The fundamental difference between Venture Capital and Value Investing


“Active management has to be seen as the search for mistakes.” Howard Marks

Venture capital and value investing share many different elements but each system is based on a different mispricing. This is a critically important point for an investor to understand. If an asset is not mispriced, market outperformance is not mathematically possible. It is also important to understand that investments can be mispriced for different reasons.

In venture capital the mispricing occurs because very few investors or asset owners understand optionality. This allows a VC to buy what are essentially long-dated, deeply-out-of-the-money call options from companies at prices which are a bargain. By purchasing a portfolio of these options, a VC who understands optionality and who has the right deal flow due to “cumulative advantage” can substantially outperform the market. The basic formula is simple for a top 5% VC with the requisite cumulative advantage and deal…

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