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It’s not that hard to google up lists of angel investment networks, and VCs. The hard part isn’t finding out where or how to find them. The hard part is getting them to listen to you, and convincing them that you’re a good investment.Angels and VCs are always looking for the next really good investment.Your job is to convince them you’re it, and that’s a really high bar.Here’s what you need to convince them of:You have a solid management team, committed hard workers, history of past success, people who will smash through barriers to make it happen.You have a solid business model, a really good, foolproof, way to monetize your app.You’re app hits an unfilled need, or pain point, in the market. This one is a toughie. There’s almost nothing new under the sun. Is Lyft really better than Uber? How many car rental and hotel finder apps do we need? Do people really need home delivery of groceries? A good prospective investor should beat you up mercilessly over this one and you need to have really good answers.And how big is that putative market anyway, and how fast is it growing? Is it really a market at all? Who’s the target customer? What makes them tick? Just how well do you understand this market; ditto about getting beat up over this one.Assuming you have good answers to all the above the next hurdle is: how hard is this idea to copy? Can one of the big guys squash you with their little finger once they figure out what you’re up to? Can some other upstart come out of nowhere and take you down? Is there an even better way to solve the problem you’re trying to solve?How are you going to market this idea? You may have the best solution in the world, but if no one knows about it you’re dead in the water.OK, assuming you can get an investor excited after going through all that your final hurdle will come down to terms of the deal, and mostly related to valuation.How much do you think your company is worth - now, as in right now, today?You have no sales, no income. Your balance sheet is negative. So in theory, your company isn’t worth anything. And in fact, if you don’t have really good answers for the list of questions above your company really is worthless today.But, if this is a really solid idea, than you do have something of value, but probably not as much as you think.Remember, investors aren’t in it because they like you or your technology or even the potential market. They’re in it to make money on their investment. And given that their money will be tied up for 5 to 10 years, with no way to recover their investment until there’s some type of liquidity event (acquisition, IPO), and there’s a very real possibility of losing 100% of their investment, they can get pretty cranky over discussions about valuation.They need to convince themselves that there’s a realistic probability of achieving a 25% or better ROI. 25% or better may sound high to you, but that’s what they need to see because there’s a lot of risk involved here.So you need to allow them to make their investment at a low enough valuation so that when the company is sold, or IPOs in 5 to 10 years, the final selling price will give them the necessary return.And remember, founders tend to get all starry eyed about the potential of their idea. Oh yeah, this is going to be the next (pick the mega success story of your choice here); we’re going to double every year for the next 5 years; we’ll be worth $500M in no time.No, professional investors have seen it all. They know how hard it is, and what the odds are (really, really slim), and they will take a cold, hard sober look at this.No acceptable valuation, no deal.

Could any two investments seem more different than precious metals like gold and silver versus digital currencies like Bitcoin, Ethereum, Ripple, Litecoin and their numerous brethren?One is dug from the ground, forged in flames and hurts like heck when you drop it on your foot. The other is purely digital, created by computers crunching complex equations, existing only in bits and bytes.Yet they actually share a great deal in common. The original cryptocurrency, Bitcoin, was even purposefully designed to mimic some of gold’s unique natural properties. You even “mine” for new Bitcoin digitally like people mine physically for gold, and the supply is purposely limited. Because they have a lot of similarities, they appeal to many of the same investors.Still, for all they share, precious metals and cryptocurrencies are very different assets that serve vastly different purposes in an investor’s portfolio. It’s useful for investment purposes to understand these differences. For the sake of simplicity, we’ll stick mostly to the Model T’s of both metals and cryptos: gold and Bitcoin. We’ll also touch on fiat currencies (“cash” to keep things simple), silver and alternative cryptocurrencies (i.e. “alt-coins”) when fundamental differences also apply.In the end, gold and other precious metals have long served a role in portfolios. Bitcoin and alt-coins are emerging as a powerful innovation, both as a possible complement to — and, in thus far rare circumstances, a replacement for — cash or precious metals in many applications. As the market comes to grips with cryptos, however, it’s increasingly clear there is a place for each in the world, and none of them — not cash nor gold nor cryptocurrencies — are going away anytime soon.But how to invest in them remains a question that many people need answered. We’ve put together this guide so everyone who’s considering buying gold or wondering how to buy Bitcoin can understand the advantages of each and what role they play in your wealth. Some of the topics we’ll cover include:The unique properties of both gold and BitcoinThe realities of bearer instruments as money/currencyInvestment anonymity, or the lack thereofStable vs. volatile investmentsWhether Bitcoin is actually moneyWill