Since the Great Recession, technology startups have been the source of the greatest value creation and opportunity. Some of the areas with the most exciting growth include smartphones, the sharing economy, cloud computing and biotechnology. Select companies have handsomely profited off these trends.
Technological developments allow new companies to gain exposure to millions of people through the internet. Additionally, for many technology companies, the cost of developing and maintaining software does not change dramatically based on the number of customers, giving these companies the potential to scale up. Thus, these companies can deliver exceptional returns to investors, as they tend to have high margins with the potential for fast growth.
Unfortunately for most investors, startups are not available via public markets. One trend since the Great Recession is huge swaths of money pouring into private markets. Thus, companies are able to grow to large sizes without having to access public markets. In fact, Uber has grown to a $50 billion valuation as a private company.
Startups are inclined to stay private as long as possible so that founders can exercise a greater deal of control in terms of equity and vision. Once companies are public, their valuation is prone to the whims and desires of Wall Street, which tend to be short-term focused.
However, a few vehicles exist on the public markets that give investors exposure to startups.
Renaissance IPO ETF
The Renaissance IPO ETF (NYSEARCA: IPO) allows investors to gain exposure to a broad, diversified mix of companies that have just become public. Of course, this is not direct exposure to startups but the same trends driving startup valuation in private markets also drive valuations for newly listed companies.
Therefore, IPO is an effective proxy for risk appetites in startup investing. When investors are bullish on IPO, it bodes well for startup valuations. The inverse is also true as private startup investors hold onto shares of newly public companies or acquire them if valuations are comparable to private markets. Given the froth in private markets, many are finding better opportunities in public markets through exchange-traded funds (ETFs) such as IPO.
GSV Capital (Nasdaq: GSVC) is not technically an ETF since its decisions are not based on an index or a formula but rather its management team's discretion. In some ways, it is superior to an ETF, as there is no expense ratio. However, it provides the same function as an ETF, giving investors low-cost, diversified exposure to a sector of the economy. GSVC gives investors exposure to some of the fastest-growing innovative startups.
Fitting as a stock that invests in early-stage startups, GSVC has been quite volatile. The stock made its debut in June 2011 at $15. At this time, it became a hot property, as it held Facebook and Twitter shares, allowing investors to gain exposure prior to their IPOs. However, once these companies debuted, demand cooled for GSVC, and the stock was halved. Since then, it has slowly recovered to $10 as of August 2015.