Should I invest in a venture fund or directly in startups?

Choosing which decisions you want to make

The main difference between investing in a venture fund and angel investing is who picks the companies. As a limited partner (LP) in a fund, you choose a manager, a strategy, and a set of terms, and the manager picks the companies. As a direct investor, you choose each company and agree to the terms of each investment yourself.

As a fund LP, you may know some of the fund’s investments when you sign up, or the fund may not have made any yet. Your research focuses on whether the team can carry out its strategy and manage the money well over many years.

As a direct investor, you size up each company’s founders, business, market, finances, who owns what, and the investment documents. You also decide whether to invest again in later funding rounds and how each investment fits with the rest of what you own.

This matters if you’re drawn to a particular founder or company. A fund that owns that company will also own many others and make future investments. A direct investment is a decision about one company. Investing in a fund is a decision about a manager and what that manager buys.

Work and control compared

Investing in a fund hands off the work of evaluating individual companies to experienced fund managers who have a track record of evaluating startups. As an LP, you’re responsible for choosing the fund and keeping track of it. Investing directly gives you control of each decision, along with the work that comes with it.

As a fund LP, you generally can’t block a company investment you don’t like. Direct investing means making decision after decision on individual companies. Think about how much time and expertise you want to give to reviewing businesses and deal terms, and to the relationships that bring you deals. An investor who enjoys meeting founders can still recommend them to a fund they’re invested in if they think the company may be a potential fit for the fund managers to consider.

Spreading your money across companies

A direct investment ties your result to one company. A fund spreads its money across many companies. How much that helps depends on how many companies the fund owns, the investment amount it puts in each, which industries they’re in, and how much capital is saved for later rounds. A few winners may produce most of the gains. Investors call this pattern the power law. A fund holds many companies, so you don’t have to pick the rare winners yourself.

Spreading money across companies can reduce dependence on one outcome, but several companies in the same industry or stage may face similar risks. A fund can still lose money, concentrate much of its value in a few holdings, and keep your capital tied up for many years. The readiness guide helps you consider those risks alongside your other goals.

For a direct investor, each company is a bet on a single outcome. Spreading your money takes many separate investments, each with its own research and paperwork, at the riskiest stages of a company’s life. A fund does that spreading inside one commitment, and you pay the manager fees and carried interest for doing it.

The cost of each route

Both routes have costs but they show up in different places.

Fund costs include management fees, fund expenses, and carried interest. A feeder fund or access platform can add its own layer of fees. The LP guide explains these costs and shows a hypothetical dollar example. Compare the total cost of the route you would use, including any extra vehicle.

Direct investments can carry legal and deal costs. Syndicates or SPVs may charge setup or administration fees plus carried interest. “Direct” doesn’t mean free, and a lower advertised fee doesn’t make one route better.

Here’s a hypothetical illustration. A $25,000 direct investment in one startup depends on that one company. A $25,000 commitment to a fund planning to back 25 companies gives you a share of the whole group and its costs. It doesn’t create 25 separate $1,000 investments under your control. It also doesn’t mean equal amounts in each company.

Payment timing can differ too. Some funds call your commitment in pieces over several years, and others collect it up front. A direct startup investment usually requires payment at closing, and the company may raise later rounds. Both can tie up your money for years and lose some or all of it.

Learning and participation

Your choice can also depend on how you want to learn. Some investors want to study managers, and others want to study companies.

If you’re new to venture, compare what each role would ask of you now. You might care about an industry but prefer to research managers rather than every startup. Or you might have experience running a business and want to study companies in depth.

I started as an LP partly to learn how experienced managers think about companies and investment decisions. I chose funds with managers who have evaluated thousands of companies with a focus on female founders and women’s health. That expertise is something I’m willing to pay for. Being able to listen to the company evaluation process, including founder presentations through the fund, is helping me develop my own understanding for evaluating companies myself at a later date.

How do you choose between a fund and a direct investment?

Compare a real fund with a real startup investment opportunity only after you understand how each one works and what each asks of you.

Write down, for each option:

• •the work you’d be doing, and how many hours a month it would take
• •the decisions you’d control
• •the full amount of money required, including future capital calls or later rounds
• •the costs, in dollars
• •the risks you’d accept, including how long the money could be locked up

If the role you’d be performing doesn’t appeal to you, that’s useful information before you spend more time on the opportunity. The goal is an investment you understand and participation you enjoy.