Alternative Investments and Venture Capital
Alternative investments are assets outside publicly traded stocks, bonds and cash, and venture capital is the alternative strategy that funds young companies in exchange for equity, with long holding periods and widely varying outcomes.
Reviewed by José Vasquéz, Managing Partner · Last reviewed
Structure
Allocators group assets by how they behave. Public stocks and bonds trade daily at visible prices. Alternatives, including private equity, venture capital, private credit, real assets and hedge strategies, usually trade rarely or never. Venture capital sits at the early end of private equity: a fund invests in companies that have little revenue and large uncertainty, and holds each position for years until a sale or a public offering.
Four features separate venture capital from conventional assets.
- Illiquidity: investors commit capital for a term, commonly ten years or more, and cannot sell at a quoted price. The compensation for that constraint is discussed in The Illiquidity Premium.
- Pacing by capital calls: investors pledge a commitment and the manager draws it down over time; see Capital Call.
- Return shape: reported value usually falls before it rises, the pattern described in The J-Curve.
- Dispersion: results differ widely between funds and between companies within a fund, so manager selection matters more than in public markets.
Legally, a venture capital fund is also a defined term. Under SEC Rule 203(l)-1 (17 CFR 275.203(l)-1), an adviser to a venture capital fund may rely on an exemption from registration if the fund represents that it pursues a venture capital strategy, holds no more than 20 percent of its commitments in non-qualifying assets, limits borrowing to 15 percent of commitments for no more than 120 days, offers no redemption rights and is not registered under the Investment Company Act. Section 3(c)(1) of that Act limits most private funds to 100 beneficial owners (15 U.S.C. 80a-3). A qualifying venture capital fund may have up to 250, but only if it holds no more than $12,000,000 in capital contributions and uncalled commitments (17 CFR 270.3c-7), so most venture funds still work within the 100-owner limit or another exemption.
Worked Example
Consider a hypothetical investor that decides to build a venture capital allocation by committing $2,000,000 each year for four years to four different funds. Assume each commitment is called on the same schedule: 30 percent in year 1, 25 percent in year 2, 20 percent in year 3, 15 percent in year 4 and 10 percent in year 5. The schedule is an assumption for illustration, not a forecast.
| Year | Fund 1 | Fund 2 | Fund 3 | Fund 4 | Total called |
|---|---|---|---|---|---|
| 1 | $600,000 | - | - | - | $600,000 |
| 2 | $500,000 | $600,000 | - | - | $1,100,000 |
| 3 | $400,000 | $500,000 | $600,000 | - | $1,500,000 |
| 4 | $300,000 | $400,000 | $500,000 | $600,000 | $1,800,000 |
| 5 | $200,000 | $300,000 | $400,000 | $500,000 | $1,400,000 |
Total commitments are $8,000,000, yet no single year calls more than $1,800,000. By year 4 the investor has paid in $5,000,000 cumulatively, and $3,000,000 remains uncalled. That uncalled amount is why allocators keep liquid assets available to meet calls. It is also why many investors commit more than their target venture exposure: if the target is $8,000,000 of invested capital, a plan must account for distributions that start returning cash and for calls that arrive before they do.
Alternative Investments and Venture Capital in a Portfolio
An investor sets a target for alternatives, divides it among strategies and then paces commitments. Venture capital often receives the smallest slice, because it combines the longest horizon with the widest dispersion. A sensible plan names the target share, the number of managers, the vintage years, and the liquid reserve for calls. It also measures progress with the right metrics: DPI for cash returned, TVPI for total value including unrealized holdings, and MOIC for a single investment. Reported values lag and rely on manager estimates, so no single figure should drive a decision.
What It Means for a Limited Partner
A limited partner must be eligible, patient and organized before buying venture capital. Eligibility starts with investor status. Under Rule 501(a) of Regulation D (17 CFR 230.501), an individual qualifies as an accredited investor with a net worth above $1,000,000, excluding the primary residence, or income above $200,000, or $300,000 jointly with a spouse. Many funds require more, including qualified-purchaser status. Patience means accepting that capital may be unavailable for a decade. Organization means tracking calls, distributions, tax reports and manager communications, which arrive on the manager's schedule and not the investor's. An investor that cannot meet a capital call may face default remedies described in Capital Call, so liquidity planning belongs in the first conversation, not the last. Family offices often handle this with a dedicated pacing model; see Family Offices in Private Equity.
In Life Sciences and Healthcare
Life sciences and healthcare is one of the most common areas for venture strategies because science-driven companies need years of capital before revenue. The BIO, Informa and QLS Advisors study of 2011 to 2020 found that 7.9 percent of drug candidates entering Phase I reached approval, over an average of 10.5 years. That timeline is longer than many fund terms, which is why a healthcare-focused venture strategy should explain how it will reserve follow-on capital, handle extensions and value positions between clinical milestones.
Frequently Asked Questions
Is venture capital an alternative investment?
Yes. Venture capital is a private equity strategy that invests in early-stage companies, and it is classed with other alternatives because it is illiquid, privately priced and held through long-term partnership commitments. Its risk and return pattern differs from public equities, with a wider spread of outcomes between funds.
How do alternative investments differ from stocks and bonds?
Stocks and bonds trade daily at visible prices. Alternatives trade rarely, are valued by managers on a schedule, require commitments for years and often charge fees plus a share of profits. Investors receive capital call and distribution notices instead of choosing when to buy or sell. Terms such as the J-curve follow from that structure.
How much should an investor allocate to venture capital?
No percentage is correct for everyone. The answer depends on liquidity needs, time horizon, tolerance for loss and the ability to meet capital calls. Most plans start small, spread commitments across several vintage years and expand only after the investor understands cash flows and reporting from real experience with managers.
Related Reference
Venture and growth strategies share the structure described in growth equity. Related entries: The J-Curve, Capital Call and The Illiquidity Premium.