As the stock market again reaches historic highs, many folks wonder how to maintain their level of returns in 2021. Venture capital might be the answer for financially qualified investors with a tolerance for risk and the patience to wait for potentially outsized returns.
A decade ago, few people knew of venture-capital backed companies such as Uber, Pinterest and Shopify. Today, these companies are household names and significantly impact daily life. Here are three personal anecdotes:
- Returning from Warsaw in 2007, I noticed a profound difference in catching a cab to the airport in an emerging, post-Soviet Bloc country compared with my taxi ride home in Denver. In Poland, the cab was a well-maintained Mercedes with a friendly driver who took pride in his vehicle and job. In Colorado, I sat in a beat-up Crown Vic with torn seats and a driver who had no regard for his or my safety, let alone the condition of the vehicle. A few years later, a venture partner described a new investment: an early-stage company called Uber. Intrigued, I downloaded the app and gave it a try in San Francisco. I was notified when the car would arrive, with no uncertain wait time trying to flag a cab. I was picked up by a new, polished BMW, driven by a friendly gentleman who took pride in his vehicle and what he was doing. The added bonus was there was no fumbling to pay for the ride as we arrived at our destination. I never knew I needed such a simple solution.
- Sitting at a small New York City dinner for investors in 2009 following the Great Financial Crisis, a venture partner introduced two young founders. Immune from the dread of the financial collapse, the pair stood in front of us describing a mobile collage that allowed users to share images of items they liked and wanted to purchase. This was the early iteration on what would evolve into the unique social-media experience of Pinterest.
- In late 2010, a venture partner quietly led an early-round investment in a company seeking to bring a “turnkey software platform to bring advanced-commerce functionality” to businesses of all sizes. Translating the jargon: They wanted to help companies compete with Amazon. Good luck, right? Ten years later, the COVID-19 pandemic has exponentially accelerated growth in ecommerce, and Shopify is providing businesses a way to scale their online presence. Today, Shopify has a market cap in excess of $125 billion.
The takeaway is that venture capital is a long-term investment that requires patience. Trying for the quick hit in a “pre-IPO” investment may or may not pay off. Frequently, the highest-growth companies don’t seek to capture market share, they seek to define new markets—like Uber, Pinterest and Shopify did.