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Unicorns: Bigger is Not Always Better

Ken Freeman, February 15, 2020

2020 began with clouds on the horizon.

How will geopolitical developments unfold? How long will the bull market last before the next correction (or worse)? Will the US-China trade conflict really be resolved, or will further tariff flare-ups impede growth?We obviously can’t dismiss these concerns. VCapital’s approach to venture capital investment offers opportunity for attractive returns in both good and not-so-good times, serving as an effective hedge against these risks.

As we communicated last quarter, innovative ventures capitalizing on longer-term trends provide protection against economic turbulence and offer real growth opportunity. We therefore don’t waver from one investment theme to another. Our investment strategies are consistent.

1. We seek growth potential at value pricing.

That’s how our investors will earn the best returns. Our greatest interest is therefore in early stage, typically Series A deals… while valuations are still low, when potential for outstanding return multiples is greatest.

This quest for value also leads us to concentrate venture search in the  Midwest. The Midwest’s lower cost of living relative to the coasts results in lower development costs. Its more conservative investors avoid the coasts’ sometimes irrational exuberance that can drive deal valuations too high. Yet successful ventures, whether in the Midwest or on the coasts, will ultimately exit into the same national or global market, enabling greater returns for Midwestern-based ventures, as documented by leading venture capital monitoring services.

While we would love for all of our portfolio companies to grow to billion-dollar-plus unicorn status, the metrics we focus on are investor return multiples and your average annual return on investment.

Illustration of Hypothetical Investment Returns

VCapital InvestmentOwnership of companyTime
 to exit
Exit
price
ReturnReturn multipleAverage
annual return
$10M10%10 years$1B$100M10X26%
$5M10%10 years$500M$50M10X26%
$5M10%5 years$500M$50M10X58%

A smaller exit may still represent an excellent return multiple. An investor benefits as well when an investment exits in a shorter time frame, allowing access to cash sooner for further wealth generation.  While unicorn bragging rights are great, and some of our companies have unicorn potential, our goal is to help you build wealth…and make an important difference to the world.

2. The VCapital investment focus is to uncover the best opportunities for our investors.

Healthcare accounts for 18% of US GDP. The US population is aging, increasing healthcare needs, as it is in the rest of the developed world. The current VCapital portfolio reflects our strategic commitment to healthcare/life sciences, with Intensity Therapeutics, Alievio (formerly Camras Vision), Raydiant Oximetry, and our latest opportunity, SentiAR.

It is more difficult to quantify precisely the share of the economy accounted for by information technology, but it is clear that productivity-enhancing information technology pervades virtually all businesses and all lives.  Artificial Intelligence is the latest frontier, and security is becoming increasingly essential as the Internet of Things proliferates. The current VCapital portfolio reflects our strategic IT commitment, with simMachines, Xaptum, Atlas Space Operations, and Imagineer Technology Group (formerly Synap).

3. VCapital is relentless in its screening and due diligence homework.

We dig deeply to select ventures with the greatest potential for long-term profitability, value, and ultimately investor return. We search for ventures whose products the market will value and pay for, with:   

  • significant intellectual property protection,
  • important barriers to competition, and
  • identifiable M&A suitors.

We are available by phone or email to continue this conversation.
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