If you want to invest in venture capital, I believe it's more beneficial to invest in a venture capital fund than in individual private companies. By investing in a venture capital fund, you will not only decrease your chances of losing money but also increase your chances of earning a positive return.
I've been a venture capital investor since 2001, and I strongly discourage angel investing. More often than not, you will end up losing the vast majority of the time. Additionally, when you lose, you are likely to lose all of your money invested in the private company. Most people have no edge when it comes to investing in individual companies, and are usually only presented with the scraps.
Over time, my conviction in avoiding investments in individual private companies has only increased. The main reason is my experience as a limited partner in multiple closed-end venture capital funds.
I've seen the outcomes of which companies succeed and which fail. The odds are not in favor of the individual private company investor. As a private company investor, you must diversify. And the easiest way to diversify is through a venture fund.
To gain access to private company investments, check out Fundrise's venture capital product. It invests in artificial intelligence, data infrastructure, property tech, and more. The investment minimum is only $10 and the fees are much lower as well.
Long Odds Of Hitting A Venture Investment Winner
As a limited partner, I recently viewed a quarterly update from a small early-stage venture capital fund. I hadn't attended one for over a year because I prefer to be completely hands-off once I commit and submit capital. Not having to think about how my money is being invested is one of the reasons why I invest in private funds and am willing to pay their fees.
The venture capital fund invests mostly in seed rounds and some Series A rounds. These funding rounds typically occur within 1-3 years of a company's inception, which means greater risk. However, if the companies succeed, the returns could be enormous. The founders all have impressive resumes, and the problems the companies aim to solve seem promising.
Just know that before investing in anything, the marketing material always makes an investment sound promising. But of course, not all investments work out, which is why diversification is important.
Venture Capitalists Know the Odds of Winning Are Low
During the update, I was shown a slide, which I can't share here due to privacy concerns. It depicted a bubble chart of 60 companies the fund had invested in. One small bubble represented the 6 expected winners, a medium-sized bubble represented 30 companies that would survive with insignificant exits, and another bubble represented 24 companies forecasted not to succeed.
What amazed me was that, despite the fund managers' willingness to invest in 60 promising companies, they already expected to lose 100% of their investment in 40% of the companies (24 out of 60), and 50% of the companies (30 out of 60) to produce little returns or lose money. Only 10% of the companies were expected to be profitable.
As an individual investor, the chance of you investing in a winning private company is far less than the 10% probability for professional venture capitalists. Additionally, the chance of you losing all your money in an individual company is far greater than the 40% probability for professional venture capitalists investing in duds.
Professional VCs Compete Aggressively For Access
Most individual private company investors lack an edge, expertise, and a robust network compared to the professional venture capitalists who run funds. Therefore, the private companies an individual investor gets to invest in are likely those passed over by all other professional VCs. This is known as adverse selection, where individual investors only see the companies that nobody else wants.
Professional VCs, on the other hand, have much greater access to the best private company investments. Even the professionals often have to fight tooth and nail just to get an allocation into the best companies. This access to top private companies is what limited partners pay for.
Taking a step further, individuals often compete to gain access to top venture capital funds!
Example of a Failed Venture Capital Investment That I Thought Would Succeed
Take, for example, a company called Cameo. Cameo is an online platform that allows users to book personalized video messages from celebrities, athletes, influencers, and other public figures. Founded in 2017, the company aims to create unique, memorable interactions between fans and their favorite personalities.
During the pandemic, Cameo's popularity soared as people were stuck at home. Instead of meeting friends for a birthday party or going out to dinner for a wedding anniversary, people found ways to give virtual gifts. It was a great idea!
I received a number of fun cameos from tennis players I followed, gifted by a friend. A newsletter reader even reached out to see if I'd be willing to record a one-minute message as a gift for his friend's wedding. I did, and I got paid several hundred bucks.
The business model was simple: get interesting people to sign up for the platform and create video and audio recordings. These individuals would get paid a market rate, and Cameo would collect a percentage of the revenue. The business seemed easily scalable—all Cameo had to do was create the marketplace.
