Venture capital investing
What is venture capital?
Venture capital has grown from a niche corner of private markets into an increasingly accessible opportunity for individual investors.
Fueled in part by the rise of AI, total VC deal value has grown significantly in recent years, even as capital has concentrated into fewer, larger investments.1 The trend signals a shift toward bigger bets on companies identified as having high growth potential.
Understanding how venture capital works, what the risks look like, and where it fits in a portfolio can help investors decide whether it plays a role in their long-term strategy.
Venture capital is a form of private equity focused on funding startups and emerging companies with high growth potential. Investors typically receive equity in exchange for capital, accessed through pooled investment vehicles or direct investments.
Within the broader private markets landscape, venture capital sits alongside other asset classes like private credit and real estate, but is distinct in its focus on early-stage businesses and innovation-driven growth.
1 PitchBook-NVCA Venture Monitor, Q4 2025
How value is created for venture capital investors
Venture capital investing is driven by long-term capital appreciation rather than income. Investors seek to participate in the growth of companies that can scale rapidly and increase in value over time.
Company growth
Expanding revenue, customer base and market share
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Operational improvement
Strategic guidance, hiring and execution support from investors
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Follow-on funding
Additional capital rounds that can increase company valuation
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Exit events
Acquisitions or public listings that provide liquidity and price discovery
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Structure and features of venture capital deals
Venture capital investments are commonly made through structured vehicles or direct participation in funding rounds.
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Venture capital
Venture capital funds managed by a general partner (GP)
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Syndicates
Syndicates or special purpose vehicles (SPVs)
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Direct angel
Direct angel or early-stage investments
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Capital commitments
Investors commit capital upfront, which is deployed over time
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Capital calls
Funds are requested at different times, typically over the first one to three years as investment opportunities arise
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Hold period
Investments are typically held (i.e. capital is locked up) for several years while companies grow
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Fees
May include management fees and carried interest depending on structure
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Sponsor/issuer role
The fund manager or deal sponsor sources, evaluates and manages investments
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Risk considerations
Venture capital involves a distinct risk profile that differs from traditional public market investments as well as other private market investments.
Illiquidity
Investments are not easily sold and may be held for extended periods, often 3—10+ years depending on the investment
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Startup failure rates
Many early-stage companies (some estimates say up to 90%) fail within the first 10 years²
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Power law dependency
Portfolio outcomes may depend heavily on a few high-performing investments across a larger basket of startup investments
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Time horizon and liquidity
Venture capital is generally a long-term investment.
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Typical hold period
Often 3–10+ years from initial investment to exit
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Liquidity profile
Limited; investors typically cannot redeem capital on demand
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Secondary markets
May exist but are often constrained, with pricing and access variability
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Exit events
Liquidity is typically realized through acquisitions, IPOs or secondary sales
Investors should be prepared to commit capital for multi-year periods, with cash
flows that may be gradual rather than lump-sum.
Common venture capital strategies
Angel investing
Directly backing startups at the earliest stages, often at pre-seed or seed.
Typically involves smaller check sizes and earlier entry points compared to institutional funds
Valuations may be lower, offering potential for outsized returns
May include opportunities to support founders through mentorship or strategic guidance
Follow-on investing
Participating in later funding rounds of companies already in the portfolio.
Helps maintain or increase ownership as a company raises additional capital
Allows investors to allocate more to companies demonstrating traction
Can help mitigate dilution and reinforce conviction in higher-performing investments
Sector focus
Concentrating investments within specific industries such as technology, healthcare or climate.
Enables deeper domain expertise and more informed investment decisions
May provide access to specialized deal flow and networks within a given sector
Allows investors to align capital with areas of interest or long-term structural trends
Stage diversification
Allocating capital across different phases of company development, from seed to growth.
Balances exposure between higher-risk early-stage investments and more mature companies
Can help smooth portfolio outcomes by diversifying timing and risk profiles
Provides flexibility to participate in companies at multiple points in their lifecycle
Power law approach
Building a portfolio around the expectation that a few investments will drive overall returns.
Emphasizes broad diversification across many startups to increase the likelihood of outliers
Recognizes that many investments may not succeed, while a few may generate significant value
Encourages disciplined portfolio construction and a long-term perspective
How venture capital may fit into a broader portfolio
Venture capital is typically considered a growth-oriented allocation within a diversified portfolio.
Growth vs. income
Primarily focused on capital appreciation rather than income generation
Diversification
May offer exposure to growth and innovation not available in public equities
Correlation
Can behave differently from public markets, though still influenced by broader economic conditions
Time horizon alignment
Often better suited for investors with long-term investment horizons
Questions to consider
Before investing in venture capital, investors may consider asking:
What stage are companies at when the fund or deal invests, and how does that affect risk and return potential?
What are the expected sources of liquidity, and what conditions need to be met for an exit?
How does the investment strategy aim to create value, and what role does the sponsor or manager play in sourcing and managing deals?
What fees and expenses are associated with the investment, including carried interest?
How many investments does the portfolio include, and how does the strategy account for the power law dynamic?
How is performance measured and reported?
