Venture capital (VC) is the process of investing private equity in companies, typically in early stages of development, that are believed to offer significant potential to grow substantially and reward investors accordingly. The objective of VC investing is to generate high rates of return over long periods of time. VC investing offers institutional investors and high-net-worth individuals high returns (historically better than stocks) and strong diversification benefits from very low correlations with other asset classes. The major negatives of VC investing are long time frames, and lack of liquidity.

A general rule for the breakdown of returns among VC company investments is 40% will be complete losses, 30% will be "living dead," with the remaining 30% generating substantial returns on the original investment. The big winners yield 10 or more times the original investment. 

Venture investing is characteristically different from traditional investing because early-stage companies usually have not yet established their business performance unlike mature companies that are established in an industry and have a track record that can be analyzed by prospective investors in order to help project future potential.

“VC investing offers institutional investors and high-net-worth individuals high returns (historically better than stocks) and strong diversification benefits from very low correlations with other asset classes.”

Venture funding and returns have been unprecedented in recent years. According to Venture Economics, the average annual return on VC funds was 48%, 40%, and 36% for 1995, 1996 and 1997 respectively. Many VC firms have reported even higher returns in the last few years.

With 271 venture-backed companies completing IPO's (Initial Public Offerings) in 1999 (comprising nearly 50% of all IPO's in 1999), early/seed stage venture funds made the most spectacular gains, netting a 247.9% 1-year horizon return, followed by balanced stage venture funds with 122.0%, and later stage venture funds with 70.2%.  The number of private companies completing IPO’s in 2000 declined however.

 While performance of buyout funds improved considerably, garnering 25.9% for 1999 (versus 11.9% for 1998), they have yet to catch up to the type of sky-high returns venture funds have generated.  One reason for this is that exits via IPO have less of a direct effect on buyout funds than on venture funds. These results represent the net return to investors in private equity funds and represent both realized and unrealized performance.