For most of its history, venture capital investors raised their capital almost exclusively from large institutions like pension funds, foundations, endowments and a few ultra-wealthy individuals. They would commit a small percentage of their total portfolio to venture capital, because of the high risks associated with this asset class. Yet, over many decades, venture capital turned out to be one of the highest-performing investment sectors and allocations to venture capital have greatly increased.
Nowadays, it is no longer the case that only those with millions to allocate to venture capital can afford to invest. Innovations in fund management enable many more types of funds and more more types of investors to participate at lower investment levels. Venture capital remains a high risk, high return sector but many more individuals, who qualify as “accredited” are seeking to participate in it at the level they can afford.
Nevertheless, venture investors must be patient. Venture capitalists work to build a portfolio of investments in high-risk private ventures with the goal of producing a return on capital of 300% or greater over a ten year period, far in excess of the typical public market returns of under 100% over ten years. Many of the ventures invested in will go bust. However, if they are successful, a few of the venture fund investments will achieve spectacular returns of 20 to 100x or greater. Venture funds have ten year terms because it usually takes a decade for a company to build a new market, revenue and achieve liquidity. The ability to wait ten years to receive return is another reason why venture capital has been out of reach for many investors.
Fortunately, there are new innovations that can make investing in venture feasible for more investors. The first is the ability to participate with tens of thousands of dollars, rather than millions. The second is the ability to provide one’s capital on a predictable schedule for a set period of time. The third is a growing market for secondary shares, which facilitates the ability of investors to sell their illiquid share positions even if the stock itself is not public. Click here to read more about venture capital investing.