With fewer publicly traded companies and a booming private credit market, venture capital investments in the middle to late rounds of funding have emerged as a much more distinctive asset class.
Mid- to late-stage venture capital funds carry much stabler returns and lower failure rates with the possibility of faster liquidity events than investments in startup firms. However, they usually offer less potential for outsize returns than seed-stage investments, according to experts. As wealth management companies flock into private capital and other nonpublic alternative investments, one registered investment advisory firm launched its second mid- to late-stage venture fund this month with a goal of raising $50 million and retail-client-catered investment minimums of $250,000.
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New York-based GoalVest Advisory is pitching its Venture Growth Fund to the high net worth customers of fellow RIAs because the “$2 million and $3 million client” often has trouble qualifying or paying the fees for those types of private market investments, CEO Sevasti Balafas said in an interview. The basket of companies across artificial intelligence, software as a service (SaaS), climate and financial technology, and defense and consumer sectors provides exposure to the asset class with lower volatility and a shorter so-called lockup period required with startups.
“There are a lot more companies or funds that are focusing on that earlier stage, and that could be a good or bad thing,” Balafas said in an interview. “We’re looking for something that is de-risked. … Because we’re going into the late stage, we’re not making concentrated bets.”
GoalVest Advisory
Private capital and venture funds in particular have proven attractive to investors in terms of their returns and tax advantages in some cases, as well as being an area of innovation with crowdfunding, impact investing and bets on wealth management firms themselves. They also carry some risks, like startup failure.
The “liquidity timeline” and “risk-return profile” for mid- to late-stage investments look much different from startups that can have lockup periods for “an extended number of years” as companies stay private for much longer these days, according to Kaidi Gao, an associate venture capital research analyst at data and research firm Pitchbook, a Morningstar company.
“Early-stage bets are highly risky, but companies that do stand the test of time and emerge as winners hold the potential to generate outsized returns,” Gao said in an email. “In contrast, later-stage investments are safer, because at this point, companies have already tested out their products and services, and are focusing on scaling and growth. Compared to their early-stage counterparts, later-stage startups have relatively lower risk of failure. Multiples generated from investments made to mature businesses tend to be stabler, but you are much less likely to see outsized returns there.”
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Accredited investors are gaining more ways to invest in mid- to late-stage firms through expanding types of products such as interval funds that have lower management fees and carried-interest profit-sharing requirements, a shorter liquidity timeline and diversified holdings, according to Aaron White, the chief growth officer of Bay Area, California-based Adero Partners. Nonpublic companies usually go through three stages, from the startup phase seeking to get “some traction with some early customers or users,” and into public or private buyouts, White said in an interview. Between those two categories, they’re in the mid- to late-stage.
“The company is trying to expand their reach, their customer base, ramp up sales and marketing and move into profitability at some point in the future,” White said. “Those are the three stages that we look at investing in, and there are the pros and cons of each.”
The GoalVest product charges a management fee of 1.5% and carried-interest sharing of 15%, compared to the respective traditional industry rates of 2% and 20%, and it will invest in a similar group of firms to that of the first fund’s roughly 20 holdings that include bakery chain Insomnia Cookies, defense technology firm Shield AI and sales software Apollo.io, according to Balafas and Blair Cohen, the head of private investments with GoalVest. Even if the mid- to later stages bring lower yields than wildly successful startup investments, they can frequently bring much higher returns with less volatility than stocks.
For clients, it’s a “great time to be deploying capital into these markets,” because the mid- to late-stage firms have “a lot more realistic valuations” than startups, Cohen said.
“We can actually also buy shares of companies from early-stage investors who are looking to exit their position,” he said. “We can kind of come in, swoop in and buy them at a discount.”
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Adero Partners
Regardless of the product or the distinctions between the early and later stages, the “public market is shrinking, and it has been for decades,” according to White. Since companies are much more valuable by the time they do go public or get acquired by other firms, some investors have the opportunity to reap large returns in areas like SaaS that “have lower overhead and more exponential growth as they expand the product that they have and raise awareness,” he said.
“The private markets have developed to the point that companies no longer need to have an IPO to raise capital,” White said. “For founders and executive teams, it’s easier to focus on the business than managing investor expectations and the quarterly movements of their stock prices.”
