook’s 2024 U.S. Venture Outlook, a market reset is in progress. Valuations have come down, and deal counts are down from 2021, but there are no indicators of a significant rebound in the near term. Interest rates and geopolitical tensions remain high, and a recession is still possible, combined with an election year, which adds to the uncertainty. 

Investors have a renewed focus on portfolio construction, prioritizing entry prices and sufficiently diligencing deals. This has led to a requirement for increased patience in a risk-averse environment.

With the exit environment remaining largely closed in 2023, the rate at which capital is being distributed back to investors is at the lowest level since 2003. Another year of sluggish fundraising will continue to put downward pressure on capital-starved startups, leading to an investor-friendly dealmaking environment.

Local investor Paul Hsu thinks that smaller, Chicago-based venture capital funds have been more disciplined in investing over the past 18 months. As reported in “Chicago Inno,” he sees reasons for optimism in 2024, especially in Chicago. His rationale is that the Chicago venture ecosystem is focused on durable business models that have weathered the bear market cycle. The focus has been on line-of-sight toward monetization and product-market fit. These portfolios can weather the downturn better than other strategies that are high-burn-rate type of situations. He noted, “If you look at 20 to 25 years of venture history, smaller funds have always outperformed larger ones, and it’s been highlighted more recently because of the bear market in 2023. Smaller fund managers ... are very disciplined in terms of not overfunding.”

The global pandemic, combined with stalled mergers and acquisition activity, has affected the progress timeline of all portfolio companies, impacting biomedical organizations especially. The expected pace of the paths to exit has been delayed by at least two years.

---

Startup Statistics

• Approximately 565,000 startups are launched each month in the U.S.
• The U.S. has almost 3x as many startups as the next ten countries combined.
• Startups created almost 3 million jobs in the U.S. in 2021.
• 70% of Americans would rather work for themselves than someone else.
• Startups only stay classified as a “startup” for five years.
• 5% of all global startups worldwide are in artificial intelligence.
• In a portfolio of 100 startups, a 10% success rate pays for 90% of failures. 

---

Targeting Diversification

A key element in venture capital investing is the inherent risk in each investment. Because of that inherent risk, for many years, the road to the highest returns was thought to be the diversification of VC investments in a fund. A typical venture capital firm, generally using institutional monies, would pool 15-30 funds and make follow-on investments in those ventures that were performing up to expectations and continued to show attractive potential. With this approach, generally about 85% of the investments made no money at all, another 10% or so perhaps doubled or tripled their money, and the remaining 5%, one to three investments, were true home runs, returning over ten times the money invested. 

In the book “Zero to One,” Peter Theil argues that rather than following a diversification method that accepts that 80-85% of all deals will fail, one would do better by making fewer investments in the first place and then going on to focus intensively all effort and capital on the few that appear increasingly likely to become the home runs. He advocates for greater selectivity from the start and only invests in ideas and companies that appear to have true home-run potential. For this home run method to work, the investor must have access to and the ability to spot or create likely home run investments. Not just one, but seven or eight must have the odds of a true home run materializing. 

We subscribe to this same philosophy, which is why we review a hundred or more opportunities for every deal we ultimately select for investment.  

The most probable route to investment success would seem to invest with a major venture capital firm that has had considerable success year in and year out for several decades. This is the way institutional investors try to invest in venture capital. 

For individual investors, however, other than the mega-wealthy, this approach has been almost impossible until now as the most notably successful VC firms rarely admit individual investors. 

VCapital Management was founded by Len Batterson and Jim Vaughan with the mission of providing access for individuals to invest in institutional-grade venture capital opportunities with manageable minimums. Rather than going it alone to find potential venture capital winners, the VCapital team does the research and due diligence to find companies with extraordinarily innovative ideas and management teams. VCapital connects with top academic institutions, accelerators, incubators, and other venture capital firms to create a network of resources and share investment opportunities. In addition to capital, VCapital provides operational expertise, active guidance, and valuable connections to entrepreneurs, increasing the chances for a successful outcome.  

Since 2015, VCapital has invested $45M in 14 portfolio companies. Eight tech and biomedical companies in the VCapital portfolio are far along in their development, with a high potential for success, and worthy of utmost focus. Two of the remaining six investments were acquired, one returning 85% of capital and the other 50%. Two failed with a 100% loss; two are currently struggling to raise capital and have limited exit potential.

Our research has provided evidence that our top eight companies have great potential to sell or go public within 24-60 months. The commonalities of the eight deals are that they were all originally made at favorable valuations, all are performing exceptionally well in the execution stages of their development, and follow-on rounds are open or will be opening, which offer:  

• opportunities to invest at still reasonable valuations (the Warren Buffet approach)
• likelihood to achieve higher gains upon exit, and
• likelihood to exit during a market cycle that will provide greater projected carried interest. 

As always, our doors are open to discuss the advantages of adding to VCapital positions. We would also welcome introductions to new investors interested in supporting the work to guide our portfolio companies to a successful outcome for VCapital investors.  

Best regards, 

Len Batterson and Jim Vaughan