We love venture capital. For one of this book's authors (Len), it's been my life's work. For the other (Ken), it's been a later‐in‐life interest, as an investor and part‐time strategic advisor, following a more traditional corporate executive career, and even while I continue as nonexecutive Chairman of a traditional, midsized manufacturing company (that makes candy and snack products, including chips that are edible rather than being made of silicon!). And for both authors, who now work together on VCapital, we are pleased to let you know that investing in venture capital has made lots of money for our investors, our partners, and for both authors' families.

But the question we need to answer here is, why should you invest in venture capital? While we've both made money at it, if anyone tries to sell you with promises of guaranteed wealth, don't believe him. As we'll remind you repeatedly, this is inherently a high‐risk asset class. Nevertheless, there are sound, rational reasons for participating, even if you don't consider yourself a big risk‐taker.

It Makes Sense Even for Conservative Investors

This is Ken speaking now. While Len's been at it for almost his entire career, let me tell you why I've been drawn to venture capital investment. You may find parallels in your own situation that make my thinking relevant to you.

I'd characterize myself as being pretty conservative, a “belt‐and‐suspenders type” is how one of my longtime friends put it. Both my wife and our longtime financial advisor agree. I'd characterize myself as a value investor. My interest in venture capital started after retiring from a career in Fortune 500–type companies. The retirement was fairly premature, as I was just in my mid‐50s, when a serious heart attack scared me badly. Less than two months later, I was fired for the first time in my life because, as my boss put it, I couldn't run around the world as I'd been doing up until then.

That triggered my decision to leave my career and not even look for the next corporate senior executive opportunity. I'd done well, and didn't need to continue working to live comfortably. I hadn't quite reached that proverbial gold ring and won the CEO lottery, so we're not super‐wealthy, but we're comfortable.

Incidentally, the heart attack and associated decision to leave the corporate treadmill were probably the best things that could have happened to me from a long‐term health perspective. After focusing on cardiac rehabilitation, including a much healthier diet and daily exercise regime, 45 pounds were quickly shed, and less than five months post–heart attack my wife and I set off for a bike tour of Ireland, pedaling 30 miles a day. I subsequently caught the running bug, and wound up winning my town's annual 5K race (for my age class) and placing competitively in a number of larger races.

Getting back to the subject at hand, why did this conservative retiree decide to invest in venture capital? I'm the analytic and strategic type. Having a lot more time on my hands, and without more highly compensated work planned at the time, I began to think hard about how to manage our assets. I figured they needed to last another 30 or 40 years, at least for my wife and hopefully for me, too.

My reading on the subject kept bringing me back to the importance of asset allocation and the need for that asset allocation, notwithstanding my conservative personal nature, to include some portion invested in more aggressive growth vehicles. With the 2008–09 financial crisis upon us, the stock market plummeting, and interest rates heading rapidly toward zero, I recognized that long‐term Treasury bills were certainly off the table and that I'd better find ways to hedge against a possible sharp run‐up in inflation sometime in the future. Fortunately, as an accredited investor, I had more options open to me than most folks.

Before we go further into my thought process, let's first explain what it means to be an accredited investor. The SEC defines an accredited investor as: (1) an individual or couple with net worth, excluding their primary residence, of at least $1 million; or (2) an individual with an income of at least $200,000, or a couple with an income of at least $300,000, for the past two years and with a reasonable expectation of that continuing.

Being an accredited investor means you are well‐off—not necessarily super‐wealthy, but you do have some financial discretion. It also means that you're allowed to invest in asset classes like venture capital and other private securities that, until recently, non‐accredited investors were not allowed to invest in. Recent regulatory developments from the SEC now allow individuals who have not attained accredited investor status to invest in venture capital as well, albeit in very limited amounts.

Serendipitously, unaware of my personal situation and resulting heightened interest in personal financial management, but simply having been a classmate at the Harvard Business School, Len Batterson reached out to me as a possible investor in Batterson Venture Capital. I'd honestly never before thought about venture capital. The background material he shared, though, was intriguing. The funds and investment teams he had led had a great track record.

