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Farewell unicorns, now VCs work as portfolio managers

Andrea Di Camillo, Managing Partner at P101 | February 14th, 2018

P101 Ventures creates its funds through a process that resembles asset allocation. Thus it can double long-term capital

Venture capital as investible asset? It cannot be based on power law. The golden rule that in a VC portfolio there is only one title worth the whole game – the Unicorn that makes all the money – does not work for the Italian market. In Italy there is only one Unicorn, Yoox, which has now joined with Net-A-Porter and makes 5 billion on the Stock Exchange.

Inventing in Venture Capital is usually perceived as high risk but it can also into non-aggressive profiles, provided that it is managed with a process similar to that of  traditional asset allocation, with the only difference that in VC we are dealing with an illiquid asset. Indeed, asset managers and other players are beginning to introduce this type of asset class in their portfolios.

Venture capitalists are not (only) dream hunters, but also analysts with a broad and articulated vision of a market to which investors usually hardly have any access. Every year, at P101 Ventures we monitor two thousand companies and select the best among them.

As is the case with wealth management, you cannot predict the performance of a VC fund. However, you can be quite assured that a fund where stocks are picked according to the principles of diversification and risk containment doubles returns on invested capital in the life-span of the fund itself.

This is a completely different arrangement, directed to completely different targets than those who use the power law approach: in which case you are aiming for a winning horse, you are inefficient at the moment you invest, but you are buying a market that becomes your own (it happened with Google, with WhatsApp, Alibaba). But it is, in fact, more like a bet than an investment.

In our case, portfolio allocation choices are primarily driven by asset quality. In particular, the three features we take into account are:

1) Duration. We are talking about a long-time investment, 7-10 years if you consider the intermediate seed phase. The idea is to have an average duration that does not exceed this time-span. In order to do so we mix seed, early stage and later stage investments. The criteria that determine the space taken by each category depend on the capacity of the fund: the higher it is, the more accurate the balance can be in terms of duration.

2) Underlying sectors. With our fund we’ve invested both in B2C and B2B businesses. This is because B2B venture investments are usually smaller and last longer, as companies grow more slowly but the results they get are more lasting. So, in exchange of a little capital, we have steady and long-term returns. With B2C, on the contrary, investments as well as volatility are very high, especially in the start-up phase. And returns are to be found in the short term. Consequently, their risk/return profile is high.

3) Geography. Although Italy being our main focus, we began stock-picking in other markets too, in those areas where the Italian marketplace has not much space left. We’ve done something that comes closer to a quoted market than to venture capital, using an underlying financial model: a proprietary algorithm that helps us make the right choices basing on numbers and data.

In conclusion, there is a fourth transversal element that affects the allocation, that is, the Italian lack of transactions in which investors can make cash flow at a controlled risk. Therefore, our investments are small, the average size is 5 million Euros. There is a need to close this gap, at an institutional and legislative level too, in order to stimulate more substantial investments in what can be described as an extremely rarefied market in respect to its potentialities.