Five things to know about venture capital investing

Venture capital (VC) is a type of private financing of early stage and high-growth companies, before they are publicly traded. They can offer exposure to breakthrough companies, such as OpenAI, Databricks, and Amazon, before they become the publicly traded, household names we all know.

Here are five things to know, when it comes to VC investing.

VC investments can offer unique upside potential

Venture capital is one of the few asset classes that offers access to the kind of upside potential that can meaningfully shift a portfolio’s trajectory.

Institutions and investors are excited about VC because they offer two main things:

• Access to innovation: From AI and biotech to fintech and climate tech, VC gives investors exposure to technologies long before they reach public markets. Can you imagine investing in OpenAI when it was still just a research-driven startup and then watching it grow into the focal point of generative AI?

• Asymmetric return potential: While many startups fail, the ones that succeed can deliver 10x, 50x, even 100x outcomes – returns that are extremely difficult to find later on in a company’s life cycle. A classic example is Amazon, where they raised a Series A of $8M from Kleiner Perkins Caufield & Byers in 1995. By 1999, the value of the Kleiner Perkins investment in Amazon created returns of over 55,000%.

How VC compares to Private Equity

Before deciding how VC fits into your portfolio, it’s essential to understand what the risk-return profile looks like. Venture capital offers the potential for exceptional returns, but that opportunity comes with meaningful tradeoffs, especially when compared to more established private market asset classes like private equity (PE).

• Higher Failure Rates: Approximately 75% of venture-backed startups fail. Even within top-tier VC funds, many portfolio companies may not return capital. In contrast, private equity typically invests in more mature, cash-flowing businesses with established track records, which lowers the failure rate. However, it also limits the possibility of outsized, exponential returns.

• Long Time Horizons: Venture capital is one of the most illiquid asset classes. Fund lives are typically 10+ years, and early exits are rare. Private equity shares a similar lock-up period, but PE deals often have clearer and more consistent paths to exit through IPOs, acquisitions, or recapitalizations, especially since they back later-stage, often profitable businesses with more predictable outcomes.

• Unpredictable Returns: In VC, fund returns are highly variable and heavily influenced by just a few standout winners. Performance can take years to materialize and depends on market conditions for successful exits. While PE returns can also vary, they tend to follow a more stable trajectory due to operational improvements and financial engineering within portfolio companies.

Strategic risk allocation drives better outcomes

Venture capital is inherently risky, but that’s not necessarily a reason to avoid it. Here’s how institutional investors think about risk and reward strategically:

• Stage exposure: Early-stage investments have the most upside potential, but the highest failure rate. Later-stage deals tend to have lower volatility and shorter timelines. Combining both can help smooth out returns.

• Manager selection: The performance gap between top- and bottom-quartile VC funds can make a big difference. Arta works with fund managers that go through a highly selective process examining Managers’ track records and specialties before bringing them onto the platform. Additionally, a balanced portfolio should have 20-30 fund managers in the underlying opportunities – exposure that can be achieved more easily through fund-of-fund structures.

• Vintage years: Institutional investors generally spread their commitments across multiple years, a strategy known as vintage diversification. This approach helps avoid overexposure to any single market cycle, such as the peak valuations seen in 2021, by spreading investments across different economic and fundraising environments. It also ensures that the portfolio is continually replenished with new opportunities, capturing innovation as it evolves.

• Sector and geography: Niche strategies (e.g. climate tech, LATAM focus) can offer alpha, but also greater risk due to the sector concentration. Institutional investors diversify across themes, while sizing opportunities appropriately.

How to build a balanced VC portfolio

With lots of VC opportunities available, how can people confidently build their VC portfolio? Here’s an approach to building balanced VC exposure, where investors can have broad market exposure while making room for targeted, high-conviction investments:

• Foundation (70–90%) = Diversified, multi-manager, multi-vintage year approach. It spreads risk and captures broader startup exposure. Think of it as the structural core, which is built to be long-term focused.

• Specialization (10–30%) = Higher-conviction positions like co-investments (direct investments made alongside venture fund managers) and sector specific funds. These specialized allocations offer the potential for outsized returns by focusing on opportunities you or your advisor believe have exceptional promise. Within this segment, emerging managers often play a key role. These are newer VC firms, typically raising their first or second fund. While they can carry more risk due to their shorter track records, they are frequently more agile, deeply focused on specific themes, and highly motivated to outperform, which are characteristics that can translate into exceptional upside when they succeed.

How Arta does Venture Capital differently

Historically, achieving this type of VC portfolio is limited to institutional investors because of the minimum investments required. However, Arta unlocks opportunities with lower minimums for Qualified Purchasers – enabling you to build curated, balanced VC exposure. Through pooled investment opportunities, we help lower the barrier to entry so investors don’t need to allocate millions to build a diversified private markets portfolio. Additionally, our global investment committee reviews VC opportunities with rigor and diligence, so that members can feel confident investing through Arta.

Transparency is another core part of how Arta works. We provide clear, upfront pricing with no hidden fees, so you always know exactly where your money is going. We combine private markets expertise with an investor-first approach, helping you invest with confidence and clarity.

If you're ready to explore these opportunities with confidence, Arta offers a modern platform to directly access high-quality private market investments like VC for qualified investors. Sign up to get started today.