What you should know:
- Venture capital is a form of private equity financing that helps start and grow new businesses.
- Venture capital investing comes with a long-term investment horizon and high return potential but also high risk due to the early-stage nature of startups. While new ventures may fail, successful ones can potentially provide significant returns.
- Venture capital offers investors considerable benefits, including portfolio diversification, the potential for long-term, compounding returns and exposure to innovative businesses.
Short on time?
Managing Director of Fund Investments Miguel Luina explains the different types of venture capital investments and their benefits in just 60 seconds.
Then, go deeper with our Introduction to Venture Capital below.
What Is Venture Capital?
Venture Capital, commonly referred to as "VC," is a form of private equity financing in which investment firms, or high-net-worth (HNW) individuals, provide capital to startups, or emerging companies, to grow their businesses. These VC-backed companies exhibit high growth potential and aim to offer highly innovative products or services. Because new businesses face significant challenges, including product development, customer adoption, market evolution and financing risks, among others, many venture-backed companies may fail. Effective strategies in venture seek to offset those losses with outsized returns from successful investments. Venture portfolios tend to be well-diversified, as a result, and it can be common for just one or two investments to offset dozens of losses.
VC investing is generally concentrated in high-potential, highly scalable industries such as software, fintech, digital infrastructure, and pharmaceutical/biotechnology, although the reach of venture has expanded over time.
Who Are Venture Capitalists?
When it comes to VC, venture capitalists are the main players involved in raising and investing capital. Venture capitalists use a similar fund structure as other private market strategies with venture capitalists serving as the general partners and capital providers, collecting capital from and distributing it to limited partners, such as pensions, endowments, sovereign wealth funds and individuals. Venture capitalists then invest the fund’s capital into startups and return capital following "exit events" at portfolio companies, such as initial public offerings (IPOs), merger and acquisition (M&A) sales or secondary transactions.
Venture capital firms differentiate themselves among peers based on their ability to source, access, assess and add value to startup companies. In many cases, venture capitalists will take on advisory roles to help startups improve strategically and operationally. These roles typically take the form of board seats or strategic advisor positions. Successful venture capitalists are highly sought-after by startups for their expertise, which can lead to long-term advantages.
What Are the Types of VC Investments?
VC investments vary by risk and return, but typically become less risky and more valuable over time.
- Angel Investing: This type of investment typically comes at the very start of a business when individuals, often friends and family, make small investments. Angel investors take on higher risk and can provide mentorship and strategic guidance in the early days of a company's formation. Companies at this stage may only have one or two individuals and an idea.
- Seed Investing: Seed investors are normally the first institutional investors in a business and help companies build their first commercially viable product and land their first few customers. In most cases, seed companies have not yet generated any revenue at the time of their seed round.
- Venture Investing: The typical path for successful startups is to raise subsequent rounds of capital from venture managers as they hit milestones and require more capital to sustain their development. These rounds are labeled as letters starting with "Series A" followed by Series B, C, D, and so on as needed. Some managers deploy a "multi-stage" approach and invest across many of these rounds, while some target only certain stages.
- Growth Equity Investing: Once a venture-backed company has achieved enough scale to meaningfully reduce its risk profile, subsequent rounds of investment are considered "growth equity." The round at which a company moves from venture to growth equity varies by company and different market players have different definitions, oftentimes with significant overlap. However, growth investors tend to focus on companies that have proven products and existing clients (known as "product-market fit"), which need additional capital to continue to scale their businesses.
What Are the Benefits of Venture Capital?
|For VC-Backed Companies
|Capital for growth
|Potential for high returns
|Expert guidance and mentorship
|Exposure to innovation
|Validation and credibility
VC offers several benefits, both to VC-backed companies and investors:
Benefits For VC Investors:
- Portfolio Diversification: With a relatively low correlation to other equity strategies, VC offers investors a chance to diversify their portfolios. Venture also benefits from disruptive platform shifts (e.g., internet, mobile, cloud, AI, etc.), helping position a portfolio towards emerging market segments and offset some of tech's impact on legacy industries.
- Potential for High Returns: VC investments offer the possibility for significant returns, particularly regarding multiples on invested capital. Venture-backed companies benefit from long-term compounding growth and the longer hold periods of early-stage venture strategies tend to result in strong multiples on invested capital.
