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3 Things Retail Investors Can Learn From Venture Capitalists

Venture capitalists are investors who invest in start-ups or companies in their early stages of development. They can be thought of as the key capital providers for the startup ecosystem. Unlike investors of publicly traded equities, venture capitalists face a different set of challenges.

For instance, there is limited public information on start-ups. Unlike listed companies, startups do not provide potential investors with annual reports or detailed accounts of their past track record. Venture capitalists also face the challenge of not knowing when they can exit their investments. Due to a lack of liquidity, venture capitalists simply cannot move in and out of their positions in a company.

The above and other challenges make a venture capitalist’s decision much less straightforward than investing in publicly traded companies. Despite this, some venture capital funds have performed exceedingly well. So how do they do it and what can public security investors learn from them?

Think long-term

As mentioned above, venture capitalists do not have the luxury of knowing when they can exit their investment. The lack of liquidity means that once they invest in a company, they are unable to take out their capital until an exit opportunity like a buyout comes about or the company decides to sell its shares in the public market through an initial public offering (IPO).

As such, venture capitalists know that every investment they make will have to be for a reasonably long period.

Despite the liquid nature of publicly listed equities, investors of public stocks should also invest with a long-term mindset. It has been proven that moving in and out of positions is one of the main reasons why retail investors end up underperforming the market or even losing money. Frictional costs, poor market timing and knee-jerk emotional reactions can lead to investors selling and buying at the wrong times.

Invest in the people behind the business

Depending on the stage of investment, a start-up firm may not even have earned a single dollar in revenue. As such, venture capitalists have limited information to go to. Therefore, a large part of the decision-making process focuses on qualitative factors, rather than quantitative ones. One crucial qualitative aspect of a company is the leaders behind it. Venture capitalists often assess the quality of a start-up by looking at whether they believe the leaders have the ability and drive to execute and lead the business forward.

As investors of public equities, we too should invest in companies that have capable management and have proven over the years that they can take the company forward. Investors often scrutinise financial reports and industry statistics, but forget that the most important aspect of any company is, in fact, the leaders who are running it.

Look for future potential

Venture capitalists are always on the hunt for companies that can disrupt an entire industry and have huge runways for growth. To identify such companies, they will need to look at whether the industry is growing and if the company has the potential to take away its competitors’ market share.

Equally, investors of public companies should look for companies that have the potential to grow. This includes looking for companies that operate in fast-growing industries, and that can consistently stay relevant to the changing economic environments.

The Foolish bottom line

Despite the clear differences between investing in start-ups and more mature listed companies, there are similar strategies that both sets of investors can employ. Retail investors who are looking for high returns in the stock market will do well following these three venture capitalist principles.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Jeremy Chia doesn’t own shares in any companies mentioned.