Investment funds operate on a “one-to-many” strategy, where a single investment is distributed across multiple companies, industries, or growth stages. This strategy can help provide a level of diversification for investors as the investment is not made in one company, but in a fund with various investments. Investors generally retain the same ownership and share control as individual investments, but fund investing can help provide some guidance and automation not seen with other opportunities.
What is an Investment Fund?
An investment fund collects capital from groups of investors and distributes the “pool” of capital across an assortment of investments. The capital can be pooled from accredited investors, institutional investors, or family offices, and the assortment of investments is dependent on the fund manager. A fund manager can be an individual or organization that implements the investing strategy, researches and selects the companies to receive fund investments, and manages the trading activities. Investment funds can have lower investment minimums than might be required if an investor made separate individual investments in each company listed in the fund.
How Investment Funds Work
Investment funds typically start with a fund manager which oversees the fund formation, selection of companies, and collection of capital from investors. Many funds start with an investment thesis that outlines how it plans to pick investment opportunities, what specifically will be offered, and the goals the fund hopes to achieve. Once an investment thesis has been determined, the fund manager researches and selects the companies that can be included in the fund.
Some funds may select the companies before receiving investments, which may be known as blended funds. Other funds may identify key characteristics of the sought-out opportunities and make discretionary investments after capital is received in companies that exhibit the key characteristics. For example, key targeted characteristics could be late-stage technology companies with anticipated exit timelines of up to five years that have previously raised at least $50 million. Each specification may vary at the discretion of the fund manager, but once the characteristics are set, discretionary investments can be made as the opportunities present themselves. The number of companies that receive investment may vary depending on the total capital raised for the fund.
Once the fund investments are made, generally the investor receives shares in the companies included in the fund and maintains the same ownership and share control as if they had made individual investments.
Benefits of Fund Investing
One benefit of fund investing is the direction that comes from the fund manager. The experience and expertise that comes from professional management can help provide guidance for investors who may not have adequate time to vet and select investment opportunities. Additionally, fund managers may have access to a wider range of investment opportunities than the average investor and may be able to provide lower investment minimums for funds than for individual offerings. Another benefit of fund investing is the diversification that comes from investing in multiple offerings. This potentially could help mitigate the risks by spreading out the investments in various asset types and in various companies.
Risk and Reward
Fund investing can hold risks just as traditional investing: total loss of capital, lack of liquidity, market risk, and more. Fund investing is inherently risky, and investors are not guaranteed to see returns. Investors should consider the level of risk they are willing to take on, as multiple companies contained within a fund could fail. In an ideal world, diversification can help offset the losses, but that outcome is not guaranteed.
The benefits of diversification and professional management can help make fund investing appealing, but fund investing still carries investment risks. MicroVentures has offered fund opportunities in the past which can range by company, industry, growth stage, and key characteristics. Log in to your account to see our current investment opportunities.
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.