Cameo Historical Funding Rounds
Below highlights the various funding rounds for Cameo, the dates, and its investors.
I invested in a venture capital fund that raised $600 million in 2018. In 2019, it started deploying capital, and one of its investments was in Cameo. The fund invested 4% of its capital, or $24 million, in Cameo during its Series B round. The post-money valuation was roughly $250 million.
Two years later, in 2021, Cameo raised a $100 million Series C round at a post-money valuation of $1 billion! Hooray! My venture capital fund had made at least a triple on its investment in two years, even after dilution.
Then, on March 13, 2024, Cameo raised a $25.1 million round, also called a Series C for some reason, at a reported valuation of only $100 million! Supposedly, existing shareholders have seen up to a 99% decline in valuation after the new funding terms.
Would Have Invested In Cameo If I Had The Opportunity
If my venture capital fund had asked its limited partners to co-invest with them during the Series C round at a $1 billion post-money valuation, I probably would have said yes to the tune of $25,000.
We were still in COVID at the time, I did a type of Cameo myself directly, and felt that a $1 billion market cap was nothing in this day and age. Furthermore, I knew smart and connected VCs who had thoroughly vetted the company for me.
If I had invested in Cameo, I would have lost all my money. Phew.
Why Did the Venture Capital Investment Sour?
Remember, 2021 was a boom year. Meme stocks were going crazy, tech stocks were on fire, and investors just couldn't lose. In the end, investors lost big as the 2022 bear market hit, bringing everybody back down to Earth.
Cameo probably failed to grow its valuation because it raised too much money at too high a valuation, the pandemic ended, demand waned, and the company overhired.
Cameo's 2024 Series C funding is considered a “cramdown” funding round. For new investors, a $100 million post-money valuation for Cameo seems attractive.
However, it stinks for me and other limited partners who invested in this venture capital fund, right? Not so fast! As I indicated above, VCs expect about 90% of their investments not to make money. Cameo will likely be part of that 90% in this fund.
The Winning VC Investments Made Up For The Losses
This fund that invested in Cameo made about 50 investments. Out of the 50 investments, 7, or 14%, are grand slams worth about $1.5 billion based on a ~$175 million investment. Around 12 of the fund's investments are in the green, totaling about $530 million based on a $300 million investment.
It just so happens that Cameo isn't one of them. In total, the $600 million fund that began deploying capital in 2019 is now worth about $2 billion at the end of 2023. That's about a 5-year compound annual growth rate of 27%. Not bad!
The main winner of the fund is its $25 million investment in Rippling, an HR enterprise software company, which was worth $542 million in the fund at the end of 2023. Given Rippling raised another round of funding in 2024 at a $13.4 billion post-money valuation, I assume the fund's stake in Rippling is worth even more.
As an individual investor, would I have invested in Rippling at a lower valuation? Probably not. The founder left on bad terms with his previous company, Zenefits. Additionally, I didn't understand HR management software and its potential. But the general partners did and knew the founder, so I was saved.
Individual Investors Have No Edge in Private Company Investing
Most of us are not professional investors or investing enthusiasts. Despite getting my MBA and working in equities for 13 years at GS and CS, there's only so much time I want to spend investing in stocks.
With two young kids and other interests, I do not have the bandwidth to do due diligence on individual private companies. Moreover, if there is a hot private company I want to invest in, I won't be able to get access unless I invest with an established venture capital firm.
Therefore, I will gladly pay a fee and a percentage of profits to private fund managers spending 40+ hours a week trying to invest in companies I have no access to. As you get older, it feels better to farm out money management responsibilities to free up time to do what you want.
Not only would I have invested in Cameo and not invested in Rippling, I would have also passed on Figma, a design company, when it was valued at $500 million. Yet, Figma grew into a $10 billion valuation just three years later. The problem with only investing in what you understand is that you can miss out on so many other opportunities.
Letting My Private Investments Ride
My initial capital commitment of $140,000 in this fund in 2018 is now worth about $404,000 as of 4Q 2023. It would have been worth $462,000 if all $140,000 of the capital had been called. But, only $123,900 has been called after all these years. It usually takes 3-5 years for 100% of your committed capital to be called.
