Founders and employees are startup investors -- whether they like it or not!

Startup workers didn't sign up to be investors... yet, here they are

Unlike investors, founders and employees consider salary, job descriptions, and geography. And they acquire startup stakes via labor, instead of capital.

But the net outcome is the same as a GP ("general partner", another term for venture capitalist, or VC) or LP ("limited partner", an investor in venture funds).

Meaningful exposure to startups. A part of their financial life that needs to be managed in a similar way that a GP or LP would.

If we accept this premise. What follows is that founders and employees must better understand the best practices of GPs and LPs. Because they are more relevant than they might imagine.

Owning great startups is just one piece of the puzzle

We invented aptions to help founders and employees deal with this reality. To transform singular, concentrated bets into diversified portfolios.

But while aptioning startup equity reduces risk and creates a healthier financial life. Aption pools don’t solve everything.

Being a successful investor in startups is largely about getting into the right companies. But another important part of long-term great outcomes for investments is managing capital. Post-exit capital management is critically important, in getting strong long-term outcomes from startups.

The startup "exit" is just one piece of the puzzle

When speaking about venture allocations and their outcomes, people often speak in terms of “fund sizes” and “fund multiples”.

But the way capital flows through a venture fund or an aption pool is quite spiky and sporadic. This has huge implications for investors, whether they are in a formal venture fund or receiving distributions from an aption pool.

Startups exits are sporadic -- preparation makes all the difference

At first glance, it seems like venture funds are illiquid for much longer than they truly are. When calculating from its inception year, the average VC fund will likely take:

• About 19 years to liquidate ⅔ of the LP stake.
• More than 20 years to liquidate 80%.
• More than 24 years to liquidate 90%.

All figures from this section are pulled from pages 16 and 17 of the Cambridge Associates annual report.

Yet, median venture capital returns are strong, despite a ~1.5-2x multiple for funds. How can this be, over such a long hold period?

The answer lies in the average investment duration. The hold periods tend to be 5-7 years on average, but are often far longer or shorter. This leads to spiky and unpredictable distributions for startup investors.

Until a venture allocation is liquidated, size and timing of exits remains unpredictable

The implications for Aption Pool users are huge

At Aption, we believe that aption pools should be part of a cohesive strategy. We tend to speak with prospective customers not just about our pools, but about their goals and the best way to achieve them. That usually involves multiple aption pool selections, for optimal balance and diversification.

But as alluded to above, another part of the strategy that must be considered is what to do after an exit.

It's easy to forget about a plan or to be ultra-conservative and idly keep distributions in a bank account.

But if one waited to redeploy the capital they received from an aption pool or venture fund until the last distribution was received, it would be devastating to their returns. The hold period for the same investment outcome would double or triple, to more than 15 years.

If one wants to enjoy venture returns, but not have the additional gains offset by a failure to plan, one has to prepare for the day after a distribution.

We recommend that a founder or employee redeploy their distributions into high quality investments. These can include low-cost index funds, like VTI, VOO, VT, or FSVAX. Either immediately, or through dollar-cost-averaging (DCA). This allows them to immediately begin capturing the long-term average of the public markets, of 9.7%.

Otherwise, they risk squandering the "reward" that they just took risk to earn.

Swift execution of a post-exit plan is an important part of "locking in" a venture outcome.

Median venture returns tend to be 12-14%, just slightly better than the historical performance of the S&P 500. When zooming out to the longer term. The difference between great and poor overall investment returns can come down to whether one judiciously redeploys distributions as they are received. Instead of letting them wallow in checking accounts.

The choice to leave assets in a bank account for a few years can easily wipe away the few percentage point differences in returns that one enjoyed, by choosing an illiquid investment over a liquid public market index.

Have a plan and stick to it

At the end of the day, nothing in startups, the financial markets, or life is guaranteed.

But startup founders and employees are “venture investors”, whether they realize it or not. It behooves them to make a thoughtful venture strategy, for both the life of their investment and after it. And stick to it. What they do both pre- and post-exit can make all the difference.

We’ve outlined some ideas and rationale, but this is not investment advice and there’s not one right way to do this. If we’ve made you think twice about your own plans, then we are doing our job. And if we can help you further think through your strategy for managing your startup exposure. Whether before, during, or after using an aption pool – just let us know.