crypto competition hurt Bitcoin’s value?So, let’s start with what makes each unique. Then we’ll compare those features side by side for an easy illustration of where both fit in a portfolio.1. Gold: Limited, Divisible, Counterfeit-Resistant and Virtually Indestructible by NatureThe appeal of gold as the oldest continuously used form of money on the planet — in use for millennia — is not just a function of tradition, but of gold’s unique properties. Many a treatise has covered the case for gold in depth. But, to sum it up, gold has stood the test of time for a few key reasons:No one’s making any more. All the gold on Earth is the likely result of supernovas billions of years ago. Unlike a modern “fiat” currency, no politician can just will more of it into existence. And despite many attempts, there’s no alchemy that can create more. Part of gold’s value is intrinsically tied to its supply, limiting the effects of inflation or even causing deflation – bad for governments but good for savers.It’s easy to “coin”, yet lasts forever. Plenty of physical items have served as currency over the millennia. But unlike salt or cockle shells, gold emerged the winner in part because you can beat it to a pulp with no ill effects, yet it can be divided into near-perfect uniform chunks that stay that way. Gold is an inert metal that never corrodes. It can be pounded into a strip a few atoms thick without breaking. Yet it’s comparatively soft and easy to shape — malleable, as they say. This makes it ideal for making into coins and bars that will remain stable for centuries or millennia to come, whether they are gram-sized slivers or brick-sized bars that weigh many pounds or kilos. That’s why buried and sunken treasure always involves some form of gold coins that are inevitably found in good condition.It’s difficult to counterfeit. Those same unique properties of gold mean experts have many ways to verify the authenticity of coins and bars. In the very worst case, it can be melted down in a process called an assay, then recast to ensure there is nothing but gold in a bar. And this can happen again and again with little energy required to ensure the gold is real.Gold’s unique physical properties have long made it an ideal form of coinage. Since the times of ancient Egypt and ancient Rome, and even well before, it has been accepted as a reliable store of wealth. This history alone has turned gold into a modern economic asset with trillions of dollars’ worth in circulation, trading hundreds of billions of dollars every day around the globe.Gold is, simply put, where the wealthy — from nation-states down to savvy individuals — store the portion of their wealth they want to keep safe from political turmoil. It’s been passed down from generation to generation. It performs as a safe haven asset when other markets crash or local currencies collapse. It is, in financial terms, the ultimate hedge — the preeminent insurance policy against black swans.2. Bitcoin: Limited, Divisible, Counterfeit-Resistant and Democratic by DesignBitcoin was designed to share many of gold’s unique properties, and even one-up it in some interesting ways.Cryptocurrencies like Bitcoin allow people to transact with each other, using the internet, anywhere on earth and trust the results as fraud-free.In the original 2008 whitepaper, its pen-named author, Satoshi Nakamoto, described:“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.”In other words, Bitcoin uses cryptography — the same branch of computer science and mathematics used to protect electronic communications from the military to your bank’s online password — to ensure coins cannot be copied or counterfeited. Unlike with cash, or even a bar of gold, in theory, you can be sure the bitcoin you received is real in a matter of seconds. (In practice, Bitcoin can take hours to verify this, and there are some underappreciated risks of its peer-to-peer design. Still, it’s an amazing innovation.)Bitcoin’s use of cryptography to achieve these goals allows for some interesting side effects. For example, the use of “public key” and “private key” digital signatures (the same basic technology behind a secure connection from your browser to a website) is like having two account numbers: one for deposits, and another for withdrawals. The only thing other people can do with your public key is send funds to you. It’s your private key that gives you access to send funds, and you need not ever share it with anyone. You could put your public key on a billboard if you wanted to and your funds would still be secure — without your private key, money cannot be withdrawn.However, this also means that, just like gold and cash, whoever last took possession of a coin is the official, sanctioned owner of that coin — even if by hook or crook.3. The Upsides and Downsides of Bearer Instruments“Mr. Takagi, I'm not really interested in your computer. But I need the code key, because I am interested in the $640 million in negotiable bearer bonds that you have locked in your vault. And the computer controls the vault.” – Fictional villain Hans Gruber, Die Hard, 1988Just like cash in your wallet, or gold in a home safe, Bitcoin makes a tasty target for would-be thieves. You must keep your Bitcoin private key exactly that, private, to prevent your coins from being stolen. Its security is entirely your responsibility. And once it is lost, there is little hope to recover it, as the recipient can spend/sell it just as easily as you could.That’s because Bitcoin is another “bearer” instrument. Whoever possesses Bitcoin — or gold or cash — owns it and can claim its value, short of an intervention to physically repossess it.What are Bearer Instruments?Long before the age of computers, when companies issued bonds or stocks, they were bearer instruments. You showed up at the right place with your bond in hand, the issuer checked to ensure it wasn’t counterfeit, stamped