I'm happy to have met the capital calls over the years and locked up the money in these private companies. As long as these companies are executing, they should continue to grow in value. It's also been nice to not have to experience visibility volatility over the years. All I had to do was keep on meeting capital calls, thereby dollar-cost averaging through good and bad years.
If you want to invest in individual private companies, please don't. Only do so if you are willing to build a portfolio of at least 20 companies with similar investment sizes. 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.
With up to 20% of my investable capital, I'd much rather invest in venture capital and other private funds every year. It feels much better knowing that professional investors are focused on making profitable investments so I don't have to.
Venture Capital Suggestion
If you're interested in investing in private growth companies, check out Fundrise. Fundrise has a minimum investment of only $10 and charges much lower fees than traditional closed-end, invite-only venture capital funds. Unlike closed-end venture capital funds, you can see what Fundrise is investing in and then decide how much to invest. You also have liquidity if you need it.
My personal goal is to invest $500,000 in private artificial intelligence companies within the year. I'm doing so partially through Fundrise because I want exposure to private AI companies which are staying private for longer. The AI revolution is here, and I want to be a part of it.
Fundrise is a long-time sponsor of Financial Samurai and Financial Samurai has invested $143,000 in the Fundrise venture so far.
Hey Sam – great topic and love your podcast.
Regarding the innovation: their eye catching names like OpenAI anthrpoic cava are intriguing.
What I am having a hard time understanding is if eg $10k is invested in the innovation fund recently or in the near future, how is it exactly invested? What’s the exit? If one of these companies goes public successful, what happens next?
Thank you!
All private company investors should invest with a 5-10-year time horizon. Although you can withdraw capital from the Innovation Fund if you need to, since it is an open-ended/permanent fund, the goal for this investment is to invest long term.
As companies raise new funding at different valuations or go public, the valuations of the companies in the portfolio will change. If they change upward, then the fund’s Net Asset Value (NAV), increases in value and vice versa.
It’s interesting b/c valuation changes with private companies are like step functions up or down, since they don’t trade daily like public stocks. Personally, I’m investing now because I think the growth is there and new investors will come in at higher valuations.
Please listen to some of my podcast episodes with Ben Miller on venture investing at financialsamurai.com/itunes or financialsamurai.com/spotify.
If you don’t mind leaving a podcast review, I’d appreciate it.
I’ve invested in venture funds and individual companies via a syndicate (Unpopular Ventures) on Angellist. I am only investing $2,500 typically in each individual company, so it is like gradually investing in a fund. I am picking those firms that map out a clear route to profitability. So far have around $30k in those firms in total. Will be many years till we see whether they will work out. One has gone bust already though. I did invest about $70k in one private company here in Australia. They are also invested in by a venture fund I am invested in. They are now in a sale process but I have no idea if this is going to be a win or a loss. The company didn’t get the expansion they were planning when they took our money. At least it’s not a total loss :)
Investing via Angellist at $2,500 amounts is a nice way to dollar-cost average in and build a portfolio without having to spend huge money. Good luck on the $70K investment. That’s a lot! I did that with Bulldog Gin co when I was 26. The IRR was 5% after like 10 years and I promised myself never again will I make that concentrated a bet.
The story: Just Say No To Angel Investing
Does investing in VC funds or the Fundrise Innovation fund qualify for QSBS tax treatment?
Great question. I’ll double check with Fundrise on the Innovation Fund.
“Instead of tax rates at 23.8% (or more), federal taxes are zero, up to each person’s QSBS limits. Not only are VCs eligible for QSBS, each limited partner in a venture fund can exclude 100% of their taxable income up to (i) $10 million, or (ii) 10x their original investment, whichever is greater.”
References:
https://www.aumni.fund/blog/the-best-kept-secret-of-qsbs
https://www.eisneramper.com/insights/blogs/financial-services/1202-qsbs-vc-ai-blog-0622/
Just got an answer:
“ None of our funds/REITs meet the criteria to be treated as small businesses so the shares wouldn’t qualify for QSBS tax treatment.”
