What are “illiquid” securities?

As an investor in the venture capital space, it’s essential to understand the concept of illiquid securities and how they can impact your overall investment strategy. Illiquid securities refer to investments in companies where selling the owned shares is either not allowed under applicable securities laws or there is no active market for buying and selling these shares. Consequently, investors may face challenges selling their holdings, making such investments riskier than traditional, publicly traded securities.

Venture capital investments are often subject to this illiquidity, as many startup companies never develop a public market for their securities. This lack of liquidity can significantly impact an investor’s ability to sell their shares or receive a return on investment before a liquidity event, such as an IPO or company sale. In the venture capital world, liquidity events can take several years, if not longer, to occur.

The illiquid nature of venture capital investments means that investors need to have a long-term perspective and be prepared to hold their securities for an extended period. In contrast to publicly traded stocks on the NYSE or NASDAQ, registered mutual funds, or other similar investments, where there is a readily available market for the securities, investors in illiquid securities may struggle to find a willing buyer on their own.

To navigate this challenging landscape, investors must have sufficient liquid assets to meet their financial needs. The returns from illiquid securities can be uncertain and take time to materialize. Consulting with a financial advisor can help determine an appropriate allocation of illiquid securities based on your unique financial situation and investment portfolio.

Investors may also overestimate their need for liquidity. This is a more complex calculus. Essentially if illiquidity provides an element of investment advantage and an investor overestimates their need for liquidity, they will under allocate to illiquid assets like venture capital. Losing the option of potential gains.

Venture investments also provide an option to invest more through participation rights. Those rights are often limited to those who made prior investments. In the case that a company starts to perform well, the option to invest more valuable. This nonlinearity is typical in illiquid securities like venture capital. Estimating the need for liquidity and the optionality of investment is a nearly impossible calculus. Optionality can act as a hedge against illiquidity risk if the investor has the cash to invest in the option when it reveals itself. iSelect attempts to increase optionality with frequent Deep Dives and investor briefings, each revealing a bit more we are learning from our network of investors, startups and early adopters in the Food is Health thesis.

Investors must consider illiquid securities as a crucial aspect of venture capital investing. These investments come with unique challenges, including the inability to sell shares quickly and the potential for a long wait before realizing any returns. To manage these risks, investors should maintain a diverse portfolio with a mix of liquid and illiquid assets, seek professional advice, and be prepared for the long-term nature of venture capital investments. By understanding the intricacies of illiquid securities, investors can make informed decisions and better navigate the venture capital landscape.

Consideration

With 2021 well underway and with public markets still strong, we think it is an important time to highlight some of the key private market, venture investment themes that iSelect fund has identified for the year. We believe technologies transforming the Agriculture, Food and Wellness markets will flourish, with a focus on four areas: technologies that enable better food choices to drive better health outcomes, technologies that drive better, more profitable farm operations, technologies that drive the Consumerization of Healthcare, and biome-based treatment technologies. At iSelect, we invest for impact AND performance. We offer qualified investors access to emerging growth companies through our national venture capital strategy. Our unique structure allows our investors to continue to invest in these companies as they develop.

Timing

Why is now the right time for venture? The answer is that now is not explicitly the right time. Venture is something we need in our economy at all times. Now is not better than any other particular time. The question is, why ever stop? When we look at the challenges we’re facing in food and healthcare the reality is there is someone, somewhere who has an insight about how to build a product that will solve those problems. And if they put the right resources to it, they will succeed. As long as we need new technology to make life better or make our lives more enjoyable, we need venture capital to help fuel those entrepreneurs.

What is iSelect as a product?

iSelect is a very unique product, but when you break it into its parts it’s fairly easy to understand. On the front end we’re a traditional venture capital fund. We have a diligence process. We have an investment process. We have categories of industries where we have focus and real expertise, and we invest in companies in those areas that meet requirements for the fund. On the back end we’re unique in that we don’t raise a large amount of capital at one time and deploy it over the life of our fund. Each deal that we bring onto the fund, our investors have to prove and determine to invest in that deal. We have to constantly prove our diligence standards. It’s accessible, transparent and easy for investors to come in and see our comprehensive process.

What is the ideal iSelect company?

We are looking for founders that are passionate and we want the problem they’re trying to solve to be big, real, and painful. We want the solution to be revolutionary and we want our capital to be able to help them solve that problem. We want to know that they have customers involved and that the solution they’ve come up with actually meets those customers’ and market needs. And we want the team to be capital efficient with the money they’re spending.

What does the ideal iSelect company look like?

We’re looking for a company that has an opportunity to have a 10x return to our investment or greater in a period of three to seven years. What excites us at iSelect are companies that are solving big problems. We want companies that are going to be the Monsantos of the future. Not just in the size and the scope, but the impact they have on people’s lives. We want to create positive impacts on people’s lives, so we invest in areas like agricultural production and areas like producing healthy foods for our kids. They are problems that impact real people’s lives on a daily basis. That’s what we’re trying to do at iSelect. We’re trying to solve the big problems out there. Find ways to bring capital to the entrepreneurs who are the real heroes out there getting up every morning, beating away at these things that are problems that you and me and everyone else faces in their everyday lives.

What is iSelect?

iSelect is a venture capital firm. What that means is we look at hundreds and hundreds of different companies and we apply tough diligence standards to each of them, looking at whether the team has a good plan for growing the business, whether the team is qualified and credible, and more. We do that to resolve the few who provide the best opportunities for investors. And then iSelect takes that smaller set of investments and goes to investors who are interested in venture capital and provides a way for them to invest in these companies, either individually or all at once. We co-invest alongside other venture capitalists. We source transactions through to an exit where the company would become public or get bought. And we manage that whole investment process on behalf of our investors.