the certificate as paid, checked off the same on their own book and paid you the interest. This is why Hans Gruber wanted those bonds bad enough to hold those people hostage for hours at gunpoint: He could show up and collect the cash with no questions asked.Bearer bonds went the way of the dodo with the electronic age. Instead, big Wall Street firms and their ilk started to keep those types of documents centrally, with firms like the Depository Trust & Clearing Corporation (DTCC) in the U.S. and local equivalents around the world.The clearinghouses could record when items changed hands, when interest was paid, etc., all without the certificate ever leaving the safety of the ultra-secure vault. Then computers came along and the DTCC morphed with them into an almost purely digital firm with the same purpose of updating ownership and debt records without the need to physically transfer bearer instruments.To Bear Bitcoin is to “Own” ItIn a way, Bitcoin takes us back to those times. As a pure bearer instrument, if a thief gets hold of your coins, you’ll likely never get them back. For this same reason, most people keep their money in a bank, or their gold in vault storage. It’s safely held by professionals and easy to transfer electronically.Similarly, many Bitcoin users choose to keep their private keys in online services. But, like the early days of deposit banking, these upstart institutions have found themselves the targets of unscrupulous robbers who will go to great lengths for that bounty. And, with their digital nature, there’s no need to lug around heavy bars or keep a getaway car running — often only seconds of vulnerability is enough for a robber to get away scot-free from halfway around the globe.For example, thousands of users have seen their holdings stolen when those online services were hacked. To name just a few of many examples:In February 2014, the Japan-based Mt. Gox cryptocurrency exchange admitted it was hacked and about $500 million of Bitcoin was stolen from users. The company declared bankruptcy and no one was paid back for their losses.In August 2016, popular exchange Bitfinex was hacked and $65 million in Bitcoin was stolen. The company repaid customers, but it took more than months.In December 2017, South Korea-based NiceHash had $63 million in Bitcoin stolen, allegedly by hackers from North Korea. The company declared bankruptcy the next day and nothing has been repaid.Users who kept their private keys stored in various services using text message based “two-factor authentication” once thought secure had their SMS messages hijacked and their bitcoins stolen in unknown amounts, and little if any was ever recovered.In January 2018, Japan-based Coincheck was hacked for $530 million worth of a popular alt-coin in Asia called NEM. This case has at least a somewhat happy ending, as the company paid back owners using its own funds in just two days.A portion of the funds from these hacks have been repaid, but most has not. It’s all come down to whether the companies trusted with the money had the resources to cover the hack out of their own profits. Unlike a bank for cash or a vault for precious metals, none of these crypto companies are required to, or even able to, carry insurance on their “deposits”. And for many customers, legal action is not feasible as they were often dealing with companies based in questionable, foreign jurisdictions like Slovenia. Who, exactly, are you going complain to?Protecting Your Bitcoin InvestmentWhen storing digital currency with a third party you should take the same level of precaution you would in, say, choosing a vault provider for gold. Among other factors:Work only with a trusted company based in a country with a strong rule of law (especially if it’s not the same country in which you reside).Look for top-notch, third-party security.Insist on insurance to cover 100 percent of your investment’s current value, also from a third party.4. On the Internet, No One Knows You’re a Dog (aka How [Not] to Invest Anonymously)One advantage some users seek from cash and gold is privacy. While there is no such thing as a truly private transaction, no electronic record necessarily needs to be created that records who paid whom and where/when. For some people, that is important.Bitcoin, on the other hand, requires that very information — who and where and when — to function. Which means it’s not particularly private without its users going to great lengths to obfuscate themselves. This surprises some crypto investors, as they assume they’re anonymous, just like they can be in a web discussion group. But with Bitcoin, each and every transaction ever completed is recorded on its public ledger, including both the sender’s and receiver’s wallet addresses and digital signatures, authenticated by their public keys to prove it was actually them. While wallet addresses are just random numbers, once someone knows your public key, they can find every transaction you’ve ever completed on the network — your wallet is just a pseudonym like the pen-name of an author.If a government comes knocking at your favorite crypto-exchange or online wallet looking for your public key, it won’t be long before they can backtrack all of your activity. Similar techniques have already been used to jail a few notorious “darknet” criminals.Many popular services try to engineer around these limits by generating multiple wallets for every Bitcoin user, even a new one for every transaction. But access to the service and its records would quickly pierce through that — providing some public privacy, but no protection from something like a subpoena.Some alt-coins have attempted to provide complete privacy through the added use of cryptography. However, few are particularly popular as of this writing, and while they have convincing math which claims to prove their anonymity, none have been tested on a widespread scale by the ever-devious