Beginner’s Guide to Venture Capital Investment and Returns

The confusion and lack of familiarity surrounding venture capital investments aren’t surprising. And with the 2020 SEC amendments to the ‘accredited investor’ definition, those who don’t meet the financial threshold to invest in VC — but have the right experience or credentials— have entered the market.

In March 2025, the SEC provided further guidance on verifying accredited investor status. This guidance allows issuers to consider high minimum investment amounts (at least $200,000 for individuals and $1 million for entities) combined with written representations from investors to verify accredited investor status. This simplifies the verification process and allows broader participation in private offerings.

Venture Capital Limited Largely to ‘Accredited Investors’

If you look at income requirements alone, government regulation prohibits over 90% of Americans from investing in private equity or venture capital.

The reason? Their income or net worth does not meet the SEC’s requirements for ‘accredited investors.’

Only recently did SEC regulations loosen to allow non-accredited investors the ability to invest in venture capital (albeit with tight restrictions).

To be an accredited investor, you must show one of two things:

1. Household net worth of more than $1 million (excluding primary residence)
2. Income of at least $200,000 ($300,000 for couples) over the last two years.

As a reader of Financial Poise, you’re more likely to pass the accredited investor test – now or in the future – so you may want to understand these asset classes better.

Venture Capital Investment vs. Private Equity

Venture capital is a form of private equity. But it’s also quite different from what most people consider private equity investing.

Venture capital and private equity investors invest in privately owned companies instead of public companies you find on the stock exchanges. Because the government regulates public equity markets more than private ones, it actively restricts who may invest in these private asset classes to protect investors.

Traditional Private Equity Groups

Traditional private equity (PE) groups seek investments in established businesses that deliver operating cash flow. They usually fund their acquisitions with considerable debt, which can be risky. PE firms expect to unlock greater cash returns by improving operational efficiency – in other words, they fix and flip businesses.

Venture Capitalists

In contrast, venture capitalists (VC) invest in startups and early-stage companies. Many such companies don’t yet have positive cash flow, and some may not have any revenue. It may take years to deliver a positive return to their investors.

Most never will!

Between 80 to 85% of VC-funded ventures lose investor money. Most result in total losses. Yet, on average, venture capital delivers outstanding investor returns. In 2022, the activity of VC-backed companies exceeded $200 billion, the second-highest year on record, according to Ernst & Young.

How a Venture Capital Investment Generates Outstanding Returns

Venture capital investment and returns are like a funnel. At the top of the funnel, many ventures get early funding. However, very few come out of the other end with positive investor returns. It is hoped that a few big winners – some returning 20x to 30x (or more) the early investment – more than offset all the losers (historically, that has been the case).

The Cambridge Associates Venture Capital Index replicates the venture capital industry as a whole. Based on that index, venture capital investment has returned an average of 23.7% over a 25-year period for more than two decades, despite the 2000 dot-com collapse and the 2007-09 recession.

But volatility hits VC, too, depending on the economy. After a record year, earnings reached 33.4% in 2021 but dropped after the pandemic market boom.

Access To Venture Capital for Individual Investors Increasing

Until recently, only major institutions and ultra-high-net-worth individuals (UHNWI) invested in venture capital. Even most accredited individual investors had limited access. That’s changing.

Title II of the JOBS Act was implemented in late 2013, allowing media promotion to individual accredited investors. There are now online venture capital portals where accredited investors can access various venture investment choices.

Then, in 2016, Title III of the JOBS Act allowed startups to market securities to non-accredited investors. This often involves crowdfunding, which has since gained popularity, though non-accredited individuals should perform their due diligence before investing.

Add to that the SEC’s amended accredited investor definition, and there are now more players in the game with more investment options.

In 2024, US lawmakers proposed legislation to democratize access to private investments further. It would allow individuals to become accredited investors through an exam to test their financial knowledge. This initiative would shift the thresholds from financial to actual investment sophistication. However, the bill’s future remains uncertain.

Advice for Prospective Investors

Individual accredited investors should invest with a reputable professional venture capital firm with a proven long-term track record of success. Look for firms with rigorous deal selectivity.

The successful ones may review a hundred or more ventures for every one they invest in.

The VC business’s average ‘win rate’ (investments with positive returns) is less than 20%. You should look for companies that repeatedly exceed that mark.

How To Spread Out Venture Capital Investments

No matter how high your deal win rate is, you must diversify within this asset class. Putting all your chips on a couple of deals is far too risky.

A mutual fund or index fund type isn’t the best approach either. That means participating in too many deals that didn’t go through rigorous screening and due diligence. Those steps are vital to increasing success odds. Instead, invest in a proven VC firm’s total portfolio — or at least 5-6 deals with home run potential.

Above all, don’t invest more in venture capital than you can afford to lose. I suggest not more than 5% of your total assets unless your net worth is over $10 million. Always check with a trusted financial advisor before making any significant moves.

Despite the outstanding returns history of an asset class, each deal carries risk. Even with a top firm, the 5-6 ventures you invest in could all lose. Nevertheless, selecting a strong firm and smart diversification gives you a better chance at the rich returns this asset class can deliver.

We think you’ll also like:

1. Key Private Equity Considerations for Would-Be Investors
2. Crash Course: Private Equity Funds, Sponsors, and Investors
3. 3 Online Securities Intermediaries for Accredited Investors

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. The Start-Up/Small Business Advisor Series 
2. Selling a Business-101: A Step-By-Step Guide
3. MBA Bootcamp Series

This article was originally published on May 25, 2017 and updated on September 19, 2023.] 

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