VC or CRE in 2022?

Disclaimer: This is not investment advice; this is an opinion. If Venture Capital was entirely a bad investment, it wouldn’t exist in the market. This is an opinion based on the current market economy.

As inflationary numbers continue to come out this week, recent headlines have discussed the fraudulent behavior of Trevor Milton, founder of Nikola, the recent IPO and popular Venture Capital Investment. The company exaggerated their technology, and made false claims about their trucks technology being totally electric, when in reality they never had a prototype. Venture Capital and IPO stock purchases are sexy investments, they’re new and come with an allure of potentially 5x, 10x, or 20xing your investment, but it also comes with a lot of risk. The business and the leadership are equally important. An unproven business with an unproven leader can lead to disastrous results.

Investing in early-stage companies and Venture Capital, is extremely risky, with 65% of VC investments resulting in a loss.?VC has inherent risks including but not limited to long hold periods, limited information, and potentially unstable markets. Compounded with that, inflationary periods make it even more difficult to earn returns with higher interest rates and overall down markets.

When examining a spectrum of different types of investments, higher returns are expected when taking on higher levels of risk.?When you look at the Efficient Frontier of investments, you find that the relationship between risk and returns is not linear, and not proportional, meaning that for every point of risk you take you aren’t always compensated for it. Now this is not a blanket statement, but in uncertain economic times, riskier investments aren’t always to be advised.

High losses are often just as likely as high returns, and the scenario in which you lose the money can be very detrimental. In The Intelligent Investor, by Benjamin Graham, one of the most talked about quotes is, “Once you lose 95% of your money, you have to gain 1,900% just to get back where you started”. Obviously, it is great to bring in 95% returns and almost double your money, but if you lose 95%, you find yourself in a difficult situation, and as we mentioned earlier, 65% of VC investments result in a loss.

Real Estate assets and development projects are certainly risky as well, but especially during an inflationary period can be a great sector to invest. We have compared today’s economy to the recession of 1980 a few times this summer, and when comparing CPI to REIT performance in 1979, REIT growth outpaced CPI by 7.7%. When inflation was high again in 2011, REIT growth outpaced CPI by 3.4%. While Commercial Real Estate is not guaranteed to out pace the dollar, it is typically a more reliable investment during inflationary times.

The headlines today of Nikola and Trevor Milton are certainly a horror story when it comes to Venture Capital investing, and obviously not all VC firms or founders are committing fraud. In the long run however, and even more so during inflationary periods, CRE is a much less risky investment, even if it isn’t as exciting. Sometimes, boring is better.