In the face of volatile stock markets, tariff uncertainty and sustained elevated interest rates venture capital investment has proven remarkably resilient. In the first three months of 2025 global venture investment reached a 10 quarter high of US$126.3 billion and up 53 percent year-on-year from US$82.3 billion in Q1 2024, according to KPMG figures.

Investment in AI and machine learning technology funding rounds has been the single biggest driver of venture capital investment resilience, accounting for close to 60 percent of combined venture deal value in Q1 2025, according to Pitchbook.

But while the importance of AI to the health for the venture deal ecosystem in the current market is undeniable, but behind the AI-driven headlines, other sectors are also generating and interest and deal flow.

Alter Domus reviews five key sectors attracting investment from venture capital managers:

1. AI and machine learning:

Without the contribution of AI funding round activity, overall venture capital funding round investment figures would have come in much weaker.

AI has been a hot ticket for investors, with the long-term growth trajectory and application of AI technologies supporting robust valuations and investor appetite for exposure to fast-growing AI start-ups with proven technologies.

The US AI space has been particularly active, with OpenAI, the developer of ChatGPT, closing the largest private tech in history with a US$40 billion funding round that valued the business at US$300 billion. In other US AI deals large-language model (LLM) competitor Anthropic raised US$4.5 billion across two closings and AI-powered augmented reality company Infinite Reality raised a US$3 billion round to lock in a US$12.5 billion valuation.

AI investment activity also corner-stoned the European venture market, although the focus was more on AI-industrial applications as opposed to the LLM deals that led the US market. Healthcare-led AI companies such as Neko Health and Cera landed funding rounds of US$260 million and US$150 million respectively.

AI also animated Asian venture capital, with the release of Chinese LLM AI company DeepSeek, which can operate with less computing power than other models, opening up AI to a wider pool of users and driving Asian technology giants Alibaba and Tencent to launch their own AI-offerings.

2. Healthtech and biotech:

The healthtech and biotech segment also showed positive investment growth, rising by 30.4 percent in Q1 2025 to reach US$3.5 billion from 185 transactions.

Investment in health and biotech has benefitted from overlaps with the red-hot AI sector, with numerous large funding rounds secured by businesses straddling both segments, such as the abovementioned deals involving preventative healthcare group Neko Health and in-home care platform CERA.

But while AI shaped investment in healthtech and biotech, other sector verticals have also managed to progress funding rounds. Windward Bio, for example, a clinical stage drug developer, landed a US$200 million Series A funding round, while FIRE1, a medical devices developer focused on heart failure care, landed a US$120 million round.

Other funding rounds – for companies spanning a range of therapeutic drug research, digital health technology and scanning and drug delivery areas – have also progressed, illustrates the sustained interest in the healthcare space from venture capital investors.

3. Cleantech

Despite policy shifts in the US on energy transition and environmental, social and governance (ESG), cleantech and climate-focused assets have continued to attract interest from investors.

Even as the policy focus on energy transition shifts, venture capital investors around the world have continued to bank on the long-term requirement for diversified energy sources, energy security and decarbonization in all modern economies.

In the US, X Energy, a developer of small, modular nuclear technology, raised US$700 million in an upsized Series C funding round, while Helion, a fusion reactor business, raised US$425 million in a Series F round.

Outside of the US, Chinese cleantech group SE Environmental secured a US$688 million round, while German real estate energy management company Reneo and Australian vertical farming group, Stacked Farm, closed rounds of US$624 million and US$150 million respectively.

4. Defencetech

Escalating conflict in Eastern Europe and the Middle East, coupled with a shift to satellite-, autonomous- and AI-powered defense system has supported a strong growth in defencetech venture investment, with CB Insights forecasting that at the current run rate defencetech investing will reach US$6 billion by end of 2025 – a 62 percent increase on 2023 levels.

In Europe funding round highlights have included sizeable funding rounds for Defence AI software company Helsing and drone manufacturer, Tekever. The US generated even bigger defensetech deals – including a $600 million raise by autonomous naval defense technology group Saronic Technologies, a $240 million raise for aerospace-focused ShieldAI, and a $250 million raise by anti-drone systems developer Epirus.