Fortunately, my financial advisor is very bright, competent, and truly focused on his clients' financial well‐being. When I asked him about investing in Batterson Venture Capital, even though his affiliation with a major brokerage firm precluded his benefiting at all from any such investment, he encouraged our jumping in.

He explained that venture capital doesn't have a tight correlation with the stock or bond markets. He viewed it as he would look at other alternative investments as well—as an asset class that over the long haul can help smooth out the ups and downs of the stock and bond markets, effectively reducing overall portfolio risk, despite the inherent riskiness of each individual venture capital investment. He explained that this benefit would be present as long as we took a reasonably diversified approach to this different asset class. In fact, when we began by investing a relatively modest amount, our advisor suggested we consider more in order to enable greater diversification, and we have indeed since increased our allocation.

To be clear, I'm not in venture capital to make a fortune. I realize you can't plan on that. In fact, reflecting my conservative bent, our initial investment was in Batterson Venture Capital's overall portfolio, not limited to just one or two ventures. That reduces risk, facilitating the diversification within this asset class just mentioned, while of course moderating potential gain as well. My motivation has been an opportunity to benefit from venture capital's overall historical 12% returns, and hoping for (but not counting on) my author partner's even better historical 28% return. Happily, some of my early investment dollars went into Cleversafe, which accounts for my frequent smile.

A Hedge Against Inflation and Lengthy Bear Markets

My original reason for thinking about including more aggressive growth vehicles in my overall asset allocation was a concern with potential future inflation. While inflation has been extremely tame in recent years, I remember well the hyperinflation of the late 1970s and early 1980s. Back then, prices were rising nearly 10% a year, mortgage rates reached 15% and higher, and if you didn't get double‐digit raises every year, you were falling seriously behind.

Maybe that won't happen again in our lifetimes, but the near‐zero interest rates over the past several years and never‐ending government deficits scare me, as they could trigger a big inflation run‐up. The experts are already warning that policies expected from the Trump administration, including substantial tax reductions and substantial infrastructure expenditures, are likely to keep government deficits high and drive at least some increase in the recent benign inflation rate. That's good reason to include at least some aggressive growth elements even in overall conservative financial plans for anyone who can afford the risk that more aggressive growth investments always entail.

And inflation is not the only worry. I also still remember vividly the sting of the broad collapse in both stock and bond prices in 2008–09. While my wife and I came out of all that okay, having avoided selling off much and instead largely staying the course with our portfolio, thanks again to our valued financial advisor, we recognize the potential for extreme volatility and big drops at the wrong time. This is a personal concern with my days of big corporate paychecks gone and our financial assets representing our main source of income.

Our 2008–09 market scare got me digging through historical data and uncovering some long stretches when the stock market—the place we've been taught to look to for reliable growth—either went down sharply or simply went nowhere positive for extended periods. You may be surprised. I was.

I looked at stock market levels at the start of 2000, the New Millennium, and then again at the start of 2017. Despite all we hear about extended bull markets, the S&P 500 index over that 17‐year period grew at just 2.7% per year. Adding dividends averaging about 2% annually, someone investing broadly in the S&P 500 over that period likely realized an annual return rate of slightly below 5%. That's hardly the froth one might expect given all the talk about the bull market.

Then I remembered the economy's difficulties back when I was still in school in the early 1970s. Fortunately I wasn't in a position yet to worry about investing and building wealth, so the market's travails didn't mean much to me then. The historical data, though, sent a shiver down my spine. The S&P 500 index began a long‐term drop at the start of 1973, and that index finally recovered back to its January 1973 level in 1983, and then dropped below that benchmark again later in 1983 and into 1984.

In a presentation Warren Buffett gave at a major investors' conference in 1999, at the height of the dot‐com frenzy, his memory and historical digging proved even sharper than mine. As Alice Schroeder described so eloquently in her book, The Snowball: Warren Buffett and the Business of Life (published in 2008 by Bantam Books), Buffett reminded that audience, a savvy group made up of many of the country's most successful movers and shakers, about market risks, presciently warning about the likelihood of a precipitous market drop at some point, though he scrupulously avoided forecasting timing.

