Venture Capital

Venture capital funds operate on a power-law model: the majority of investments are expected to fail or return minimal capital, while a small number of portfolio companies generate the bulk of the fund's returns. This structure drives the need for large portfolio diversification and a tolerance for total loss on individual positions that would be unacceptable in most other asset classes.

Funding is typically staged. A startup may receive a seed round from angel investors or micro-VCs, followed by Series A, B, and later rounds from progressively larger venture funds as the business proves its model and scales. Each round dilutes earlier shareholders, so the initial ownership percentage matters less than the absolute dollar value at exit. VCs use convertible notes and SAFE (Simple Agreement for Future Equity) instruments in early rounds to defer valuation negotiations.

VCs add value beyond capital by providing introductions to customers, recruiting talent, structuring governance, and preparing the company for institutional investors in later rounds. Board seats typically accompany meaningful ownership stakes, giving the VC direct influence over strategic decisions including the timing and method of exit — usually an IPO or a sale to a strategic acquirer.

The vintage year of a VC fund strongly affects its returns because macroeconomic conditions, interest rates, and IPO market activity shape the exit environment. Funds raised just before major market downturns often show weaker returns because exit multiples compress precisely when they need to sell.

For individual investors, direct venture capital access has historically been limited to accredited investors and institutional LPs. Venture-focused business development companies (BDCs) and some public fund structures have opened partial exposure, but the core economics of a traditional VC fund remain largely inaccessible to retail participants.