So, you’re thinking about dipping your toes into venture capital? Well, let me tell you, it’s better to put your money in a venture capital fund than to invest directly in private companies. Why? Because it reduces your risk of losing money and increases your chances of making a profit. I’ve been in the venture capital game since 2001, and I’ve learned that angel investing often leads to losses.
My experience as a limited partner in several venture capital funds has shown me that investing in individual private companies is a risky business. I’ve seen companies rise and fall, and the odds are stacked against the individual investor. The best way to spread your risk is by investing in a venture fund.
I recently got an update from a small early-stage venture capital fund I’m involved with. They mostly invest in seed rounds and some Series A rounds, which are high-risk but can yield huge returns if the companies succeed. But remember, not all investments pan out, which is why diversification is key.
During the update, I saw a chart showing the 60 companies the fund had invested in. Only 6 were expected to be profitable, 30 were expected to survive but not make much money, and 24 were expected to fail. This shows that even professional venture capitalists know that the odds of winning are low.
Individual investors often lack the resources and connections that professional venture capitalists have. This means that the private companies they get to invest in are usually the ones that professional VCs have passed over. This is known as adverse selection.
Let’s take a company called Cameo as an example. It’s an online platform that lets users book personalized video messages from celebrities. It seemed like a great idea, especially during the pandemic when people were looking for virtual gifts. But despite its initial success, Cameo’s valuation plummeted from $1 billion to $100 million in just a few years. If I had invested in Cameo, I would have lost all my money.
But it’s not all doom and gloom. The venture capital fund that invested in Cameo also invested in 50 other companies. Seven of these investments turned out to be grand slams, and 12 are in the green. So, despite the failure of Cameo, the fund is still worth about $2 billion, which is a 27% compound annual growth rate over 5 years.
As an individual investor, I wouldn’t have invested in some of the successful companies that the fund did. For example, I would have passed on Rippling, an HR enterprise software company, because I didn’t understand its potential. But the fund’s general partners did, and that’s why I’m happy to pay them a fee to manage my investments.
In conclusion, if you’re thinking about investing in private companies, don’t do it unless you’re prepared to build a portfolio of at least 20 companies. Remember, professional venture capitalists build portfolios of 50 or more companies, expecting only 10% of them to provide outsized returns. That probability drops to 5% or less as an individual investor.
Instead, consider investing in venture capital and other private funds. It’s a great way to get exposure to a diverse range of companies without having to do all the legwork yourself. Plus, it’s nice to know that there are professionals out there who are focused on making profitable investments so you don’t have to.
So, have you had any success with private company investments? How have your venture capital funds performed? If you’re interested in investing in private growth companies, check out the Innovation Fund. It’s an open-ended venture capital fund that lets you see what it’s investing in before you decide to invest. Plus, it offers liquidity if you need it.
My personal goal is to invest $500,000 in private artificial intelligence companies this year. I’m doing this partially through the Innovation Fund because I want exposure to AI companies like OpenAI, Anthropic, and Databricks. The AI revolution is here, and I want to be a part of it.