As recounted by Ms. Schroeder, Mr. Buffett's comments did highlight the timing risks of stock market investing. He explained, “In the short run, the market is a voting machine. In the long run, it's a weighing machine. Weight counts eventually. But votes count in the short term. Unfortunately, they have no literacy tests in terms of voting qualifications, as you've all learned.” He then displayed on the conference room screen a simple PowerPoint slide.

He went on, “During these seventeen years, the size of the economy grew fivefold. The sales of the Fortune Five Hundred companies grew more than fivefold. Yet, during these seventeen years, the stock market went exactly nowhere.”

Many of you reading this book may be old enough to remember what happened shortly after Buffett's 1999 presentation. The S&P 500 exited 1999 at 1469, but dropped to 880 by the end of 2002. The NASDAQ plunge was even worse. On March 10, 2000, that index peaked at an intra‐day high of 5132. The index then declined to half its value within a year, and finally hit the bottom on October 10, 2002, with an intra‐day low of 1108. While the index then gradually recovered, it did not trade for more than half of its peak value until May 2007, and it took until 2016 for the index to finally recover all the way to its March 2000 peak.

Too many investors “vote” repeatedly. They don't practice the buy‐and‐hold discipline espoused by Mr. Buffett. On an average day, 3–4 billion shares change hands in NYSE composite trading. Even worse, too many investors rush in following market run‐ups and then sell in a panic as prices plunge. In the midst of some recent volatility, small investors have even lost small fortunes simply waiting minutes for trades to be executed. High‐speed traders rely on split‐second moves.

Venture capital investment, on the other hand, is far less susceptible to short‐term price and valuation fickleness. It is long‐term by nature, not intended for short‐term trading, so you're unlikely to shoot yourself in the foot like you can do in the publicly traded securities markets. Its values are based more on a venture's long‐term financial valuation rather than on short‐term market vagaries.

Hedge Funds and Private Equity Buyout Funds No Longer So Attractive

By the way, if you think you can outfox the market by hitching your wagon to the hedge fund and activist investor icons, think twice. So much has been written about activist hedge funds and their wealthy leaders—like Carl Icahn, William Ackman, and Barry Rosenstein—that you may have assumed these guys were winning big and that investors in their funds could feel confident of big gains.

Some of the activist hedge funds were big winners years ago, hence their founders' personal fortunes. However, it looks like there may now be just too many dollars chasing not enough great ideas and so, of necessity when so many dollars flowed into their funds, some pretty questionable ideas received investment dollars, too. As a result, these funds are not doing so great these days. The Wall Street Journal, citing an index tracked by Hedge Fund Research, Inc., reported that the average activist hedge fund returned just an estimated 1.5% after fees during 2015, versus a 1.4% return for the S&P 500, and that 2015 was the third consecutive year of declining returns.

Here's a more surprising disappointment. Private equity funds aren't doing too well these days, either. Based on a white paper published by the Center for Economic and Policy Research, private equity funds' performance advantage relative to the S&P 500 has been shrinking in recent years. For background, the Center for Economic and Policy Research (www.cepr.net) is a Washington DC–based non‐profit think tank focused on complex economic and social issues through professional research and public education.

The researchers found that the median PE buyout fund outperformed the S&P 500 by 1.75 percentage points annually in the 1990s and by 1.5 percentage points in the early 2000s, but has performed only about the same as the S&P 500 since 2006. Moreover, the performance of PE buyout funds is worse when compared to a stock market index based on midcap companies more comparable to those found in private equity portfolios rather than one based on large‐cap companies like the ones that make up the S&P 500.

Again, the problem has become too much money chasing after too few good deals. Per the previously cited white paper published by the Center for Economic and Policy Research, “By 2016, 4,100 private equity firms headquartered in the U.S. were competing against one another to acquire portfolio companies in an environment in which the number of high‐performing, undervalued target companies is shrinking. In addition to the $185 billion raised in 2015, buyout funds held another $460 billion in unspent funds—or ‘dry powder’—from prior rounds of fundraising.”

