For investors who are comfortable making high-risk investments (for potentially outsized returns), venture capital funds can offer a convenient way to spread a single investment across a broad range of startups. Keep reading to learn more about how venture capital funds operate plus why this investment strategy is an attractive option for many investors.
How venture capital funds work
A venture capital fund is a type of investment fund. Investment funds operate by pooling large amounts of capital from a group of investors–accredited individuals, institutional investors, or family offices–to collectively purchase assorted securities. Each investor retains ownership and control of their shares under this investing model, but the fund manager is responsible for selecting investment opportunities and allocating the funds.
Venture capital funds are designed for investors seeking opportunities to make private equity investments in early or late-stage startups. Typically, the fund will offer a thesis (or strategy) on how it plans to pick investment opportunities–whether it be startups at a certain stage, geographic area, industry, or other criteria. For example, MicroVentures has created and managed funds such as these in the past targeting early- or late-stage tech startups.
Benefits of investing in venture capital funds
One of the great things about our platform is that it enables investors to browse a variety of different startup investment opportunities, investing at their own pace and potentially at lower minimums than have been available in the past. While this strategy is great for hands-on investors, some may prefer more guidance and automation, and investing in venture capital funds can be a good option.
For many investors, one of the draws of investing in a venture capital fund is the professional fund management that comes along with it. The obvious benefit is the experience and expertise the fund manager can provide. In addition to this, the fund manager will likely have greater access to investment opportunities and may also be able to secure lower investment fees than an independent investor could be able to find on their own.
Convenience and simplicity
Some investors may not want to devote the time or have the time needed to fully vet and select investment opportunities. Investing in a venture capital fund simplifies the investment process by spreading a single investment across an assortment of investment opportunities and leaving the heavy lifting to the fund manager.
Opportunity to diversify
Finally, this investment strategy provides investors with an easy way to diversify their portfolio of startup investments. We know that not all startups will be successful–venture capital funds can help mitigate this risk by investing across various startups in anticipation that at least one will deliver a respectable return.
Risk and reward
While there are many potential benefits to investing in venture capital funds, this type of investment is not suited to everyone. Investing in startups is incredibly risky, and it’s important to understand that of multiple startup investments, many will fail. Ideally, enough will succeed to offset these losses and deliver substantial returns. The ideal investor for this kind of investment is one who is comfortable taking on a high level of risk for potentially high returns.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
- For Investors
- institutional investors
- tech startups