and creative hacker.More on Bitcoin & CryptocurrencyIf you’re looking to learn more about how Bitcoin and other cryptocurrencies work, check out the eighth episode of Mike Maloney’s smash hit docu-series, Hidden Secrets of Money: The Cryptocurrency Revolution. In it, you can follow Mike’s own personal quest to understand the fascinating new technologies.5. Bitcoin: Desperately Seeking Stable Investment ValueGold’s primary purpose in most portfolios is as insurance — something that’s value is generally stable most of the time and is on standby to serve a specific purpose when needed.In other words, gold is boring. And that’s how you want it. Between more speculative assets, whose value changes with the whims of traders, like stocks, bonds and even currencies, gold is meant to be a stalwart. You buy it, pop it in a safe and hold it.Bitcoin, on the other hand, has been nothing but excitement for quite a few years:Big ups, which can be highly profitable, especially if your cost started at a few cents; many a story was told when Bitcoin zoomed past $10,000 USD.And big downs: Over its first six years of active trading, Bitcoin fell more than 10% in a single day dozens of times.As you can see below, compared to gold, Bitcoin is a highly volatile asset, the kind that speculators and gamblers alike are really drawn to. Until it finds wider commercial uses and more buy-and-hold-minded investors, it’s likely to remain that way.The takeaway is simple: Gold, with its stable of long-term-minded investors — from the world’s largest governments to the generational wealth of family offices — has a history of retaining its purchasing power with relatively low volatility over many decades. Most of the time.Many people do not know there are various ways one can benefit in the investment of bitcoin.For example,investing your coin on a platform like cryptomax(www.cryptomac.tech)where your invested coin will be doubled in 7 days.Try it and thank me latter.6. Gold: Volatile When It Needs to BeBut don’t mistake gold’s normally low volatility for a non-performing asset. When economic or monetary conditions deteriorate, gold’s role as a hedge moves to the fore and shields investors from losses.This was a wakeup call for many investors come the market crash of 2008, for example. You’ll recall how hard many investments were hit at the time during the extreme, pervasive uncertainty around the globe. While the gold price initially fell in tandem with stock and bond markets — due largely to liquidity needs at the time drawing money out of all assets — it ended 2008 up 5.5 percent. And over the next three years, it nearly tripled, eventually gaining four times the amount the markets lost.The same thing happened in the late 1970s — during a period of two recessions, an energy crisis, sky-high interest rates, runaway inflation and a flat stock market, gold rose over 700 percent from its 1976 low to its 1980 peak.There are many examples from history like this, where gold buoys and sustains a portfolio precisely when most other investments are failing or at least underperforming.Wall Street types call this inverse correlation, or low beta, which means it tends to move in the opposite direction from the stock market. And it’s why you’ll find a bit of gold on every heavy hitter’s balance sheet, from the U.S. Federal Reserve to Goldman Sachs.

As Master Sensei of Hedgeable I can address how the venture investing works, what we are investing in, and how selections are made -Executive SummaryHedgeable was the first digital wealth manager (Robo-Advisors) to offer venture capital investing to clients. As of the time of this writing (early 2016), all Accredited Investors that are Hedgeable clients are eligible for any venture fund. There is no additional fee for this feature, and the minimum investment in the fund is $1. Hedgeable mainly relies on top crowdfunding platforms like AngelList (company) to source investments, typically co-investing with the top venture capital firms in Silicon Valley.Fund Structure & Investor StatusHedgeable’s Venture Capital funds are formed in Delaware as Partnerships. They have a distinct Tax ID and registered agent in Delaware that is separate from the Hedgeable corporate entity. Hedgeable serves as the General Partner, while all investors are Limited Partners. The General Partner makes investment decisions and handles the fund administration, while the Limited Partners may contribute capital and own a stake in the fund. Limited Partners do not need to be involved in the ongoing operation of the fund, but are able to benefit from any profits made.Private partnerships like Hedgeable's are excluded from the definition of an investment company, and are not registered under the U.S. Investment Company Act of 1940. Instead, these partnerships fall under the U.S. Securities Act of 1933. According to this law, Hedgeable can offer its fund to accredited investors as long as they meet the standards that were described prior. Under Section 3(c)(1) of the Investment Company Act of 1940, partnerships like Hedgeable’s are compliant as long as no more than 99 individuals own it. Because of these restrictions, each Hedgeable fund is limited to accredited investors, and only 99 investors can allocate capital to each fund. When the 99 accredited investor limit is breached, Hedgeable opens a new fund.As of the time of this writing, we do not believe there is a sufficient number of quality offerings on the market that meet the criteria for non-accredited investors under Title III of the JOBS Act of 2012. We will continue to explore if, and how, we will offer venture capital to our non-accredited clients via the new Title III provisions. As a fiduciary, it is our duty to take a cautious approach to new regulation, as effects are typically not seen in markets for years after implementation.Fund Costs & TaxesAs part of our overall mission to democratize the