PEINVEST
Equity investment in early-stage, high-growth companies from seed through late-stage.
Venture capital provides equity funding to startups and early-stage companies with high growth potential but unproven business models. The asset class is characterized by high failure rates (60-80% of investments) offset by outsized returns from successful outcomes (10-100x returns on winners). VC spans multiple stages: pre-seed and seed (product development), Series A (product-market fit), Series B-C (scaling), and late-stage/growth (pre-IPO). The industry has evolved significantly with the rise of mega-funds, corporate VC, solo capitalists, and sector-specific vehicles. Key sectors include AI/ML, fintech, biotech, climate tech, and enterprise software.
The power law describes how VC fund returns are driven by a small number of outsized winners. In a typical fund of 20-30 investments, 1-3 companies generate the majority of returns. This means VC firms must invest broadly and back potential category-defining companies to generate top-quartile performance.
VC invests in early-stage, often pre-profit companies using equity only (no leverage), taking minority stakes. PE invests in mature, profitable companies using significant debt, often taking majority control. VC returns are driven by revenue growth and valuation expansion; PE returns combine operational improvement, multiple expansion, and leverage.
Top-quartile VC funds historically generate 20-35% gross IRR. Top-decile funds can exceed 50% IRR. However, median VC fund returns are much lower and often trail public market equivalents. Manager selection is critical—the spread between top and bottom quartile VC funds is much wider than in PE or other alternatives.