Recent IPO wave has advisors talking tech, venture capital with clients

The IPO window is open, or at least it’s noticeably ajar. So what does that mean for financial advisors whose clients are interested in venture capital and seek to invest in a company before its shares hit the big board?

Despite the recent sell-off in stocks, a number of high-profile new issues have hit the market of late. This rising river of initial public offerings has energized many investors into believing that the long-halted venture capital industry is once again flowing. Recent IPOs like Instacart, Klaviyo and Arm Holdings may be struggling to sustain their post-debut gains, or even their initial offering prices, yet they're still sparking conversations between advisors and clients.

“For clients that are not directly working at these early-stage companies and are looking at other ways to diversify their investments, this area might be a good place to look. A lot of innovative companies are hesitant to explore the public markets and are staying private for longer, increasing their valuations before they go to market,” said Jack Heintzelman, financial planner at Boston Wealth Strategies.

Heintzelman advises a number of clients who work at early-stage biotech and tech companies, so he's well versed in the risks and rewards of VC investing. He highlights the fact that early-stage companies tend to grant equity to their employees, thus causing some of his clients to become overly concentrated in a single investment.

“We look at this as a portion of their overall investment strategy,” Heintzelman said. “It all starts with the specific goals and aligning the strategy with each individual goal. If it’s a shorter-term goal with a higher priority, you might want to reduce the overall risk to an investment that is more diversified. If it’s a longer-term goal, then some additional risk might be warranted if the return outlook is attractive.”

Ted Haley, financial planner with Advanced Wealth Management, doesn't include VC or startups into the “normal investment process.” Nevertheless, he regularly provides counsel to clients either with pre-IPO holdings or those considering investing in startups.

“We advise them on how a higher-risk investment like that can fit into their overall financial plan, but we don’t advise on the investment merits of those vehicles very often,” Haley said.

On the other hand, Scott Bishop, managing director at Presidio Wealth Partners, does perform due diligence on VC deals or funds for clients. Put simply, he looks before they leap into something risky.

“When we source VC deals, usually in funds, for our clients, we have a very thorough and detailed data-gathering process and we share what we need to help with that. If it is a small deal, or a small investment for a client, we can share what ‘at a minimum’ they should look at before they invest,” Bishop said.

Matt Chancey, certified financial planner with Micel Financial, is also vigilant when it comes to due diligence. And he warns clients about the consequences of getting too excited about an unproven technology.  

“When you don't have the ability to help your clients build a diversified tranche of tax-advantaged venture capital offerings, then human nature causes clients to overconcentrate and take on too much unnecessary risk while trying to chase outsized returns,” Chancey said.

WHAT’S HOT? STILL AI

Brett Martin, general partner at Charge Ventures, says that despite the moderation in major AI stocks in the past few months, the technology remains "red hot" and ripe for venture investors even at the very earliest stages.

“You have companies raising $40 million valuations with $5 million in revenue. And then you also have AI companies that are raising hundreds, if not billions of dollars and they haven't made a dime. But that said, most of these companies are making money,” Martin said, adding that this profitability is the “big difference between AI and blockchain a couple of years ago.”

David Page, head of macro research at Axa Investment Managers, agrees with Martin’s assessment, saying the AI revolution is still in its relatively early stages.

“The technology is relatively new,” he said. “There's a long way to go with this and I think a lot of disruption comes through over the next decade or so.” 

Page doesn't expect current AI giants such as Microsoft, Nvidia and Alphabet to crowd out investment opportunities in smaller players. They may be enjoying an early lead, but in his view more competition will be coming through.

Still, he admits that seasoned professionals have difficulty in picking companies that can go the distance, so diversification remains the rule even when investing in AI startups.

“It's never easy to pick exactly the right sort of stock, the right company that's going to deliver technology that we really don't know the limits of at the moment," Page said. "So look at broad diversification into areas where we would expect to see this, and effectively that's into service-driven firms, potentially customer service-driven firms.”