investment process, we provide venture capital investing to our clients with no additional fee. That means the Hedgeable venture funds do not charge any management fee or performance fee, and any administrative costs are covered by Hedgeable. Any member of the Hedgeable platform that meets the regulatory requirements is eligible to invest in our venture capital offering with no added cost. Hedgeable charges one fee for all platform features, based on the total assets under management for each client.Similar to publicly-traded ETF portfolios, some of the investments in venture capital funds that Hedgeable makes may have costs associated with them. However, Hedgeable's fund does not charge a fee for its services.Funds will be administered by Assure Services in Utah. The administrator is responsible for issuing an annual Schedule K-1 to all investors in the funds. All clients will be responsible for filing their own taxes. Hedgeable will not file or handle tax documents for any Limited Partners.Fund Performance BenchmarkingPerformance will be shown on the Hedgeable platform as data becomes available, utilizing updates provided by the index funds or individual companies and following standard mark-to-market practices.The benchmark that Hedgeable uses for the Hedgeable Venture Funds is the iShares Micro-Cap Index. This index tracks publicly-traded securities in the bottom tier of the Russell 2000 Index, with market capitalizations generally below $1 billion. This is a serviceable proxy, as the majority of Hedgeable’s venture capital investments are made in firms valued below $1 billion.Fund Liquidity & TimingCurrently, there is no secondary market for shares in any Hedgeable venture fund. Therefore, commitments cannot be redeemed until a fund liquidates, which is estimated to occur 7-10 years after investments are made. Investors should be comfortable with this lockup period before committing assets, and must qualify as accredited investors to be eligible. Ongoing distributions may be made to fund investors if an underlying company has an exit or another liquidity event occurs over the course of the fund.Hedgeable intends to launch at least one venture fund each year, closing on or before December 31st of the calendar year, or when 99 accredited investors have successfully committed to a fund (whichever happens first). The graphic below shows projected timeframes for Hedgeable fund investments:As shown above, there will be some overlap across funds, as investments for each will be spread over a period of roughly two years. For clients seeking greater vintage diversification, an investment in multiple Hedgeable funds is possible.Fund AllocationsWhen clients hire Hedgeable as their investment advisor, we use proprietary data science to construct customized portfolios, in line with their long-term goals and objectives. We target a 0%-5% recommended allocation of a client's overall portfolio to venture capital. The precise amount is tied to a client's overall profile and goals. Our proprietary algorithms analyze the risk appetite and liquidity tolerance of each client, both of which are instrumental factors in determining a recommended venture capital allocation.The chart below demonstrates what a typical portfolio might look like, including Hedgeable's recommended venture capital allocation:Hedgeable Venture Capital MethodologyIn this section, we will go over the methodology that underlies Hedgeable's venture capital investing. Our venture capital exposure mirrors the core-satellite approach we utilize for clients' broader stock and ETF portfolios.Core InvestmentsAt least 65% of the venture capital exposure is invested in index fund offerings from leading venture platforms such as AngelList (company), CircleUp, and OurCrowd. These investments will form the “core” portion of the venture portfolio. The index funds provide exposure to a wide array of consumer technology, enterprise technology, food & beverage, retail, and healthcare companies.The core exposure aims to have diversification across both sectors and geographies. For example, with core public equity exposure, most clients are invested in the U.S. stock market, international developed markets, and emerging markets. Each of these investments may be represented by an ETF that has exposure to hundreds of underlying companies from all sectors of the market.Hedgeable venture capital portfolios make investments in approximately five index funds, each of which invests in an estimated 25-100 underlying startup companies. We consider a diverse range of platforms through which we can obtain the core exposure, including but not limited to CircleUp, AngelList, and OurCrowd. CircleUp is a platform focused on the consumer and retail startups, while AngelList focuses on high-growth companies in the consumer technology and enterprise technology spaces. To increase geographical diversification, we also leverage high quality platforms like OurCrowd that invest in Israel and across Asia.Why Crowdfunding Platforms?Hedgeable leverages equity crowdfunding platforms for core investments because of the vast array of investment opportunities they offer.Equity crowdfunding is a new way for companies to raise capital that started in the wake of the 2008 financial crisis. As credit markets tightened, less capital was available from banks and other traditional sources. This coincided with an explosion in the use of social networks like Facebook. When you combine the social power of the crowd with the demand for capital, you end up with the emergence of crowdfunding platforms.Some of the earliest crowdfunding platforms were Kickstarter or Indiegogo. Investors who fund projects on these platforms can contribute capital to something they want to support, but they do not receive an equity stake in the project or company. A new batch of crowdfunding platforms sprouted up in 2009-2011 to solve this problem, including