5. Fintech

The fintech sector has been focused on the exits and realizations of existing assets, but investment opportunities have continued to emerge, with CB Insights tracking an 18 percent quarter-on-quarter increase in fintech funding to US£10.3 billion for Q1 2025.

A rally in investment in crypto and blockchain assets, including large rounds such as the US$2 billion deal for Maltese crypto exchange Binance, contributed to the increase in fintech investment, with a number of crypto assets also testing out markets for exits.

Outside of the crypto and blockchain space, Mexican buy-now-pay-later (BNPL) platform Plata secured a US$160 million round to achieve unicorn status, while Israeli fintech services provider Raypd landed a US$500 million round to support its acquisition of PayU.

Other areas to watch:

In addition to the core investment themes listed above, venture managers have also kept tracking longer-term investment trends. These are other investment themes to watch:

6. Quantum computing:

Quantum computing – an advanced form of computing based on the principles of quantum mechanics – has the potential to solve calculations and complex problems that current computing systems can’t deliver.

The sector is still relatively nascent, but venture managers are moving actively to build exposure to the sector, with quantum computing groups raising more than US$1.25 billion in Q1 2025 – more than double the year-on-year comparison.

As the sector moves into the commercial domain, and is not solely used in a research and development context, more commercial applications and investment opportunities are opening up.

7. Graphene:

Graphene – a feather-light but incredibly strong substance with huge potential across the construction, manufacturing and industrials sectors – is expected to grow at a compound annual growth rate (CAGR) of 35.1 percent between 2024 and 2030 and become a US$1.61 billion market, according to Grand View Research.

Compared to other venture verticals, funding rounds are still relatively small, but with demand for the substance expected to increase across the energy storage, aerospace and car-making industries, this is an area venture firms are going to be paying ever closer attention to.

8. Synthetic biology:

Synthetic biology – a science applying engineering principles to living systems – has the potential to transform the availability of personalized medicine and food production and is forecast to grow at a compound annual growth rate (CAGR) of 23.2 percent between 2025 and 2035, according to Vantage Market Research.

Venture capital players have invested steadily in synthetic biology research, but commercial applications are still some way off and transitioning the sector from one receiving steady private sector capital flows at seed level, into a sector the presents an attractive risk-reward proposition for venture investors deploying scale-up levels of capital is still some way off.

9. Robotics:

Venture investment in robotics has cooled since 2021, when funding rounds totaled US$14.7 billion versus around US$7.5 billion last year, according to Dealmaker reports.

The sector, however, has continued to attract sizeable, albeit concentrated funding rounds, as companies combine physical robotics capability with AI tools.

Physical Intelligence, for example, a start-up that develops “brains” for robots secured a US$2 billion valuation when closing its recent US$400 million funding round.

In another notable deal Apptronik, a humanoid robotics company based in Texas, closed a Series A funding round at US$350 million. The company is building intelligent robots that can be deployed in the manufacturing, health care and social care sectors, among others.

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Challenge 1: Managing capital calls and distributions 

Venture capital firms will routinely issue capital calls to draw down committed funds from limited partners (LPs). And when they exit portfolio companies, they will issue distributions.

However, both of these processes come with several challenges that can affect fund efficiency, investor satisfaction, and even regulatory compliance. 

For example, capital calls require precise timing. Calling capital too early, i.e., before the VC firm is ready to deploy it, such as before finalizing a deal, can tie up investors’ cash unnecessarily and lead to frustration. Conversely, calling it too late can lead to missed investment opportunities or cash shortfalls.

Additionally, coordinating capital across multiple LPs can be complicated, especially when managing large or global investor bases. There is also the issue of making sure that each investor’s share of the capital call is calculated correctly. This can also be complicated, especially when the firm is managing a mix of different commitments or investment tiers. Miscalculations can cause legal issues or investor dissatisfaction.

In distribution terms, these often depend on successful exits, which are unpredictable. Timing them to meet investor expectations while preserving portfolio value can be difficult. Also, managing distributions often involves complex calculations to ensure each LP receives their correct share of returns.

