As an investor in the venture capital space, it’s essential to understand the concept of illiquid securities and how they can impact your overall investment strategy. Illiquid securities refer to investments in companies where selling the owned shares is either not allowed under applicable securities laws or there is no active market for buying and selling these shares. Consequently, investors may face challenges selling their holdings, making such investments riskier than traditional, publicly traded securities.

Venture capital investments are often subject to this illiquidity, as many startup companies never develop a public market for their securities. This lack of liquidity can significantly impact an investor’s ability to sell their shares or receive a return on investment before a liquidity event, such as an IPO or company sale. In the venture capital world, liquidity events can take several years, if not longer, to occur.

The illiquid nature of venture capital investments means that investors need to have a long-term perspective and be prepared to hold their securities for an extended period. In contrast to publicly traded stocks on the NYSE or NASDAQ, registered mutual funds, or other similar investments, where there is a readily available market for the securities, investors in illiquid securities may struggle to find a willing buyer on their own.

To navigate this challenging landscape, investors must have sufficient liquid assets to meet their financial needs. The returns from illiquid securities can be uncertain and take time to materialize. Consulting with a financial advisor can help determine an appropriate allocation of illiquid securities based on your unique financial situation and investment portfolio.

Investors may also overestimate their need for liquidity.  This is a more complex calculus.  Essentially if illiquidity provides an element of investment advantage and an investor overestimates their need for liquidity, they will under allocate to illiquid assets like venture capital.  Losing the option of potential gains.

Venture investments also provide an option to invest more through participation rights.  Those rights are often limited to those who made prior investments.  In the case that a company starts to perform well, the option to invest more valuable.  This nonlinearity is typical in illiquid securities like venture capital.  Estimating the need for liquidity and the optionality of investment is a nearly impossible calculus.  Optionality can act as a hedge against illiquidity risk if the investor has the cash to invest in the option when it reveals itself.  iSelect attempts to increase optionality with frequent Deep Dives and investor briefings, each revealing a bit more we are learning from our network of investors, startups and early adopters in the Food is Health thesis.

Investors must consider illiquid securities as a crucial aspect of venture capital investing. These investments come with unique challenges, including the inability to sell shares quickly and the potential for a long wait before realizing any returns. To manage these risks, investors should maintain a diverse portfolio with a mix of liquid and illiquid assets, seek professional advice, and be prepared for the long-term nature of venture capital investments. By understanding the intricacies of illiquid securities, investors can make informed decisions and better navigate the venture capital landscape.