AngelList, CircleUp, and OurCrowd.These equity crowdfunding platforms offer a great way to see which companies are raising money in the first place. For example, in 2010, a little known company called UberCab listed itself on AngelList and gathered an impressive $1.25 million in capital from the crowd. Little did anyone know, just five years later, UberCab would be the $60 billion phenom that we now know as Uber (company)! Equity crowdfunding played a role in making Uber what it is today.Companies listed on equity crowdfunding platforms often have large institutional investors backing them as well, or have been incubated by top accelerators like Y Combinator. Not only do equity crowdfunding platforms provide great marketing tools to learn about new companies, but they also serve as a filter for the hundreds of thousands of companies that start every year.A Venture Capital ETFIn our core stock and ETF portfolios, we typically allocate to ETFs like the Vanguard Total Stock Market Index (VTI) for U.S. exposure or the iShares MSCI EAFE Index (EFA) for international exposure. Using these two investments as an example, investors get exposure to over 4,000 underlying companies. Since these ETFs are weighted by market capitalization, they include exposure to small-cap companies across the world.Remember the iShares Micro-Cap Index that we use as a benchmarking for venture capital? The challenge for investors is getting access to small, upstart companies before they reach the public markets. Our venture index fund methodology acts as a proxy for the performance of micro-cap stocks before they reach IPO status. We look to diversify the core venture index exposure in the same way that we would the core public index exposure in the rest of your portfolio, by considering both sector and geographic diversification. So, while no such publicly-traded security exists, Hedgeable's venture capital exposure serves as a Venture Capital ETF proxy with its hundreds of underlying investments.Satellite InvestmentsOutside of the core index piece, the Hedgeable venture funds also make "satellite" investments into individual companies. Up to 35% of a fund's capital may be used for the satellite portion, with a target of 15-35 companies across different areas of the market. Satellite investments in individual companies mirror the satellite allocations we make to individual stocks for clients' publicly-traded portfolios.Satellite investing increases diversification in the funds by boosting exposure to lower correlation sub-sectors. By separating out some of the sectors within the index, we can also overweight the most attractive sectors given the vintage year. To understand this concept, consider the following data from Cambridge Associates:The return dispersion in the chart above is striking. Earlier, we noted that venture capital, as a whole, produced a 14.6% annualized return from 1984-2014. Yet, some sectors deviate substantially from that overall movement and provide much higher returns. The primary goal of satellite investing is to best isolate those sectors, providing increased diversification and also greater opportunity for return.Lead Investing vs. Follow-On InvestingWhen startups raise capital after a friends and family round, they typically have what is called a lead investor for a funding round. The lead investor sets the terms (provided in a term sheet), including the pre-investment valuation of the company, the percentage of equity being offered, and the board seats offered. The lead investor, in turn, can bring other investors into the round at the same set terms. A lead investor can also act as a cheerleader for the company, helping and guiding founders through the fundraising process. The lead investor is generally the largest shareholder in the round and is typically granted a seat on the company's board.Hedgeable does not act as the lead investor for any satellite investments. Instead, we participate as a follow-on investor. This means we only get involved in a deal once terms are set by a lead investor. The Hedgeable venture funds will always represent a small portion of any fundraising round and any investment will result in a minor economic stake in the company.Deal SourcingHedgeable finds individual deals for satellite investments in one of two primary ways: (1) by utilizing syndicates, or (2) by sourcing deals directly.SyndicatesOne way to get deal flow for satellite investments is through a syndicate, including those listed on the AngelList platform. In a syndicate, a lead individual or firm will bring forward deals to the syndicate backers. The backers rely on the lead’s connections or deep knowledge of the industry to gain access to quality investing opportunities. Due to the lead’s track record, syndicate backers will pay the lead of the syndicate a percentage of the profits, known as a carry, and in some cases, a management fee on the asset invested via the syndicate. Investments made using AngelList are currently only subject to carry and operational costs, and are not charged an annual management fee.The backers of a syndicate reserve the right to not participate in any of the deals sourced by the lead. Participating in syndicates not only allows Hedgeable to make very specific and themed investments, but also enables us to leverage the insight of the lead, which is typically an established venture fund or investor with a proven track record and deep domain expertise in the syndicate's focus area.Direct InvestmentOutside of deals that are syndicating by leading VC firms, Hedgeable may opportunistically invest in individual deals outside of any online platforms. These opportunities may come from connections of the Hedgeable management team, referrals from knowledgeable individuals in the startup space, attendance at incubator demo days from Y Combinator, TechStars, and other leading programs, or events hosted by Hedgeable to