Indexing and the Venture Capitalists

Twenty years ago, my first meeting with a venture capitalist did not go well. This wouldn't have been a problem, except my second, third, and fourth didn't go well either. When I got to my 10th strike, I realized I did not understand their thinking. At that point I did not understand that a venture capitalist might be a different genus than homo sapiens, but that's a different story.

When you are 22 years old with a resume shorter than the Lord's Prayer and are asking someone to write you a $10 million check, I learned that when they ask you a question about your business you should never answer with "it's unclear." So I hired an experienced CEO to help me, let's call him Apollo for this newsletter.

Venture capitalists would ask us questions that no human could correctly answer, and Apollo would 1. talk very loudly as if decibels predicted results and 2. answer "yes" or "oh sure" to everything they asked. It was all achievable and would be done, and soon. We would leave the meetings and I would point out to Apollo that we had zero chance of delivering any of the products he just committed to. He said it would all work out.

It didn't. After a party high above Boston celebrating the deal closing, the venture capitalists walked away without closing the deal, timing, at least of the party, that I thought odd. Apollo was soon ushered out the door and I was left to pick up the pieces.

A venture capitalist does not care about an opportunity to make 100% on their money. He or she has to pick a huge winner to offset the mediocrity in the other investments. Mediocrity is a bit kind - many of the companies they invest in are going down the flusher one way or the other, and to get good returns, the venture capitalist needs to find something like the next Google to average into the results.


One reason an index fund works is because it shares some of the characteristics of a venture capitalist, in a less extreme manner. While some of the companies in the index are not doing well, they are generally surviving. And while the winners are doing well, it's a more moderated version of success.

But you have to own the winners. And it is almost impossible, at least to those of us not named Apollo, to know this in advance. In the first 6 months of 2017, just 5 stocks out of 500 provided 28.4% of the entire gain of the S&P 500, and they were all in the tech industry (Amazon, Apple, Facebook, Netflix, and Google). Miss just one of those and your returns collapsed (In 2017, 119 members of the S&P 500 had negative returns. Someone has to make up for those slackers.) In many indexes the big returns do not come from companies with household names.

This wide diversification is fundamental to how the One Day In July model, and indexing, work. By casting a wide net, you ensure you catch the winners. Because of the dominant percentage effect of the winners relative to the others, historically an investor has ended up in a happy place in the long term.

Aah, you say. The net is wide, but how much of each fish do we collect in the catch? Do they get equal proportions, are they measured by their market size, or do their dividends determine their destiny. It's a hot area of debate, and I'll visit it in the future.

Dan Cunningham

p.s. Don't think the venture capitalists have any golden touch. Harvard Business School and the Kauffman Foundation report that the majority of venture capital funds underperform the small-cap index too. In fairness, the parties are more fun.

Return to Articles
How We Are Different
Low-fee index funds. Transparent & fiduciary financial advisors.
Local Financial Advisor
We are in your community. We are local.
Investment Management
We tailor to each client. Index funds at the core.
Index Funds
Broad market exposure, low expense.
Dan's Corner
Meaningful musings from our founder.
Fiduciary
Your best interests are our priority.
Low Fees
Our fees are among the lowest in the nation.
Financial Planner
Financial advisor optimizes your financial picture.
U.S. Treasury Bonds
Use Treasury Bonds to reduce risk.
Book Recommendations
Here are some of our favorites
Who We Serve
We work with clients nationwide from all financial backgrounds.
When Should I Invest?
Life transitions = important financial decisions.
Retirement: 401k and More
Retiring? Plan the future you want.
IRA Rollovers
401k Rollovers. IRA Rollovers
Active vs. Passive Investing
We believe there is a winner in this debate.
The Investment Process
How we work: low-cost index funds, personalized attention.
Simplicity
Simplicity is the ultimate sophistication.
Investing: What to Focus On
Low-fee index funds. fee-only advisor.
Switching Financial Advisors
Can be uncomfortable, but an important step.
Advisor Recruiting
We attract top-tier talent. Not your usual firm.
Basic Investing
Let's start with Investing 101.
Understanding Your Financial Statement
Let's break it down to basics.
Taxes on Investments
What causes taxes within your investments?
Behavioral Finance
Nudge vs. Sludge.
Advanced Investing
Let's geek out on stats and figures.
How Financial Firms Bill
Fee-based vs. fee-only, and lots more.
Who Supports Indexing?
Bogle, Swensen, Buffett, and others.
Transparency
One click to see our fees.
Mutual Funds vs ETFs
Clarifying the difference.
Does Stock Picking Work?
The resaerch says no.
Countering Arguments Against Index Funds
What happens in a down market?
Annuities
Lots of fees, little clarity.
How Do Mutual Funds Work?
Invest in the basket.
How to Relieve Financial Stress
New client? anxiety is normal.
Financial Terms Glossary
Common investment terms you should know.
Firm Comparison
One Day In July vs the competition.
Retired Investing
Retiring? Let us help.
Young Investors
Plant a seed, watch it grow.
High Net Worth Investors
Preserve and grow your wealth.
Investing an Inheritance
Prioritizing and planning for the future.
Frequently Asked Questions
Good questions, real answers.
Female Investors
Your voice needs to be heard. We are listening.
For the Business Owner
Choosing what's best for your business.
Environmental Investing
Carbon intensity, fossil fuels.

Locations

Vermont

Connecticut

United States

Services

Individuals

401k Plans

Institutions

Environmental

Account Types

Differentiators

Cash Flows

Low Fees

Fiduciary

Dedicated Advisor

Materials

Advisors: Join Us

Careers

Articles on Investing

About the Secure Act

Quarterly Booklets

Resources

Vermont Investment Management

Vermont Retirement Planning

Vermont Wealth Management

Vermont Financial Advisors

Investment Tools

Shelburne, VT Financial Advisor

Frank Koster | Josh Kruk | Keith McCarthy

5247 Shelburne Rd, Suite #101

Shelburne, VT 05482

(802) 777-9768

Stowe, VT Finanical Advisor

Available for meetings in Stowe.

Peter Egolf

(802) 999-2321

Burlington, VT Financial Advisor

Hans Smith | Katie Muttitt

Nancy Westbrook | Peter Egolf

77 College Street #3A

Burlington, VT 05401

(802) 503-8280

Darien, CT Financial Advisor

Available for meetings in Darien.

Keith McCarthy

(203) 554-9466


v 1.7.16 | © One Day In July LLC. All Rights Reserved.