Independent Thinking^®

Q&A with Atul Rustgi of Accolade Partners

Editor’s Note: Evercore Wealth Management supplements its core investment capabilities with carefully selected outside funds across the range of the firm’s asset classes. Here we discuss opportunities in venture capital with Atul Rustgi, a Partner at Accolade Partners. Accolade is a venture capital and growth equity fund of funds, concentrating on the technology and health sectors. Please note that this represents the views of Accolade and not necessarily the views of Evercore Wealth Management.
 
Q: Venture capital investing is a long-term commitment, with investors sacrificing the liquidity of the public markets for the prospect of higher returns. What are the advantages of this approach to investing in the technology and healthcare sectors?
 
A: Given venture capital is a high-risk, long lock-up investment strategy, investors should be compensated with higher returns versus the public markets. We believe that software companies inherently have superior business models with high growth, high gross margins, high recurring revenue, low fixed costs, and the potential for significant profitability. As a result of these characteristics, public software companies are at all-time high valuations. What venture capital can provide is scale arbitrage, allowing investors exposure to these companies at both lower absolute valuations and lower multiples. Venture capital investors can benefit as these companies compound for 10-plus years in the private markets before entering the public markets at exponentially higher valuations.
 
Q: Your funds are focused on investing at the early stages and in growth rounds of financing. What do you think about valuation in the context of risk at these early stages?
 
A: Early- versus late-stage venture capital offer different risk returns. In early-stage venture, valuations are more compelling at sub $10-$50 million, where venture investors can achieve 10%-20% ownership of companies. Loss ratios for any early-stage fund can go as high as 60% of the portfolio, but if any one of these companies eventually achieves a multi-billion-dollar outcome, usually between five and 10 years from investment, they can return multiples of a manager’s fund. In late-stage venture capital, given that the product-market fit has been established, loss ratios are much lower but valuations are much higher.
 
Q: You have also been active in healthcare IT and biotech. What trends do you see there?
 
A: Biotech continues to be very exciting, with significant levels of innovation. Areas of focus for our managers include oncology and neurology. Diagnostics also continues to be an area of focus. Recent advancements are enabling the use of liquid biopsy in cancer screening, therapeutic selection and drug trial optimization.
 
Healthcare information technology is an emerging investment area. The 2009 Recovery Act was the catalyst for the adoption of electronic health records, or EHRs. About $30 billion in incentives were given to hospitals and providers to implement the use of EHRs and reporting of clinical quality measures, which in turn enabled the submission of claims electronically and has catapulted the volume of healthcare data. As a result, we have seen an explosion of new companies that aim to synthesize and analyze data to provide insights that lead to better outcomes, from value-based care to new care-delivery models.
 
Q: You’ve been investing in blockchain technology for several years, an area that has the potential to disrupt many industries. How do you think about the risks in investing here and what opportunities are you finding? Editor’s note: For a primer on blockchain, click here.
 
A: We have spent years researching and landscaping in blockchain technology. We have gained significant conviction in the space and have launched a dedicated fund of funds vehicle to invest in the leading blockchain managers.
 
Several years ago when we started performing due diligence on the blockchain space, there were a number of concerns that gave us pause. First, regulatory: Would the SEC shut it down? Second, there was not a deep bench of institutional managers. Third, the best engineers were focused on traditional tech. And fourth, there was not enough product market fit outside of Bitcoin, nor any commercial traction.
 
Today, all of those concerns have been alleviated. On the regulatory front, the SEC is not shutting it down, but instead creating guiderails. From a manager perspective, there are now over 100 firms with a VC approach, and 10-15 stand out as leaders in the space. Talent-wise, all the top universities have highly sought-after programs across cryptography and distributed systems, and we consistently hear that the best engineering talent is now focused on blockchain. Finally, we have seen real commercial traction and product-market fit both within and beyond Bitcoin.
 
In addition to hedge funds and companies buying Bitcoin, financial service companies such as Square, PayPal and Visa are incorporating digital assets into their offerings. Furthermore, we are seeing growth in areas beyond Bitcoin, such as decentralized finance (commonly called DeFi), consumer applications and emerging areas such as non-fungible tokens.
 
We believe the decentralized business model is as disruptive to centralized business models as online was to offline and SaaS to perpetual license software. Consequently, we believe blockchain has return potential similar to venture in the early 1990s.
 
For further information on Accolade and the other externally managed funds on the Evercore platform, please contact Evercore Wealth Management Partner and Portfolio Manager Stephanie Hackett at [email protected].