Sam, Great article! One area that I feel was omitted is around getting access to a private fund. I work in Fintech and had the opportunity a decade ago to join the fund that was investing in my firm. 12 years later and we are now a public company. So 1/1 and hit about 800% return. But the question is how/where do we find the VC to invest via fund? Thanks!
Got to love a 800% return in 12 years!
I bet a lot of your colleagues DIDN’T invest in that fund right?
You have to know someone who works at the fund or know a significant limited partner at the VC fund and be invited to invest during the friends and family round of the launch.
Since not everybody can do so, I’m pleased Fundrise offers the Innovation Fund for everybody to invest with just a $10 minimum. You can see what the Innovation Fund invests in before making an investment decision and how much. Whereas with a closed-end fund, you commit $100,000+ and have to trust the GPs will invest in the right companies. Both work.
As you said, most of us are not professional investors or investing enthusiasts. Despite getting my MBA and working mostly in financial software development these past few decades, there’s only so much time I want to spend investing in stocks. With over half a dozen grandkids that live nearby, and way too many other interests (and a complete inability to multi-thread my own central processor thus far). I can’t do due diligence in everything, and, again as you said, I can’t get the kind of access to private companies that would satisfy me.
Consequently, I seldom invest more than 10 to 15% of my portfolio in individual equities (can’t completely ignore the itch or I would go crazy). What I generally invest in is funds and not so much the funds, or what is in them (although the latter is a filter for if I even consider them for investment). I invest in fund managers. Specifically, I want to see a long enough track record to see how they perform during good times and bad. I don’t want to see tepid earnings during boom times and I’d like to see less than average loss during bad. And I can and do find them. And they have performed well for me, allowing me to considerably exceed the so-called 10% average for a long time, even while avoiding especially risky investments, especially those in dubious parts of the world. (I traveled abroad a great deal as boy and, later, as a young man–it was eye opening.)
Part of this, too, is that, after reading how many people monetize their hobbies, I wondered if, with many hobbies of my own, I could do the same. Above all else I realized I am a bit of a futurist. Everyday I search for articles and announcements of new scientific discoveries, new technologies, and implementation of the same. To a lesser degree, I also look at economics, and geopolitics, which dovetails with what I taught in academia before transitioning entirely to software development, and economics. It’s quite possible to be pretty smart and stupid at the same time. Once I looked at these things with an eye to monetizing my ‘hobby’ it became evident. For example, I began betting on AI around 2010, and would have before that, but I was starting over with very little, as I recovered from where my first wife’s extended illness had taken me.
“ With over half a dozen grandkids that live nearby, and way too many other interests (and a complete inability to multi-thread my own central processor thus far). I can’t do due diligence in everything, and, again as you said, I can’t get the kind of access to private companies that would satisfy me.”
Having so many grandkids close by is true wealth right there! What a blessing. This is something I would like, but not some thing I may have given I started so late.
I agree with you on investing in the fun manager with a great track record. I just trust that the general partner of these funds will do the right thing as their incentives are aligned.
Great article. What is the minimum investment for the Kleiner Perkins funds?
No set minimum. The challenge is having a connection to getting in to a new fund round as demand has historically been way higher than availability.
$100,000 is usually a minimum as there are administrative costs.
Venture capitalist writing here..
There’s data that substantially all of the returns in the VC industry go to the top quartile funds. Most of those have solidified their status and networks over decades (both on the side of founders, and LPs) and are generally oversubscribed, and won’t take new capital without a personal tie.
While it might be possible to get in here or there, I would guess the majority of your readers can’t, and if they take your advice and up in worse funds than say Kleiner 2018 vintage, and will likely underperform, especially after 2/20 fees.
More broadly, I’d invite you to consider your own counterfactual: if, at the same moments you met capital calls for the VC fund, you had simply invested in QQQ (naive public tech proxy) instead, would you have done substantially better after fees?
Vanilla tech has roughly 3x’d from 2018. The same trends driving AI on private markets you’re trying to ride are in parallel driving Google/Microsoft/Meta/Nvidia on public markets. And, if you opt for the public alternative, no 2/20, and no need to write articles about how stressful illiquidity is, either!
