Venture capital investing is a complex and diverse field, and there are many different options available to investors. One option that is often overlooked is investing in a fund of funds, also known as a Fund of Venture Funds (FOVF). In this blog post, we’ll take a closer look at what a FOVF is, the benefits of investing in one, and the potential downsides to be aware of.
What is a FOVF?
A FOVF is a type of investment vehicle that pools together funds from multiple investors and then invests those funds in a portfolio of underlying investments. These underlying investments are typically venture funds, which in turn invest in startups and early-stage companies. This means that by investing in a FOVF, investors are able to gain exposure to a diverse range of startups and early-stage companies through a single investment.
Benefits of a FOVF
One of the key benefits of investing in a FOVF is diversification. By spreading the investment across multiple underlying venture funds, investors are able to mitigate risk and reduce the impact of any one investment’s performance on their overall portfolio. This is especially important in the venture capital space, where investments are inherently risky and the failure rate of startups is high. According to data from CB Insights, around 30% of startups that raise seed funding eventually fail, while around 60% of startups that raise a series A round eventually fail. By investing in a FOVF, investors can spread their risk across a large number of underlying investments, reducing the impact of any one investment’s performance on their overall portfolio.
Another benefit of investing in a FOVF is the access to professional money managers. These managers have decades of experience and know how to spot the next big thing. By entrusting your money to them, you’re giving yourself a chance to get in on the ground floor of some incredible investments. Additionally, investing in a FOVF can also give you access to difficult-to-reach investments that you might not be able to get exposure to otherwise. For example, a FOVF might invest in a venture fund that specializes in investing in companies in a specific industry or geographical region.
However, it’s important to note that there are some downsides to investing in a FOVF. One is that you will likely pay higher fees than if you were investing directly in startups or venture funds. According to Cambridge Associates, the average fee for a FOVF is around 2.4%, compared to around 1.5% for a direct venture fund investment. Additionally, because your money is spread across multiple investments, you may have difficulty accessing it if you need cash quickly.
In conclusion, FOVFs are an often overlooked but a good investment option for those looking for a way to invest in venture capital. FOVF provide diversification, professional management, and access to difficult-to-reach investments—all of which can help investors achieve their investment goals. However, investors should also be aware of the potential downsides, such as higher fees and less liquidity, before making a decision. Ultimately, whether or not investing in a FOVF is right for you will come down to your specific financial goals and risk tolerance. It’s important to do your due diligence and research any FOVF you’re interested in investing in and ensure the underlying funds align with your goals and risk tolerance. Additionally, it’s worth noting that FOVF can be a great option for investors who are looking to gain exposure to venture capital but don’t have the time or expertise to make individual investment decisions.