Earlier this week, one of the most venerated venture capital (VC) firms – Kleiner Perkins Caufield & Byers announced that it is splitting in two, a surprise rupture that reflects the struggle to balance making smaller bets on young startups and major investments in companies that are soon to go public. The move is indicative of the changing fortunes in venture capital, as startups are staying private longer with money that in the past would have been raised in the public markets.
And VC investors are getting impatient. Money that could be put in an simple S&P 500 index fund is instead tied up in companies that are not making any moves to go public and allow these investors to cash out. It does not help that Kleiner which made its name with big bets on Amazon and Google in the mid 90’s and missed out on early investments in Facebook and Twitter, has instead placed its bets on clean technology which has simply not produced any meaningful returns.
But Kleiner is not alone in its woes. Vinod Khosla left Kleiner Perkins Caufield & Byers to launch Khosla Ventures because he wanted to make an outsize bet on clean technology. Khosla invested hundreds of millions of dollars of investors money in biofuel and biochemical companies. The returns have been dismal. Many of the companies have gone bankrupt and Khosla Ventures is now mired in lawsuits from investors.
Future Wealth’s View
The major problem with VC investing is that it ties up capital for years on the promise that the return at the end will be much, much better than investing the same amount of money in a liquid asset like a S&P 500 fund, which provides regular dividends and allows the investor to cash out at the push of a button.
VC investing is clearly not for everyone and with the problems they have been having lately, it is likely not appropriate for anyone. For every 10 or 100 bagger like a Google or Netflix, there are tons of bankrupt companies that ultimately make VC investing simply a game of Russian Roulette.
Benjamin Graham in his seminal book – The Intelligent Investor, wrote that “In the short term, the stock market is a voting machine and in the long term, it is a weighing machine”. If you want to weigh your money one day and find it to be much higher than what you put in years ago, giving that money in the hands of VC guys or hedge funds and expecting that they will somehow miraculously make it substantially heavier than the S&P 500 index, is simply being unrealistic.