The Risks Tribal Investors Should Understand Before Investing in Venture Capital

Venture capital carries real risks, and most of them are built into how it works: young companies fail, money is locked up for a decade or more, results vary enormously from one manager to the next, and a fund's early years can look like losses even when it's on track. A Tribal government carries additional risks that other investors don't, from council turnover across a long commitment to membership scrutiny of paper losses. None of these risks can be removed entirely. Most of them can be understood, sized, and planned for before a Nation commits.

Can a Nation lose money in venture capital?

Yes. Venture investors buy ownership in young private companies, and many of those companies fail. When one does, the investment in it is usually lost entirely. Failures are common enough to track as a trend: 966 U.S. startups on the Carta platform shut down in 2024, up from 769 in 2023, according to Carta data reported by TechCrunch.

A fund spreads its money across many companies, so one failure doesn't sink it. But within most funds, a few successes produce most of the gains while many investments return little or nothing. If those few successes don't appear, the whole fund can return less than investors paid in.

Whole periods can disappoint too. The Cambridge Associates U.S. Venture Capital Index, which tracks more than 2,500 venture funds, returned an annualized loss of 5.30 percent over the three years to September 30, 2024, net of fees. Over the same stretch, the same cash flows invested in global public stocks would have earned 9.45 percent a year. Venture results move in long cycles, and a commitment made at the wrong point in one can spend years behind.

How long is the money locked up?

A venture fund typically runs about ten years, often with extensions, and a limited partner (LP) can't withdraw early. Selling an LP interest to another investor requires the manager's consent and usually means accepting a discount. The mechanics are explained in How Does a Venture Capital Fund Work?

Cash can take longer to come back than many investors expect. Through March 2024, nearly one third of venture funds raised in 2017 had not returned any money to their investors, according to Carta data reported by Axios. Money committed to venture should be money a Nation won't need back on any schedule, because the fund, not the investor, decides when it returns.

Why does choosing the manager matter so much?

In public stock markets, most professional managers end up with results fairly close to one another. In venture, the gap between good and poor managers is wide enough to decide whether an investment works at all.

Cambridge Associates' benchmark data shows the spread. Among U.S. venture funds raised in 2006, the top quarter returned at least 12.71 percent a year, while the bottom quarter lost at least 2.96 percent a year, across 83 funds. Among the 156 funds raised in 2000, at the peak of the dot-com boom, the median fund lost money. The same asset class, in the same years, produced both strong gains and losses depending on who managed the money and when it was invested.

That spread makes manager selection, and the diligence behind it, one of the most important risks a Nation takes on. It also means an average venture allocation is not guaranteed to produce average results.

What risks are specific to a Tribal government?

A Tribal government faces considerations that endowments, pension funds, and family offices don't:

1. Governance continuity. A ten-year fund commitment outlasts most council terms. A new council may question an investment it didn't make and can't easily exit, so the reasons for a commitment need to be written down and explainable to leaders who weren't in the room.
2. Membership scrutiny. In a fund's early years, fees and write-downs can make results look negative even when the fund is performing as expected. Reported to General Council or membership without context, that dip can look like a mistake.
3. Liquidity under pressure. In a lean year for gaming revenue or federal funding, a capital call competes with services. Money set aside for future calls has to be truly set aside.
4. Legal terms. Fund agreements may ask a government investor to waive sovereign immunity or accept another jurisdiction's law and courts, terms explained in What Is a Limited Partner in a Venture Capital Fund? Each is a decision for the Nation and its counsel, made before signing.

These risks call for governance as much as financial skill. The Navajo Nation offers one model of the structure involved. Its investments are governed by a Master Investment Policy approved by the Navajo Nation Council's Budget and Finance Committee, which oversees the Nation's fiscal and investment policies. The Navajo Nation Investment Committee, established by the Council, serves as an advisory group to that committee, accepting or rejecting the investment consultant's recommendations on managers before the Budget and Finance Committee approves each manager contract. A written policy and a standing committee keep long-term investment decisions consistent across changes in leadership. Every Nation's structure will differ, and the right one depends on the Nation's own governance.

Which risks can be managed?

Several of these risks can be reduced, though not removed:

• Timing risk falls when commitments are spread across several years, so no single year's market decides the outcome.
• Liquidity risk falls when the allocation is sized to money the Nation won't need, with calls planned and funded in advance.
• Manager risk falls with independent diligence, comparisons against benchmarks for the same vintage, and attention to cash returned on a manager's prior funds, not only reported valuations.
• Governance risk falls with a written investment policy, clear delegated authority to meet capital calls, and a reporting plan that explains the early years before they arrive.

The risk of loss itself remains. Structure reduces avoidable mistakes; it can't make a risky asset safe.

What a Nation gains

Understanding venture's risks lets a Nation decide with clear eyes: how much of its capital can be tied up for a decade, how much loss it can absorb, how it will choose and monitor managers, and how it will explain the journey to future councils and members. Venture returns are uncertain and take years to arrive, and planning for the risks is what makes any decision about them defensible.

If your council or finance team wants to talk through how these risks apply to your Nation, send us a message.

Sources

• "2025 will likely be another brutal year of failed startups, data suggests," TechCrunch, January 26, 2025 (Carta data).
• Cambridge Associates, "US Venture Capital Index and Selected Benchmark Statistics," as of September 30, 2024, March 2025.
• "Venture capital is full of distribution deadbeats," Axios, August 19, 2024 (Carta data through March 2024).
• Cambridge Associates, "U.S. Venture Capital Index and Selected Benchmark Statistics," as of June 30, 2016, November 2016.
• Navajo Nation Council, Legislation No. 0210-22, An Act Relating to the Budget and Finance Committee, November 2022 (findings on the Master Investment Policy, Resolution BFD-45-18, and the Navajo Nation Investment Committee).