The emergence of venture capital as a major asset class was unlocked by the new ability to mathematically measure and price risk. Similarly, the current impact investing movement is being driven by our newfound technological capacity (via big data and computing) to quantify a company's social and environmental effects.
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Just as the 1929 stock market crash revealed the need for standardized profit reporting (GAAP), today's social and environmental crises necessitate standardized impact reporting. This creates the transparency required for investors, consumers, and employees to make informed decisions and for markets to function efficiently.
Top growth investors deliberately allocate more of their diligence effort to understanding and underwriting massive upside scenarios (10x+ returns) rather than concentrating on mitigating potential downside. The power-law nature of venture returns makes this a rational focus for generating exceptional performance.
Venture-backed private companies represent a massive, $5 trillion market cap, exceeding half the value of the 'Magnificent Seven' public tech stocks. This scale signifies that private markets are now a mature, institutional asset class, not a small corner of finance.
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Sir Ronald Cohen critiques the philanthropic model, arguing that relying on donations keeps charitable organizations small, underfunded, and perpetually begging for capital. This prevents them from achieving the scale needed to solve massive problems, a flaw that impact investing aims to correct by creating self-sustaining models.
Acknowledging venture capital's power-law returns makes winner-picking nearly impossible. Vested's quantitative model doesn't try. Instead, it identifies the top quintile of all startups to create a high-potential "pond." The strategy is then to achieve broad diversification within this pre-qualified group, ensuring they capture the eventual outliers.
The current movement towards impact-focused business is not just a trend but a fundamental economic succession. Just as the tech revolution reshaped global industries, the impact revolution is now establishing a new paradigm where companies are valued on their ability to create both profit and positive contributions to society and the planet.
Impact data isn't just a niche metric for investors. Sir Ronald Cohen reframes it as a basic human right. He argues that every employee, consumer, and investor has a right to transparent, standardized information about the good and harm a company creates, moving the conversation from finance to ethics.
Major technological shifts create new industries in unpredictable ways. The spreadsheet automated manual financial modeling, revealing massive inefficiencies in companies. This enabled private equity firms to acquire businesses, streamline operations using this new tool, and extract value, effectively birthing the modern PE industry.
The venture capital return model has shifted so dramatically that even some multi-billion-dollar exits are insufficient. This forces VCs to screen for 'immortal' founders capable of building $10B+ companies from inception, making traditionally solid businesses run by 'mortal founders' increasingly uninvestable by top funds.
The majority of venture capital funds fail to return capital, with a 60% loss-making base rate. This highlights that VC is a power-law-driven asset class. The key to success is not picking consistently good funds, but ensuring access to the tiny fraction of funds that generate extraordinary, outlier returns.