Investing in a Venture Fund? You Have Options
Over two funds, and now entering our third, I’ve likely been in more than 1000 meetings with people wanting to learn about venture capital as an asset to add to their portfolio. There’s a lot of great content out there about when and why people choose to invest in the asset class, but HOW to do it often ends up as an afterthought, instead of as a core part of the strategy.
Your approach matters. How you enter a venture investment impacts the complexity, tax treatment, accessibility to any proceeds, and even your long term legacy planning. In the following, I’ll share some of the most common paths that we’ve seen our Limited Partners (LPs) join; hopefully this helps you understand the options and gives you some direction to guide your conversation with a tax professional prior to making an investment.
Directly Investing as an Individual/Jointly
This is the most straightforward route; you invest in your own name, without any additional structures. This is also the most common way that our LPs have joined the Groove funds.
Through a Trust
For investors with estate planning vehicles in place, a trust can hold the investment and integrate it into longer-term portfolio planning.
Via an LLC (with multiple Partners)
Some investors create a small LLC with friends, family, or colleagues to pool resources and invest together.
Using a Retirement Savings Account
[From IRAfinancial.com] A self-directed IRA can be used with a pre-tax IRA, Roth IRA, SEP IRA, or SIMPLE IRA. With a custodian controlled self-directed IRA, the IRA funds are generally held with the IRA custodian. At the IRA holder’s sole direction, the IRA custodian will then invest the IRA funds into a venture capital fund.
Through a Donor-Advised Fund (DAF)
If you have a donor-advised fund, you may be able to direct charitable assets into venture investments that align with your giving strategy. This option is becoming more common as more individuals and families are incorporating DAFs into their charitable strategies.
**The Minnesota Angel Tax Credit is a pretty great tax benefit for LPs, when it’s active. When a qualified Fund (like Groove) invests in a qualified company (many of them are) 25% of that investment is shared pro rata with the fund’s investors in the form of a Minnesota State annual tax credit. These credits add up, and can be a great sweetener for LPs who don’t have to do anything to receive the benefit. BUT, the program comes and goes. As of writing this article, the Minnesota legislature has NOT renewed the program for 2025. Let’s hope it comes back.
For corporations, family offices, and foundations the options are even more expansive, but for independent decision makers, this is the greatest hits list of how most people tend to get involved in venture capital.
As you can see, each of these structures has advantages and tradeoffs depending on your goals. Some investors choose the simplicity of investing directly, while others integrate their investment into broader tax, estate, or retirement planning. The best choice depends on your financial picture, and we recommend discussing the options with your legal or tax advisor before making a decision.
Happy investing!