Venture capital has become an increasingly attractive asset class for investors worldwide thanks to historical returns and liquidity in recent years. The many success stories of VC-backed startups that have gone public have also brought in more and more attention from investors. The asset class has now outperformed every other primary class in the last three years and is expected to continue its strong performance.
There are many other reasons why investors are rushing to invest in both venture capital and venture capital funds. High net worth individuals who have historically been angel investors or opted to focus on other asset classes that are deemed less risky have started to become limited partners in venture capital funds. This is due to a decrease in barriers to entry and the increasing number of venture firms being formed. New venture capital managers with smaller funds tend to outperform existing managers, larger funds, and new angel investors. Consequently, this subsect of venture capital fund managers has gained traction with many existing LPs and has attracted new entrants.
The benefits of being an LP in new funds do not end there either. Angel investors are finding that becoming an LP vastly increases their deal-flow as well as their networks within venture capital. Not only does becoming an LP in a venture capital fund allow investors to save time viewing thousands of companies per year, but also presents compelling co-investment opportunities.
The portfolio approach taken on by specialized fund managers is shown to reduce overall risk and mitigate the many duds in a portfolio which go to zero. With pooled capital, fund managers have more capital to make more bets, which tends to lead to better results for its investors.
In VC Lab’s comprehensive article, we dive deeper into the historically high returns of VC, reducing risk via portfolio approach and the benefits of a focused thesis through a specialist fund manager.