Distributions also have tax implications, which can vary by investor. For example, U.S. investors may be taxed differently from foreign investors. Managing these tax complexities while ensuring compliance with local and international tax regulations can be a big challenge for VC firms.

Challenge 2. Navigating complex fund structures

As venture capital firms grow and take on more investors, some often set up different types of funds to meet various needs. 

For example, they might create co-investment vehicles for large investors, special purpose entities (SPEs) for single deals, or parallel funds to handle different tax or regulatory requirements. 

These structures can unlock strategic advantages for VC firms and attract a wider range of investors. However, they also introduce a host of operational, legal, and compliance challenges for venture capital management. 

Having multiple entities of fund structures means more data to track, including fund performance, investor allocations, fees, and distributions. Keeping everything accurate across these entities can be difficult.

Different fund structures may also fall under various regulatory regimes. Keeping up with ongoing filings, disclosures, and audits across jurisdictions can be costly and error-prone.

In the same vein, different fund structures often come with varying tax implications, especially when dealing with cross-border investments. Managing these complexities and ensuring tax efficiency for both the firm and its investors can be a daunting task. Inaccurate tax reporting or inefficient structuring can lead to unexpected liabilities or penalties.

Furthermore, explaining the structure, rights, fees, and returns across different vehicles to LPs can be challenging. Complex structures can obscure performance and increase LP concerns about transparency and alignment of interests.

Challenge 3: Meeting an expanding regulatory environment

As the venture capital and private fund industry, in general, matures, governments and regulatory bodies across the world are ramping up their oversight, creating new compliance burdens that funds must follow. 

This expanding regulatory environment poses significant challenges for VC firms.

Complex global regulations:

Many VC firms often execute deals  and raise capital from LPs in multiple countries, each with its own set of regulatory frameworks. Adhering to diverse national and international regulations, such as securities laws, tax codes, and anti-money laundering measures, can be cumbersome and time-consuming.

In Europe, for example, the Alternative Investment Fund Managers Directive (AIFMD) imposes strict obligations on fund managers, particularly around reporting and investor disclosures.

Dynamic regulatory landscape:

Regulations are continually evolving. A regulatory framework that is compliant today may no longer be so tomorrow. This requires firms to be proactive in monitoring changes and adjusting their strategies accordingly.

Rising compliance and operational costs:

Meeting regulatory demands can be expensive. Firms must invest in compliance teams, legal counsel, and technology systems. These rising costs can strain smaller firms and divert capital away from growth-oriented activities.

Constraints on strategic flexibility:

Regulatory considerations, including ESG-related requirements, may limit the types of investments firms can pursue or slow down decision-making as additional due diligence becomes necessary.

Data privacy and cybersecurity pressures:

Regulations like GDPR impose strict obligations on how personal and financial data is handled. VC firms must ensure strong data protection protocols are in place or risk fines and reputational damage.

Legal liabilities:

With stricter regulatory oversight, VC firms face an increased risk of legal action for non-compliance, which could include monetary fines and penalties.

For example, the SEC reported it had filed a total of 583 enforcement actions against firms in 2024 ​​and secured a record-breaking $8.2 billion in financial penalties, the highest total in its history. Legal action against a firm can lead to reputational damage, which in turn can affect a firm’s ability to attract future investors or raise additional funds.

Challenge 4: Delivering accurate and timely LP reporting

Modern LPs, armed with greater knowledge and a more discerning approach to their investments, are demanding a richer and more frequent flow of information from venture capital management.

However, delivering on these expectations is not without its challenges for VC firms. Here are some hurdles companies currently face.

Complexity of data collection and aggregation:

VC firms often invest in multiple startups, each with its financial systems, performance metrics, and stages of development. Aggregating data from these diverse sources, including equity positions, valuations, fund expenses, and portfolio performance, can be time-consuming and prone to errors.

Valuation challenges:

One of the most significant challenges in VC reporting is valuing early-stage investments accurately. Unlike public companies, which have easily accessible market prices, early-stage startups often lack clear market comparables, making valuations more subjective.

These valuations are typically determined through methods like discounted cash flow (DCF) or using comparable company analysis, both of which can be influenced by assumptions that may not be universally agreed upon.