- Exposure to Innovation: VC provides investors with exposure to cutting-edge technologies and disruptive business models. By supporting innovative startups, investors can help shape the future of various industries.
Benefits For VC-Backed Companies:
- Capital for Growth: VC helps to grow and scale businesses, which may be challenging to finance through traditional means.
- Expert Guidance and Mentorship: Venture capitalists often provide valuable industry experience, knowledge and networks of customers, partners and experts. Their guidance and mentorship can help startups navigate challenges, make strategic decisions and avoid common pitfalls.
- Validation and Credibility: Securing VC funding can act as a stamp of approval, potentially giving companies credibility in the marketplace and possibly leading to additional funding from other investors.
How Can VC Fit in Investors' Portfolios?
VC investments can play a role in diversifying an investors overall portfolio as they offer exposure to high-growth, early-stage companies with the potential for substantial returns. Including VC in a portfolio can enhance its risk-reward profile and provide opportunities for long-term compounding gains but consideration should be given to the strategy's higher risk profile and longer duration.
This presentation has been prepared solely for informational purposes and contains confidential and proprietary information, the disclosure of which could be harmful to Hamilton Lane. Accordingly, the recipients of this presentation are requested to maintain the confidentiality of the information contained herein. This presentation may not be copied or distributed, in whole or in part, without the prior written consent of Hamilton Lane.
The information contained in this presentation may include forward-looking statements regarding returns, performance, opinions, the fund presented or its portfolio companies, or other events contained herein. Forward-looking statements include a number of risks, uncertainties and other factors beyond our control, or the control of the fund or the portfolio companies, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect our current judgment, which may change in the future.
All opinions, estimates and forecasts of future performance or other events contained herein are based on information available to Hamilton Lane as of the date of this presentation and are subject to change. Past performance of the investments described herein is not indicative of future results. In addition, nothing contained herein shall be deemed to be a prediction of future performance. The information included in this presentation has not been reviewed or audited by independent public accountants. Certain information included herein has been obtained from sources that Hamilton Lane believes to be reliable, but the accuracy of such information cannot be guaranteed.
This presentation is not an offer to sell, or a solicitation of any offer to buy, any security or to enter into any agreement with Hamilton Lane or any of its affiliates. Any such offering will be made only at your request. We do not intend that any public offering will be made by us at any time with respect to any potential transaction discussed in this presentation. Any offering or potential transaction will be made pursuant to separate documentation negotiated between us, which will supersede entirely the information contained herein.
Certain of the performance results included herein do not reflect the deduction of any applicable advisory or management fees, since it is not possible to allocate such fees accurately in a vintage year presentation or in a composite measured at different points in time. A client’s rate of return will be reduced by any applicable advisory or management fees, carried interest and any expenses incurred. Hamilton Lane’s fees are described in Part 2 of our Form ADV, a copy of which is available upon request.
Hamilton Lane (Germany) GmbH is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (Germany) GmbH is authorized and regulated by the Federal Financial Supervisory Authority (BaFin). In the European Economic Area this communication is directed solely at persons who would be classified as professional investors within the meaning of Directive 2011/61/EU (AIFMD). Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients.
Hamilton Lane (UK) Limited is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (UK) Limited is authorized and regulated by the Financial Conduct Authority (FCA). In the United Kingdom this communication is directed solely at persons who would be classified as a professional client or eligible counterparty under the FCA Handbook of Rules and Guidance. Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients.
Hamilton Lane Advisors, L.L.C. is exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 in respect of the financial services by operation of ASIC Class Order 03/1100: U.S. SEC regulated financial service providers. Hamilton Lane Advisors, L.L.C. is regulated by the SEC under U.S. laws, which differ from Australian laws.
The PDS and target market determination for the Hamilton Lane Global Private Assets Fund (AUD) can be obtained by calling 02 9293 7950 or visiting our website www.hamiltonlane.com.au.
Any tables, graphs or charts relating to past performance included in this presentation are intended only to illustrate the performance of the indices, composites, specific accounts or funds referred to for the historical periods shown. Such tables, graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision.
The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.
The calculations contained in this document are made by Hamilton Lane based on information provided by the general partner (e.g. cash flows and valuations), and have not been prepared, reviewed or approved by the general partners.
VC Investment Strategy: Access to Top-Tier Companies
Find out how our venture capital strategies may provide investors with considerable benefits, including portfolio diversification, the potential for long-term, and compounding returns.