incubate companies internally.Categorizing DealsWe divide our potential investment universe into 16 distinct sectors:Artificial IntelligenceBiotechnologyBlockchain TechnologyUnmanned Aerial Vehicles and DronesFinancial TechnologyAlternative EnergyHealthcare TechnologyInternet of Things (IoT)MarketplacesMediaRestaurantsRoboticsSoftware-as-a-ServiceCollaborative Consumption (Sharing Economy)Virtual Reality (VR) & Artificial RealityWearable TechnologyEach sector is described below:Artificial Intelligence (AI) - Artificial Intelligence involves the creation of machines that are capable of replicating human cognitive functions like speech recognition, learning, planning, and problem solving. According to reports published by Markets and Markets, the AI market will grow at a 53.65% Compound Annual Growth Rate (CAGR) to $5.05 billion by 2020.Biotechnology - Biotechnology companies develop drugs and conduct clinical research aimed at treating diseases and medical conditions by using live organisms or their products, such as bacteria or enzymes. Hexa Research expects the biotech market to grow at a 12.3% CAGR through 2020.Blockchain - Blockchains are distributed databases that record and maintain data, without the potential for tampering or revision. This new form of technology became popularized with the advent of bitcoin, and many platforms have emerged since. One example of blockchain technology is Ethereum, which is a platform for the development and distribution of business applications on the blockchain. According to Aite Group, blockchain spending by banks & other players in capital markets is set to grow at a 52% CAGR through 2019.Drones - The drone sector builds hardware and software for unmanned aerial vehicles for consumer, commercial, or military purposes. TechSci forecasts the commercial drone market will grow at a CAGR of 27% through 2021.FinTech - FinTech companies operate in traditional finance industries by utilizing technology to improve data collection and dissemination. According to Research and Markets, the FinTech sector is expected to grow at a 54.83% CAGR from 2016-2020.Green Energy - Green startups attempt to more efficiently utilize existing energy consumption and production, or focus on developing new ways to generate energy while minimizing environmental harm. BCC Research forecasts that the green energy market will grow by an 8% CAGR through 2019.HealthTech - HealthTech companies use mobile apps, cloud storage, and other information technology to collect, store, and evaluate health data. These companies have goals of preventing, diagnosing, and treating diseases, improving rehabilitation, or improving long-term care. According to Statista, the HealthTech market will grow at a 36% CAGR until 2020 when it will reach a total addressable market of $223 billion.Internet of Things (IoT) - The Internet of Things is a network of electronic devices that collects and exchanges data without human involvement. According to IDC, the IoT market will grow at a 17% CAGR, to nearly $1.3 trillion by 2019.Marketplaces - Online marketplaces bring together and process transactions between buyers and sellers who are looking to exchange value in the form of a product or a service. Marketplaces can be B2B or B2C, and generally seek to improve availability, pricing, and/or liquidity for a given market. Forrester expects marketplace sales in the US to grow at a 10% CAGR from 2015-2019, hitting $480 billion by 2019.Media - Digital media is the distribution of entertainment and informational content using the web and mobile platforms over traditional distribution sources such as television and newspapers. PwC expects the sector to grow at a 5.9% CAGR through 2019.Restaurants - Venture investing in the restaurant sector typically focuses on funding companies that target an underserved segment of the market, those with proven concepts looking to expand into new markets, or capitalizing on new dietary habits or eating trends. For example, Infiniti Research forecasts that fast casual restaurants will grow at a 6% CAGR until 2019.Robotics - The robotics industry designs, manufactures, and operates machines that assist or replace humans in the workplace. According to Boston Consulting Group, the robotics industry could grow 10.4% annually and reach $66.9 billion in revenue by 2025.Software as a Service (SaaS) - SaaS companies create software that is distributed over the internet using a third-party provider, removing the need for customers to install and run applications on their own computers or in their own data centers. IDC forecasts the SaaS market will grow past $112.8 billion in revenue by 2019 at an 18.3% CAGR.Sharing Economy - The sharing economy connects people with spare capital or resources with those who need it. The two biggest players in the sharing economy are currently Uber and AirBnB. According to PwC, the sharing economy is expected to grow at a 29.5% CAGR to reach $335 billion in revenue by 2025.Virtual Reality (VR) & Augmented Reality (AR) - Virtual reality technology creates holistic interactive environments for users, in which senses are stimulated as they would be in the physical world. Augmented reality technology creates interactive environments that are not holistic, but instead are overlaid on a user's physical surroundings. According to ABI research, VR and AR technology is expected to grow 78% annually from 2015 to 2020, reaching a total addressable market of $100 billion.Wearables - Wearables are electronic devices that are worn on the body to track information and collect data. According to Markets and Markets, the wearable device market will grow to $8.36 billion in revenue by 2018, with a 17.7% CAGR.Sector SelectionFor satellite investing, our methodology involves targeting specific sectors. In order to assess the opportunity presented by a given sector, we analyze the growth potential and the risk profile of