Whether you are just getting into investing or have been exploring different investment strategies for years, among the most effective investments available to you is a private venture fund of funds.
This strategy gives you the opportunity to reduce your risk, increase your returns, and properly diversify your portfolio. If you’re researching venture capital fund of funds, this guide should give you all of the information you need to make a sound decision on if this strategy is right for you.
What Is a Private Venture Fund of Funds (FOF)?
Venture capital is a kind of private equity that allows investors to place some of their assets into small businesses and startups that they believe will grow and become successful in time. Investing in new and unproven companies can make for a risky investment. It’s impossible to predict exactly how a new business is going to perform. Even if the startup has a great idea, there are thousands of other great ideas that never gained any market penetration.
Because each startup and small business performs differently, the returns from one venture capital investment can be completely different from another. You can effectively mitigate the issues that come with investing in venture capital by diversifying your venture capital portfolio. If you have invested in numerous companies, all it takes is for one or two of these investments to perform well for any losses to be offset.
Top-performing venture capital funds are extremely difficult to access. As such, it’s highly recommended that you look into investing in a venture capital fund of funds. This type of investment strategy involves placing your money into a separate portfolio of venture capital funds, which means that you will be effectively investing in multiple companies and startups.
Why Invest in an FOF?
There are many reasons why you should consider investing in an FOF, the primary of which is that doing so will allow you to invest in venture capital without taking on the usual amount of risk. The number of people who are making this type of investment is on the rise because of how advantageous this strategy can be.
Once you’ve invested into an FOF, you will be able to reduce your overall risk and increase potential returns since your venture capital investment will automatically be diversified. Keep in mind that a fund of funds allow you to invest in many different types of businesses, which adds further diversification.
The main reason that an FOF invests in different types of businesses is because doing so protects you from fluctuations in one market. Since you won’t be directly managing your investment, you wont need to do research on the business that you’d like to invest in. The due diligence is handled by the fund of funds manager. If you’re just getting started in the world of investing, placing your money in an FOF is a wise and practical strategy to use.
How Does an FOF Work?
A fund of funds is relatively simple and straightforward compared to some other investment strategies. The fund invests into numerous underlying funds instead of investing directly into securities or companies. As such, your investment is immediately diversified regardless of the amount of money you put into the FOF.
Fund of funds may include funds that have similar or related investment strategies, geography, or industries. Or they may include funds that have no similarities, providing further diversification. The life-cycle of the underlying funds is typically 10 years as with most venture capital funds.
Pros and Cons of FOF Investing
Investing in a fund of funds can be highly beneficial for your portfolio. The primary benefits include:
- Lower minimum investment requirements
- Much better portfolio diversification
- Access to expertise and knowledge of numerous fund managers
- You won’t need to research companies yourself
- Can provide high returns with low risk
While FOF investing is a fantastic way to diversify your venture capital portfolio, there are also some issues with this investment strategy that you should be aware of. These issues include:
- Double layer of fees and interest
- Venture Capital funds can last for upwards of 10-12 years
- You may not know what the underlying funds are, which means that you must place trust in the fund manager
Where Can You Invest in a Private Venture FOF?
Many venture capital fund of funds are associated with specific geographical areas, the primary of which is Silicon Valley. However, investing in a fund of funds gives you the unique opportunity to make investments in practically any location around the world. Entrepreneurial talent can be found anywhere. In fact, Urban Capital Network is proving to be highly popular among FOF investors.
Final Thoughts on Private Venture Fund of Funds (FOF)
Investing in a venture capital fund of fund allows you to mitigate the risk of a venture capital investment while leaving open the opportunity for a high return. Even if only one of the underlying funds becomes highly successful, your returns should remain consistent.
There’s also a possibility that multiple funds will perform well at the same time, which could help you bring in high returns. Because of the low risk associated with this investment strategy, it’s ideal for beginners and experienced investors alike.