A guide to the VC asset class

Investing in venture capital

With its potential for outsized returns and capacity to diversify an investment portfolio, VC is used by many investors to build wealth. Here's what you need to knew about the asset class.

What are the benefits of investing in venture capital?

💰 Potential for outsized returns

Venture capital investments are high-risk, high-return investments made in startup companies that have potential for massive long-term growth. According to Invesco, the top quartile of venture capital funds have outperformed other asset classes in each of the trailing 5, 10, 15, 20, and 25 year periods.1 


📊 Diversification

As an asset class with little correlation with the stock market, VC can offer meaningful diversification. By diversifying an investment portfolio among and across an uncorrelated asset class such as private VC companies, an investor reduces exposure to unnecessary risk of loss, which helps to create a more stable and profitable portfolio.

Historically, those who diversify a portion of their portfolio in alternative investments such as VC have outperformed those who haven’t.2


🏢 Access to private markets

There has been a huge shift in value creation from public to private markets. Companies, especially those in high-growth tech industries, are choosing to stay private longer – making it difficult for investors to access through traditional means. 


🚀 Be part of the Canadian tech boom

Canadian tech is having its moment. Promising new tech startups continue to emerge, and many are disrupting massive markets and creating significant value.

What is a typical venture capital investment?

VC seeks returns by providing early-stage financing to privately held companies thought to have strong growth prospects due to a new technology, product, or business model.

Here are some of the components:


The General Partner (GP)

GPs set up the funds and are its day-to-day managers. Primarily, they choose companies that the fund invests in, and manages these transactions. On top of allocating capital, the best GPs provide value to founders in the form of advice, introductions, and services.


The Limited Partners (LPs)

LPs are the fund’s financial backers, the people whose capital is being invested. LPs are usually wealthy individuals, family offices, and financial institutions.


The Fund 

The two most common investment vehicles are:

Single Purpose Vehicle funds 
(invests in 1 company)

Allows investors to actively choose the companies they want to invest in.

Traditional VC funds 
(invests in 15 to 30 companies)

Invests in multiple companies over a set number of years.

The companies

These private companies typically have high growth potential, with the goal to become a significant player in their industry. Companies seek VC funding at various stages in their growth. They may need capital to accelerate the development of their product, finance their growth as they scale, capture a significant market share – and everywhere in between.

How do venture capital investors make money?

There are 3 main types of liquidation events that create returns for investors:

🏦 Acquisition

The company gets acquired by another company or entity. Strategic acquisition by an incumbent who is buying a differentiated technology, a large customer base, a rockstar team, or some other combination. Google, Facebook, Yahoo, and Microsoft are among the top buyers in the tech space.


📈 Initial Public Offering (IPO) 

A company reaches a stage in its growth process where it decides to be listed on the public market. Having public shares available requires significant effort, expenses, and risks. In recent years, the trend of IPOs has gone down significantly. 


🔁 Secondary sale

Limited Partners may also have the option to sell their holdings to other accredited investors through a private sale, usually via an Exempt Market Dealer. 

Brightspark is one of the first firms in Canada to offer the potential for early liquidity through secondaries



A note on risk

The scenarios and examples above represent positive liquidation events, but investing in venture capital involves a high degree of risk. Many early-stage tech companies fail before reaching a liquidation event, and investments are lost. Additional risks that affect VC investments include changing economic conditions and difficulty in valuing startup investments.

Before investing in venture capital, you should carefully review the risk factors, and consult your own advisors as to legal, tax, business, financial, and related aspects of a VC investment.

What is the timing of venture capital investments?

Venture Capital is generally a long-term investment, typically over the course of several years

While private companies can be slow to get to a liquidation event, it can also mitigate the volatility found in assets with higher liquidity, like publicly traded stocks and bonds. 

The holding period or time horizon for venture capital is generally several years (the average is 7 years). The timeline to liquidity will also depend on whether the investment is made at an early-stage or at a later-stage. 

Just like a fine wine, investors should expect their VC investment to slowly age over time before achieving its full potential.

How much do investors invest in venture capital?

On average, investors allocate 2% to 5% of their total assets to alternative asset classes such as venture capital.

When deciding how much to invest, investors should strongly consider diversifying their risk by investing in multiple companies (by making multiple individual VC investments, or investing in a diversified VC fund), as well as plan to reserve some capital for a follow-on strategy. 

Investment minimums can he high to enter into VC funds, although Brightspark has some of the lowest investment minimums in Canada: $10K for individual deal, and $100K commitment for a diversified fund. 

What are the options to invest in venture capital?


Active

Build a custom portfolio and only invest in the companies that fit your personal criteria. Invest deal-by-deal through SPV funds that only invest in one company, and/or buy the holdings of other VC investors through a secondary sale. 

Learn how to build a custom VC portfolio with Brightspark


Passive

Make a one-time investment in a VC Fund that is investing in a diversified portfolio of early-stage tech companies over multiple years. 

Learn about the Brightspark Canadian Opportunities Fund

Considering investing in venture capital?

Brightspark is a leading VC firm with a 20-year track record of generating top quartile returns for investors. We offer innovative ways for accredited investors to participate in the VC asset class.

Sources

1. Invesco, "The case for Venture Capital", 2

2. Blackstone, "Seeking an Alternative: Understanding and Allocating to Alternative Investments", 15