Venture Capital's Strong Historical Returns

That's enough bad news about the problems other asset classes are having. Let's focus again on the positives venture capital offers. Importantly, venture capital is the lifeblood of major, fundamental innovation, the key to substantive economic growth. Think about the big business success stories of the past dozen years—Microsoft, Alphabet, Facebook, and so on. All were spawned by venture capital investment, and there are many more that have not yet gone public and are still operating on their own as well as ventures that were acquired by established companies that recognized and valued their growth potential. As a result, aggregate returns for the asset class have historically been outstanding, and there's no sign that will change anytime soon.

This is demonstrated well by the Thomson Reuters Venture Capital Research Index, launched in 2012 to replicate the venture capital industry as a whole. Based on that index, venture capital investment has on average returned 19.7% per year since 1996, notwithstanding the 2000 dot‐com collapse, versus modest single‐digit returns for traditional equities and bonds.

Don't Invest More Than You Can Afford to Lose

To be clear, neither of your authors is suggesting that you should invest a large share of your net worth in venture capital. It is inherently a high‐risk/high‐reward potential proposition. You shouldn't invest more in venture capital than you can afford to lose without meaningfully changing your life.

If you are an accredited investor, and most venture capital firms limit their investor rosters to accredited investors due to the strict restrictions in dealing with those who are not accredited investors, you should be able to risk, say, 5% of your net worth without potentially jeopardizing your financial health and future. If you're not an accredited investor, the SEC limits your venture capital investments anyway, precluding you from taking undue risks in this asset class.

Substantial Institutions Love Venture Capital

Getting back to the positive, on average returns are terrific. That's why most sophisticated pensions and endowments have come to the conclusion that allocating a portion of their total portfolio to venture capital (and other private equity investments, particularly when private equity funds were doing better) makes sense. Yale University's endowment, often held up as a standard of investment excellence, has generated nearly a 30% average annual return on its venture capital and private equity investments since 1973. Their commitment is so great that the university has invested in a large satellite campus, west ofYale's hallowed downtown New Haven, Connecticut campus, dedicated largely to scientific and technological research, has actively fostered entrepreneurial development in its graduate business school, and has invested with thriving venture capital firms that have sprouted right in New Haven.

Again, keep in mind that institutions like Yale can diversify their venture capital allocation across a large number of promising ventures. While you won't be able to diversify your venture capital allocation to nearly the same degree, the high‐risk/high‐reward aspect of venture capital still makes diversification within this asset class important. However, you'll want to think about and implement a diversification strategy with your venture capital investment allocation that is quite different from the way you probably think about diversification in stocks and bonds. We'll come back to that issue later.

Emotional Reasons for Venture Capital Investment

You've heard the rational reasons for including venture capital investment in your asset allocation. Now let's discuss the more personal and emotional reasons, too.

Consider the personal satisfaction in helping enable ventures that deliver something for society that means a lot to you. Perhaps a loved one has suffered from the ravages of cancer, or Alzheimer's, or some other dread disease. Wouldn't it feel satisfying to invest in a venture that may bring a cure for, or better yet eradication of, the disease? Or maybe you feel passionate about saving the environment. Wouldn't it feel great to enable a venture that contributes importantly to your dreams of a greener world?

If you're fortunate enough to have your physical, security, and social needs met (thank you, Dr. Maslow, for your work in explaining the hierarchy of human needs), it's just natural to move on to wanting to help others and make a difference to the world. And having the opportunity for a potentially outstanding financial return at the same time would be great, too.

Still one more reason for investing in venture capital is that it can be exciting and fun. Investors in our funds have told us that, in a world of increasing gravitation to the plain‐vanilla index funds, they look forward to hearing about the latest developments and growth achievements of the ventures they have funded. They tell us that the prospect of a 10‐to‐1 or 20‐to‐1 investment return is exciting.

And while we know that bragging isn't polite, wouldn't it be nice to regale your friends on the golf course or at cocktail parties with your off‐the‐charts investment finds?