As private markets continue to draw interest from accredited investors, family offices, and institutional players, a key question emerges: should you invest directly in startups or allocate your capital through venture capital (VC) or private equity (PE) funds? Whether you’re an accredited investor exploring private markets for the first time or a family office refining your strategy, understanding direct versus fund investments may be essential.

Direct Investments vs Fund Investments

Direct Investments

Direct investments refer to putting capital into an early-stage or growth-stage company in exchange for equity. This route allows investors to support startups they believe in, often before institutional investors are involved.[1]

Benefits of Direct Investments

One of the appeals of direct investment is the potential for growth. Backing a company early could result in growth and exit opportunities. Direct investors may also enjoy a higher degree of influence and transparency, with opportunities to secure board seats, advise management teams, or monitor operations firsthand.

In addition, direct investing may allow alignment with personal values or industry expertise and can also avoid the layered fees associated with managed funds.

Example of Benefits of Direct Investing

An investor with experience in healthcare tech may choose to invest $100,000 in a digital diagnostics startup at a $2 million valuation. Five years later, the company is acquired by a major health system for $100 million. The investor’s original stake is now worth $5 million—a 50x return—assuming no dilution and pro rata ownership.

Risks of Direct Investments

Despite its upsides, direct investing also carries considerable risk. Startups have high failure rates, and even those with solid fundamentals may struggle to scale. Liquidity is also a major concern, because investors may have to wait 7–10 years or more for a return, with no guarantee of an exit.

Without a portfolio of startups, it may be difficult to achieve meaningful diversification, increasing exposure to any single company’s failure. Moreover, identifying quality deals often requires access to elite founder networks, and managing investments can be time-consuming and operationally demanding.

Example of Risks of Direct Investing

Another investor puts $50,000 into a promising consumer app that gains early traction but burns through its cash within 18 months. Without additional funding or revenue, the company shuts down and the investment is lost.

Fund Investments

VC and PE funds are the two main types of fund investments. These are professionally managed investment vehicles that pool capital from multiple investors and allocate it across a portfolio of private companies.

These funds can help provide diversification, with experienced managers sourcing deals, conducting due diligence, and overseeing the performance and eventual exits of portfolio companies.

Benefits of Fund Investments

One of the arguments for fund investing is diversification. By backing a fund, investors can gain exposure to various companies, which may help to mitigate risk tied to a single startup’s success or failure. These funds are typically managed by seasoned professionals who have deep networks, access to top-tier deals, and the ability to add value post-investment.[2]

For investors seeking passive exposure, funds can be appealing because there’s no need to screen deals, join advisory calls, or manage cap tables. Fund investments also can provide structured reporting, investor updates, and professional governance, helping to add transparency and accountability.

Example of Benefits of Fund Investing

An investor allocates $250,000 to a venture capital fund targeting early-stage SaaS startups. The fund invests in five companies, three of which later achieve exits (one acquisitions and two IPOs). The overall fund returns 3x net of fees over 10 years, delivering $750,000 back to the investor—without the need for hands-on involvement.

Risks of Fund Investments

However, fund investing can still be risky. The fee structure, which is commonly 2% annual management fees and 20% carried interest on profits,[3] can eat into net returns. Investors also have little say in the fund’s investment decisions or timing.[4]

Investors should be prepared for capital to be illiquid for 7–10 years, with funds often delaying returns until portfolio exits occur. Additionally, many funds are highly competitive, have high investment minimums,  and may be inaccessible to inexperienced or first-time investors.

Example of Risks of Fund Investing

A first-time investor joins a lower-tier PE fund with limited track record. While the fund operates with the goal of aggressive growth targets, the underlying companies underperform, and two key investments fail outright. After 10 years, the fund returns only the original capital—leaving the investor with no gain and opportunity cost.

Comparing Investments

When comparing these two strategies, several key differences stand out. Direct investment may offer greater control, transparency, and potentially higher growth—but also comes with higher risk, limited diversification, and requires active involvement. VC and PE funds can provide a diversified, professionally managed, and passive alternative, but at the cost of higher fees and less control.

Choosing the Right Investment Opportunity

Choosing between direct startup investments and VC/PE funds depends on your personal circumstances, experience, and goals. If you’re comfortable with risk, enjoy working closely with founders, and have the network to source quality deals, direct investing may be the route you choose. On the other hand, if you value diversification, prefer a passive role, and want access to a managed portfolios, a fund allocation might suit you better. Consider the following questions to help guide your decision:

• Are you willing and able to commit time to evaluate deals?
• Do you have access to high-quality startups or funds?
• What level of risk are you comfortable with?
• Are you seeking more control or more simplicity?
• How important are fees, liquidity, and transparency to your strategy?

Consider a Hybrid Approach

Some sophisticated investors are using a hybrid model—combining direct startup investments with VC or PE fund exposure. This approach could provide potential benefits of both worlds: opportunities through direct investments and risk-mitigated, diversified exposure through professional fund investments. A blended strategy also may allow investors to leverage personal expertise while gaining broader access to emerging markets or sectors they may not be able to reach on their own.

Final Thoughts

Private market investing is not a one-size-fits-all journey. Both direct startup investment and VC/PE fund investments have unique strengths and limitations. It is important to see how each aligns with your investment thesis, risk appetite, and level of involvement. By clearly understanding the trade-offs, you can build a strategy that leverages private markets while managing the complexities that come with them.

Want to learn more about investing in private markets? Check out the following blogs to learn more:

• Beyond Tradition: Alternative Investments
• Navigating Risk and Rewards in Venture Capital Investments
• Early- and Late-Stage Investments
• Slice of the Pie: Navigating Ownership Dilution in Startup Investments

Are you looking to invest in startups? Sign up for a MicroVentures account to start investing!

 

[1] https://smartasset.com/investing/direct-investment-vs-portfolio-investment

[2] https://www.baofinancialgroup.com/post/the-benefits-of-investing-via-funds-vs-direct-investing

[3] https://www.home.saxo/learn/guides/pricing/management-fees-vs-performance-fees-whats-the-difference-and-why-it-matters

[4] https://www.cnlsecurities.com/blog/private-capital/two-flavors-of-private-equity-direct-investing-versus-fund-of-funds/

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.