This subjectivity introduces potential discrepancies between what different LPs consider the “true” value of the portfolio. Furthermore, the valuation of startups can fluctuate dramatically based on the latest funding rounds, exits, or market conditions, making it difficult to provide consistent and reliable valuation data in a timely manner.

Custom reporting requirements:

LPs often have unique reporting requirements based on their investment strategies, risk profiles, and other preferences. Meeting these customized reporting needs while maintaining accuracy and consistency can be challenging, particularly for smaller VC firms with limited resources.

Internal resource constraints:

Many VC firms, especially smaller ones, lack the resources or dedicated staff to manage the heavy workload required for accurate LP reporting. This can lead to overburdened teams, delays, and errors in reporting, which can negatively impact investor confidence.

Manual processes and lack of automation:

Many VC firms still rely on manual processes for collecting, organizing, and analyzing investment data. This increases the risk of errors and delays and makes it challenging to produce accurate and timely reports.

Challenge 5: Scaling operational infrastructure and talent

As venture capital firms grow, success brings a new set of operational demands. 

Early-stage VC firms can often function effectively with lean teams, informal processes, and minimal infrastructure. But as they raise larger funds, expand their portfolios, and attract more established LPs, this becomes unsustainable. Firms must scale their operation infrastructure and talent to support this expansion and growth.

But again, many firms experience challenges in this area.

For example, as the firm grows, it needs to hire specialized professionals across various functions, including deal sourcing, legal, operations, and portfolio management.  The demand for skilled individuals in these areas is high, and with many firms competing for the same talent, recruitment becomes costly and time-consuming. Finding candidates who not only have the necessary skills but also align with the firm’s culture is a big challenge.

Once the right talent is acquired, retaining it can also be an issue. Failing to build a clear career progression path, offer competitive compensation, or provide sufficient work-life balance can lead to high turnover, which disrupts operations and increases recruitment costs.

Operationally, scaling infrastructure often means higher costs. As the firm’s portfolio and the number of deals increase, so do the demands for more sophisticated systems and tools. Firms must invest in technology and support to handle portfolio management, investor relations, and reporting. These tools can require significant upfront costs for software, licensing, and implementation, and ongoing maintenance expenses. 

For many VC firms, outsourcing some of these operational tasks to specialized service providers can be a good practical solution, as we’ll see in the next section.

How outsourced venture capital services address these challenges

To overcome some of the challenges outlined above and streamline their operations, many VC firms are turning to outsourced VC service providers like Alter Domus.  

These firms offer the expertise, technology, and dedicated resources needed to manage critical back-office functions that would otherwise consume significant time and effort if handled internally.

For instance, these providers offer advanced fund administration platforms and experienced teams capable of managing every stage of capital calls and distributions. They can handle everything from calculating individual LP obligations to processing payments and providing detailed transaction reporting.

To address the increasing demands of regulatory compliance, these providers often have dedicated compliance teams that stay current with evolving rules. They can assist with developing and implementing compliance programs and managing regulatory filings, thus helping firms stay compliant. 

Outsourced service providers can also help VC firms improve the quality, consistency, and transparency of their reporting. These providers typically bring a combination of experienced professionals and purpose-built technology platforms that streamline the reporting process and ensure greater accuracy.

For example, they offer technology and resources to centralize financial and operational data across funds, integrating information from multiple systems into a single, unified platform. This approach reduces the need for manual data entry, minimizing errors and ensuring that all financial information is accurate and up-to-date.

Many service providers offer secure, user-friendly online portals where VC firms and stakeholders can easily access real-time reports, transaction histories, and performance data. This centralized access enhances transparency, allowing firms to share information quickly and efficiently with investors, auditors, and other key parties.

Finally, outsourcing offers a flexible and cost-effective solution for scaling operational infrastructure and talent. Firms gain access to a scalable pool of specialized professionals and technology platforms without the fixed costs and management overhead of building an in-house team.

Wrapping: Venture capital operational challenges

Venture capital firms face a range of operational challenges as they grow and manage increasingly complex portfolios. These challenges as seen include managing capital calls and distributions, meeting expanding regulatory compliance requirements, delivering accurate and timely LP reporting, finally and scaling operational infrastructure and talent.

