How to Get Venture Capital Exposure? Deal-by-Deal Investing vs. Venture Funds

Deal-by-Deal investing vs. venture funds: We look at the pros and cons and explain what investors should look at when seeking VC exposure.

Private investors seeking Venture Capital exposure usually invest alongside a Venture Capital intermediary — like BackBone Ventures (BBV) — or they invest in a Venture Capital Fund. The major difference is, that BBV does not sell stakes in a fund vehicle, but enables investors to participate in individual deals.

What’s better, deal-by-deal investing or fund investing? It depends. The question is: What do you prefer?

To help you decide, here are the pros and cons of both.

Deal-by-Deal investing: Personal, flexible, but less diversified and more cumbersome

Partaking in individual VC deals enables investors to decide on a case-by-case basis if they are interested in participating in a particular startup or not. Deal-by-Deal investing means investors can choose the companies they believe in and that fit into their overall portfolio mix. It also enables investors to get involved with start-ups directly, get to know the founders, and have a direct business relationship or even a personal relationship, if desired.

While VC funds often require significant minimum investments, Deal-by-Deal investing allows for greater flexibility. It’s really up to the investor and the owners how they want to structure their deals, including fixed lock-up periods, strategic milestones, and the overall involvement of the investor in the company.

On the downside, closing a transaction takes usually more time than a simple VC fund investment, as the administrative effort is more significant. There is also a greater co-dependency between the firm and the investor, as the firm needs to meet the investor’s needs, and the investor ties up his capital in just one investment.

That also means investors are less diversified and carry higher risks — but also have higher upside potential. Of course, an investor can also diversify by allocating the capital he is willing to invest in start-ups to several companies and thus basically putting together his own diversified VC portfolio/fund. To overcome the higher administrative work, of structuring and monitoring all these transactions, it additionally makes sense to affiliate with a VC for deal-by-deal investments.

That’s what we do at BBV. We connect investors with start-ups and help to negotiate and to close transactions. We also supervise the respective investment companies, join the board, and take care of the administrative efforts.

VC Funds: Leaving the work to the fund manager

The alternative is investing in a VC Fund that simultaneously invests in several start-ups and gives the investors a stake in this asset pool.

Investors then indirectly hold stakes in several start-ups, preferably in different industries, meaning they are less dependent on the business success of one particular start-up or industry.

This type of VC investment involves a much lower administrative burden, as the investor only has to invest in the fund once and not in each individual start-up. Hence, investor-onboarding is a relatively fast and straightforward process.

On the other hand, investors then depend on the fund manager. They usually have no say in the portfolio allocation, and all owners own a stake in the entire fund, not in individual start-ups. VC fund investments typically also come with higher fees, lock-up periods, and less flexibility in terms of exit and investment strategies.

What’s our recommendation?

Generally speaking, private investors choose a deal-by-deal structure when they seek access to individual start-ups. They may know the owner personally or particularly believe in a specific start-up. On the other hand, investors who seek exposure to the asset class, not to particular businesses, typically invest in more diversified VC Funds.

That said, there is no general answer to what’s the better way. It really depends on the individual portfolio and preferences of each investor. Anyone seeking exposure to the asset class should weigh the pros and cons of both alternatives. It’s also not an either-or decision. It can make perfect sense to invest in a fund while also holding stakes in individual start-ups.