The "Ivy League" Club in Venture Capital and Investment Management

I recently met with Richard Kerby, former VC at Venrock and founding partner at Equal Ventures, who updated his research into the venture capital “groupthink phenomenon” in a blog post on July 30, 2018. Kerby previously pointed out venture capitalists were largely white (72%) and male (82%). In his 2018 update, Kerby also notes 40% of venture capitalists from his survey graduated from just two universities: Harvard or Stanford.

Kerby goes on to say in his post that “it is no wonder that this (venture capital) industry feels so insular and less of meritocracy but more of a mirrortocracy.”

As the founder of Rocket Dollar, an occasional angel investor in technology companies and a Certified Financial Planner, this prompted me to ask the question: Is there a similar “Ivy League Club” in the investment management world? The answer is a resounding YES. The Ivy League endowments invest very differently from the average American.

For decades now, average American investors have been guided by their financial advisors to invest in stocks and bonds through mutual funds and ETFs, with a 60% to 40% stock to bond mix, as a safe way to build wealth for retirement.

Less than 30 years ago, even the endowment fund at Yale had over 80% of their total endowment assets invested in traditional stocks, bonds, and cash, while investing only a small percentage into real estate, private equity and venture capital. Today, sophisticated portfolio managers at Ivy League schools such as Yale and Harvard have a drastically different investment strategy from you and I.

Yale University’s endowment fund prioritizes investments in leveraged buyouts, private equity, natural resources, real estate and absolute return strategies by allocating 88.5% of its $27.2 billion endowment to alternative assets. 

Yale said in its annual report that the endowment earned an 11.3 percent investment return (net of fees) for the year ending June 30, 2017. U.S. equities now only make up a meager 4 percent of its portfolio while 25 percent is allocated towards absolute return, 17 percent to venture capital and 15.5 percent to foreign stocks.

Since the mid-1990s, the stock market now has half the number of companies - from 8,000 to 3,627 in 2016, according to data from the Center for Research in Security Prices at the University of Chicago Booth School of Business, the New York Times reported.

The end result is that the profits are shared among a smaller number of companies, said René Stulz, an Ohio State finance professor who wrote a report for the National Bureau of Economic Research, according to this New York Times Article. Main Street investors will be affected negatively as their investments will be less diversified. Relying solely on the stock market is not the solution anymore.

As many Millennials are reaching their mid to late 30s, a large percentage of them are attaining large amounts of wealth within the next decade and need investment strategies with more diversity and greater returns.

Many Millennials, also known as High Earners, Not Rich Yet (HENRY), also find current retirement investment options to be outdated and likely will not generate enough income once they retire. The traditional strategy of 60% stocks and 40% bonds no longer works. Diversification is crucial to increasing personal net worth.

A recent CB Insights report said that by 2030, Millennials will have five times as much wealth compared to 2018 and financial experts should be prepared to offer greater diversity in assets such as being able to invest in startups, cryptocurrencies, and real estate.

By creating an account through Rocket Dollar, anybody, including Millennials, can roll their old retirement accounts into Self-Directed IRAs to begin investing in alternatives such as cryptocurrency (Coinbase), crowdfunding platforms (SeedInvest or Republic), technology startups and other businesses that are far more likely to pique their interests. These investments satisfy the need to diversify investment options, as well as the need to place money into 21st-century investments that are better suited for younger individuals with a long time horizon.