Venture Capital Fund Misconceptions Many Investors Face

By Ellie Pigott

Investing in a venture capital fund can be a great way for investors to diversify wealth beyond traditional means like stocks and bonds. However, many shy away from this potentially lucrative avenue because of uncertainties and common VC misconceptions surrounding returns, success rates, involvement and theses among funds. In this blog we’ll help explore and debunk many misconceptions faced by investors considering venture capital.  

1. Misconception: All Venture Capital Funds Are the Same 

When many investors think of venture capital funds, they picture traditional Silicon Valley funds investing hundreds of millions into prospective unicorns. While these funds do exist, they are only one piece of the larger VC pie. VCs come in all shapes and sizes, and their theses can vary dramatically. Examples of thesis niches include geography, industry, investment size, and company stage. It is important to consider your personal interests, values, specific areas of economic impact, and level of desired involvement before selecting a VC whose investment thesis aligns with yours.  

2. Misconception: Investor’s Returns Are Quick and Guaranteed  

Because of startups’ rapid growth, some investors may approach venture investing expecting an equally rapid return. Although the goal of a venture capital fund is to achieve significant and fast growth with the companies it invests in, this process still takes time. The average lifetime of a venture fund is around 10 years, which includes the time it takes to make all of the fund’s investments and exit from them (either by acquisition, IPO or liquidity). Fund managers may seek extensions if they anticipate needing to manage some of the investments longer.  

Some investors may also expect “guaranteed results” from VC in the same way they would expect certain results from other investments like treasury bonds. It is important to note that VC investments are inherently risky. The lack of a proven track record, uncertainty in market demand, and the potential for unforeseen challenges all contribute to the high level of risk. Despite this inherent risk, many VCs mitigate by having a lengthy and comprehensive due diligence process where they weigh the potential challenges and opportunities.  

3. Misconception: Most Portfolio Companies Will Succeed 

With such high return rates, it’s not uncommon to think that the majority of investments would be successful, but in most cases, this is the opposite. Every venture capital fund is different, so it’s important to seek information on your fund’s thesis, but generally, most VCs expect that for every 10 companies they invest in, 9 will fail. Traditional VCs rely on only a few successful exits to drive overall fund returns. However, some nontraditional and non-coastal VCs (like Traction Capital), rely on a different model. These nontraditional funds tend to bet that a higher number of their portfolio companies will succeed but at a more realistic level ($50M exits instead of billion-dollar exits).  

4. Misconception: Investors Have Limited Involvement in Portfolio Companies 

Just as all funds are different, the same is true for investors. Some VC investors seek a high level of involvement with the companies they help invest in, while others prefer to remain only as financial support. It is not typical for a VC fund to manage portfolio companies directly, but their involvement, advice, and network can be crucial for the success of startups. Active engagement and support from investors can contribute significantly to the growth of portfolio companies, especially when the investor can provide specific industry experience. Before investing in a fund, inquire about their level of involvement and determine if there are ways you can add value.  

Mastering the Venture Capital Landscape 

To navigate the world of venture capital successfully, it’s important for investors to be informed and understand the nuances of different funds, embrace the inherent risks, and recognize the potential for meaningful involvement and long-term returns. By addressing these misconceptions, investors can make informed decisions that align with their financial goals and risk tolerance in the dynamic landscape of venture capital funds.  

If you’re interested in taking the next step in learning more about investment opportunities in venture capital or have questions, reach out to us at ellie@tractioncapital.com 

 

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