each. Growth factors are consolidated into a Sector Growth Score, risk factors are consolidated into a Sector Risk Score, and these two metrics contribute to an overall Sector Rating.Growth ScoreThe two key data points that influence the Sector Growth Score are growth rate and valuation. For growth rates, we utilize projected CAGRs (compound annual growth rates) from leading industry experts such as IDC, BCG, and PwC:To measure sector valuations, we consider known valuations from a sample of existing companies across each sector. For example, the following is valuation data for early stage companies that have raised money on AngelList:Sector Growth Scores are calculated as growth-to-valuation ratios. This is analogous to a PEG (Price to Earnings to Growth) ratio. PEG ratios are commonly used to measure the value offered by publicly-listed securities, considering a security's value in relation to its expected growth. A low PEG ratio indicates that a security may be undervalued. Hedgeable's Sector Growth Score is calculated in the reverse, measuring a sector's growth prospects adjusted for value. A high Sector Growth Score suggests a compelling case for future growth given a sector's current valuation level. The primary objective of the Sector Growth Score is to identify areas of the private market in which companies have ample room left to grow, which is a crucial barometer for early-stage investing.For the purposes of standardization, the ratio is interpolated onto a scale.Risk ScoreThe two key data points that affect the Sector Risk Score are burn rate and sector age. Both of these metrics can vary drastically across sectors.In order to incorporate these two very different measures into one score, we interpolate each on a standardized scale. Lower burn rates and longer sector histories lead to higher scaled values, as they indicate a more favorable risk profile. The numbers are then equally weighted to arrive at the Sector Risk Score, which is also standardized because it is derived from scaled values.Sector RatingThe Hedgeable Sector Rating is a weighted average of the Sector Growth Score and the Sector Risk Score. Considering the individual components of the Scores, it is calculated as:The variables w1 and w2 represent weights assigned to the Growth Score and the Risk Score, respectively, where w1 and w2 sum to one. These weights provide our model with flexibility to accommodate different market environments across fund vintages. At the end of an economic cycle, for example, growth prospects may play a slightly more important role than a sector's risk profile. In other economic environments, the two factors may contribute to the Sector Rating equally.For example, in 2015, the top sectors as measured by Hedgeable's Sector Rating were:Artificial Intelligence (AI)BiotechnologyBlockchainFinTechHealthTechRestaurantsRoboticsSharing EconomySoftware as a Service (SaaS)Virtual Reality (VR) & Augmented Reality (AR)Those sectors with high Sector Ratings are given top priority when evaluating satellite investment opportunities. Investments that do not fall into a sector with a high Rating are still considered on a case-by-case basis, dependent upon the individual security selection methodology outlined later in this paper.Interacting with the CoreOne additional layer of analysis when considering satellite investments is the relationship between satellite exposure and core exposure. Companies in sectors that are already well-represented in one or more of the core index funds are given lower priority, in order to optimize the core-satellite structure of the venture portfolio. Similarly, if there is a large amount of overlap between the market catalysts that drive a sector and the catalysts that drive part of the core exposure, said sector is also given lower priority as a satellite. For example, if a core portion of the venture portfolio has substantial exposure to investments that depend on the decline in traditional energy markets or the transition to clean energy, potential satellite investments in the Green Energy sector may be given lower priority than other investment opportunities, all else being equal.Security SelectionWhile identifying attractive sectors to target for satellite exposure is important, it is also imperative that individual companies be analyzed thoroughly. We use a proprietary two-tiered framework to assess a company's health and potential. This includes both a quantitative screen and a qualitative screen.Quantitative ScreenCompanies must pass our quantitative screen, which judges the competitiveness of the company in relation to its peers on factors like valuation, financials, and revenue growth. For earlier stage companies, product success - in the form of sales or customer growth rates - are weighted more heavily than the other measures.Qualitative ScreenAll companies are also subject to a qualitative screen, which judges the market potential of the business, the quality of the product or service, and the strength of the founding team. For earlier stage companies, the strength of the founding team and the potential for market disruption are most important.ConclusionVenture capital has long been the domain of the ultra-wealthy. Historically, allocation to this asset class has helped the wealthy to outpace their retail counterparts. With the advent of new technology platforms and more education, we believe this will change for the better. To that end, we are proud to offer a robust venture capital investing feature that curates a venture portfolio for our clients, with commitments as low as $1 and no added fees.Disclaimer: This is not a solicitation to buy or sell securities or an offer of personal financial advice or legal advice. Past performance is not indicative of future performance. It is suggested you seek out the help of a financial professional before making any investing or personal financial management decision.