If you are looking into venture capital as an investment opportunity, you are likely aware of other options like private equity and real estate. While these alternative asset classes share some similarities (illiquidity, long investment holding periods), there are distinct differences in structure and investment strategy that are important to consider as you dive into venture capital investing.
A recent article in the Wall Street Journal takes a critical look at the differences in venture capital and private equity, specifically when it comes to returns. The biggest takeaway from their research is that venture capital investing vastly outperforms private equity when it is successful. However, the returns are more volatile, with longer holding periods. This time horizon stems from the fact that venture capital firms invest in early stage companies that may be pre-revenue, and venture investors only make money when those companies are acquired or go public. Thus, venture capital gets in early on high-growth opportunities, in contrast to private equity, which makes shorter term investments in mature, private companies.
Real estate investing presents its own set of variables. Real estate investors make money from regular payments and a long term increase in property values (although increases in property values rarely result in capital gains). This means that you can have steady cash flow with less market volatility. However, you don’t have the opportunity to see the tremendous returns that venture capital is known for.
As you take steps to diversity your portfolio, it’s worth taking the time to evaluate the different asset classes available to you. A side-by-side comparison of alternative assets, like the chart below, is a good starting point to figure out what type of investing is right for you.