Few of us ends up doing what we imagined as kids. We can’t all be astronaut or president, there just isn’t a spot for everyone. But the real reason, in my opinion, is that we just don’t know about all the possibilities out there.
Economics interested me from a young age, however my early perception of what that discipline would truly entail was narrow at best. Now with over a year of working at Evli Growth Partners, I’m sharing my thoughts over why I initially wanted to work with private companies and what that experience has been like.
Having followed the general capital markets, especially listed stocks, and reading theories about market efficiency, I developed this belief that it’s a tough place to compete at, with many sharp and ambitious minds chasing the same excess returns. This is certainly true for the venture capital market as well. We are talking about investing after all, analyzing data points to call the next great investment, so there must be a lot of similarities. However, I argue the that the biggest difference is in the data itself when we split markets between private and listed. While the listed equities have an abundance of standardized, easy to access symmetric data, the story is completely different on the private side.
Computers against humans
Much of today’s trading is already done by machines and algorithms, and I firmly believe that this evolution will continue as we move forward. It’s easy for machines to work with standardized data, and in the longer term, I think it’s going to be even harder for the human mind to compete in that race. This was the core reason why I sought to join the private markets over listed ones, as it will take a much longer time for us to be able to apply machines and algorithms because of the differences in data supply. Furthermore, there are many qualitative factors that contribute to the analysis of startups, with the most important being the team behind the business. The interviews and discussions with the founders are for me the most interesting and fun part of my job, and I also think for the time being that we humans can do it better than any computer.
While access to management and the whole human factor makes the analysis quite different, the numbers side varies as well when compared to an established company with years of stable cashflows behind. Any plug-and-play model quickly becomes unwieldy to the point that it’s rendered useless, with long-term earnings forecasts feeling arbitrary at best. When you combine novel products or unconventional new business models with very fast growth, determining whether a startup is a good investment from a numbers point of view is no easy task.
“Many qualitative factors contribute to the analysis of startups, with the most important being the team.”
Complex analysis and stiff assumptions don’t go hand-in-hand with the ever-present uncertainty and rapid rate of change emblematic for the startup industry. However, common sense and some simple mathematics gives us a solid starting point. Combined with access to very granular data, I try to paint an accurate picture of the unit economics we are dealing with. If I’m looking at a business where it costs me one unit to acquire a customer, who then pays me five units back (preferably as fast as possible), I can generally conclude that it’s good business. On top of that, I want that exchange to be repeatable over and over again because the best companies combine profit (great unit economics) with size (huge market potential). Studying and examining the market answers the question about repeatability. On a side note, no matter what type of equities we are talking about, market analysis is crucial when investing for the long term and some part of the whole assessment should be reserved for it in order to better understand risk and upside.
When it comes to investing in private markets, the startup world feels like one of the most exciting places to be in. It’s fascinating to watch and follow the people in the forefront of tomorrow’s world. The decisions have a strong sense of tangibility, as we deal with real challenges through human interaction, rather than just numbers on a screen. Although I never imagined working in VC, now that I’m here, it’s hard to think of a place in the investment world that would be as intriguing, exhilarating and dynamic.