As a 28 year investor in public tech companies, I concur. The vast majority of my investable capital excluding real estate is in public equities (80%). It’s been a great ride.
Up to about 20% of my investable capital is in private funds (VC, VD), which have also performed well. I enjoy the diversification component and the hunt for unicorns. What I have found is that more capital you have to Invest, the less comfortable I feel having all of that in public equities that gyrate every single day. I also consistently invest in VC every year to capture ongoing vintages.
As a VC, how is your performance? And based on your comment, are you getting disillusioned by the industry? I’ve met several Veces to left to build companies instead. They didn’t like the competition to try to chase hot companies. I know it’s been tough for VCs since the pandemic. But I also saw so much opportunity to invest in 2023.
Being a VC sounds like one of the best jobs in the world. Don’t have to risk your own Capital and can earn a management fee for 10 years before having to prove any returns. What do you think?
I like the open-ended VC fund model given you can see what the fund is invested in before deciding how much capital to invest, if at all.
“What I have found is that the more capital you have to invest, the less comfortable I feel having all of that in public equities that gyrate every single day. I also consistently invest in VC every year to capture ongoing vintages.”
VC is equally, if not more, volatile than public markets. The difference is that it’s illiquid with slow mark-to-market valuations, creating an illusion of a smoother ride. That said, there’s some value in that—what you can’t see can’t hurt you, and more volatile assets, in theory, ought to deliver higher returns
“As a VC, how is your performance? And based on your comment, are you getting disillusioned by the industry? I’ve met several VCs who left to build companies instead. They didn’t like the competition to try to chase hot companies. I know it’s been tough for VCs since the pandemic. But I also saw so much opportunity to invest in 2023.”
This is probably more philosophical. Broadly, anything we as an industry touched from 2014 to 2020 went public in the mania of 2021 and made huge returns. If you had the presence of mind to exit in 2021, you did great; if not, 2022 reversed much of it. Living through a cycle made me appreciate that even though the VC day-to-day is company picking, the “final exam” of when things IPO and your decision-making around when to exit is just as important. I got it mostly right, but I sometimes wake up and wonder if it was luck, or skill… or all just a dream.
“Being a VC sounds like one of the best jobs in the world. Don’t have to risk your own capital and can earn a management fee for 10 years before having to prove any returns. What do you think?”
I love it! You get to work with some of the smartest people in the world on things that drive change for humanity at scale. If you’re good, the upside is largely from the carry. There’s a bit of groupthink in chasing “the next hot thing,” but I do believe the rewards ultimately go to the contrarians, so it evens out.
Beyond philosophical, how are your actual returns?
One of the things I talk a lot about is having one’s actions be congruent with beliefs to live a more meaningful life. I’m wondering if you would feel better if you worked in public equities instead of VC, given your belief public equities provides better returns? If not, why continue with VC if you don’t believe the returns and risk are worth it?
Recently invested in Friends and Family Capital, LLC and am really excited about the potential here. Do you know much or have you run across
This management team?
Thanks for sharing this investment class, the power law is what VCs bank on (one or a few companies returning the fund). There are thousands of funds in venture, wondering if you have any criteria in choosing. Would love to see a follow up article on this, i.e. how to think about capital allocation to this investment class, tax implications, illiquidity, secondary sales. Did the fund you were a part of that invested in Cameo, have options to sell some of their stake in 2021 during series C?
Nice article, thanks. I’m just starting to consider investing in private funds; what should I look for in terms of costs – are 2-3% annual fees reasonable, in additional to upfront fees of ~1%?
Standard is 2% management fee and 20% of profits (carry). Some of the top tier VCs charge 3% and 35% of profits. It’s the price a limited partner pays for access to this asset class and potential higher returns. No guarantees of course.
The Innovation Fund charged a flat fee of 1.85% and no carry.
Related: Why Invest In Private Funds Despite Higher Fees
Fascinating insights. I don’t have any VC exposure at the moment but I have always found it fascinating. Those stats on the expected losers vs winners is pretty eye opening. Makes me feel better for not working at a startup. It’s not easy for companies to make it in today’s world of competition.