Expert Discusses Current State of Venture Capital Investing, How It Can Benefit Individual Clients Of All Wealth Levels And The Steps Needed To Make That A Reality
Alternative investments have flourished in types and availability, reaching new tiers of investors over the years and accelerating rapidly as traditional portfolios struggled with the twin downturns in equities and bonds. However, one well-known category of alternative investment – venture capital (VC) – has remained the elusive domain of ultra-high net worth and institutional clients.
VC, which is a type of private equity that supports startups and small businesses that investors believe have long-term potential, maintains high minimum investment thresholds and is typically sold in regulatory structures that prevent many investors from participating.
Founded by CEO Steven Weinstein in 2019, Seismic Capital seeks to bring VC investments to all wealth levels of individual investors, including non-accredited investors through SEC registered offerings, as well as pension funds, institutions and family offices.
We caught up with Weinstein to understand the current status of VC investing and how that may change, including accessibility for a broader range of advisors’ clients.
WSR: Which clients typically have access to VC investments, and who does not? How can VC investments be made available to those who do not currently have it? What is needed to make that happen?
Weinstein: VC, one of the best performing asset classes of the past 25 years, has generally been off limits to all but the wealthiest investors. Most VC firms are formed as funds, and funds typically have limits on how many investors they can have. Typically, the maximum is 100.
The math then dictates that raising large amounts of capital has to be limited to big investors – in some cases, the minimum investment is $1 million or more.
Beyond that, typical VC funds are structured such that investors have to keep money available on the sidelines for capital calls. By not taking the full investor commitment upfront, VC funds can juice their returns, and managers of VC firms can improve their own personal finances by charging fees for asset management, closing transactions and bringing in investors.
Firms should endeavor to reduce minimum investment thresholds, eliminate capital calls and discontinue fees, as well as take advantage of tax structures such as the Qualified Small Business Stock rules. Our firm is engaged in creating these solutions, including investing minimums as low as $1,000, no capital calls, no fees and a holding company structure designed to produce capital gains tax savings.
WSR: How does VC increase portfolio diversification in ways that other investments do not?
Weinstein: By adding VC to a portfolio, an investor is increasing diversification into the highest performing of all asset classes. Until now, just about all other asset classes have been available in one form or another to just about all investors, but VC has not. Instead, VC has been reserved for high net worth investors and institutions, and often is not even listed on a typical brokerage firm’s custody platform.
This must change, and VC should be listed on custody platforms accessible to traditional brokers. Our firm has begun working to obtain listing on custody platforms so it can be accessed through traditional brokers.
WSR: What are the pros and cons for advisors’ clients of investing in VC, and which clients are the right fit, or not the right fit, for VC investments?
Weinstein: Even though the performance returns of VC have been high, the associated minimums that sometimes top $1 million or more have caused investors and investment managers to view the asset as a high-stakes bet.
With a low threshold, it’s now possible for an investor with a small investment to test the waters. When the entry ticket is $1 million of hard-earned capital, it’s a different weighting – toward the downside – in the risk-reward curve than when the upside potential is so great versus the small risk of loss. Given this, advisors can now feel more comfortable discussing this asset class with all types of clients from any wealth background.
Michael Madden, Contributing Editor & Research Analyst at Wealth Solutions Report, can be reached at mmadden@wealthsolutionsreport.com.
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