However, these operational complexities don’t have to hinder growth and success. By strategically partnering with specialized service providers, venture capital firms can access the infrastructure, technology, and expertise needed to tackle these challenges effectively. 

Additionally, outsourcing frees up VC firms to focus on what really drives value, which is identifying, investing in, and nurturing high-potential, innovative companies.

Explore Alter Domus venture capital solutions to learn more about how we can help you optimize and streamline your operations.

Challenges of scaling up venture capital operations

Before we get into how fund administration can enable more efficient scaling, let’s first look at three major operational challenges that many venture capital firms face as they expand their operations.

Increased fund complexity

Scaling a venture capital operation usually includes either launching more funds, managing larger funds, or structuring funds in increasingly complex ways. All these changes add operational strain to the firm.

• Increased number of funds: Managing multiple funds, each with its own investment focus, lifecycle, and mandate, creates a higher administrative burden. More funds require more resources to ensure each operates smoothly and in line with its objectives.
• Larger funds: Bigger funds demand more disciplined capital deployment, enhanced reporting, and a stronger internal team to manage investor relations.
• Complex fund structures: Specialized funds, such as region-specific funds, co-investment vehicles, and special purpose entities (SPEs), introduce additional layers of governance, reporting, and compliance obligations.

Regulatory burdens increase

Growth venture capital firms also tend to increase their exposure to regulatory scrutiny. For example, crossing certain AUM thresholds can trigger mandatory filings with relevant regulators like the SEC. Additionally, more investors mean more Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance work.

International expansion adds additional complexity to regulatory requirements. Firms must follow varying regulations, such as tax codes, disclosure rules, and securities laws, in each jurisdiction where they operate. Staying on top of all regulatory obligations can be quite challenging.

Growing LP demands for transparency

Limited Partners (LPs) are increasingly expecting greater transparency and more comprehensive reporting from General Partners (GPs) in the private equity industry. They want more frequent, detailed, and transparent reporting, not just during fundraising rounds, but throughout the fund lifecycle. This includes timely capital account statements, NAV updates, performance metrics, and ESG disclosures. 

Meeting these heightened expectations for an increased number of investors and funds can be challenging without the proper mechanisms and support in place. 

The good news for VC firms is that these challenges are manageable. One of the most effective solutions is leveraging professional fund administration services.

What is venture capital fund administration?

Venture capital fund administration involves outsourcing back-office tasks to a specialized third-party firm. Essentially, the third-party, known as a fund administrator, takes over the day-to-day operational or administrative tasks, such as fund accounting, investor reporting, and regulatory compliance, that VC firms would otherwise need to manage in-house.

How fund administration helps scale venture capital firms

Fund administration plays a crucial role in supporting firms during periods of expansion by managing the increasing demands of back-office functions. For example, they can provide support in several key areas, including the following.

Streamlining capital call and distribution processes

Fund administration automates and organizes the capital call and distribution workflow, ensuring that these transactions are executed seamlessly and on time. This reduces the manual workload on VC firms, mitigates the risk of errors and improves the overall experience for investors.

Enhancing LP reporting and transparency

Fund administration provides the necessary infrastructure to ensure that all limited partners (LPs) receive timely, accurate, and consistent reports on their investments. Such transparency fosters trust and confidence among investors and helps maintain strong, ongoing relationships as the firm scales its operations.

Supporting regulatory compliance and governance

Fund administrators ensure that VC firms meet all regulatory obligations as they scale by managing the necessary filings and documentation. They handle KYC and AML checks and maintain proper records on these. In addition, fund administrators closely monitor changes in the regulatory environment and advise firms on any changes they might need to make to ensure compliance.

Why outsourcing fund administration makes strategic sense

According to a 2024 Ocorian survey,  99% of private equity, venture capital, and real estate fund managers globally plan to increase outsourcing over the next three years, with nearly half (46%) targeting a 25–50% increase in outsourced functions.

Besides helping firms overcome some of the operational complexities that come with scaling, outsourcing fund administrations offers several other significant advantages.

Cost savings

Building an in-house fund administration team requires significant resources, including hiring specialized staff, investing in technology, and training employees to keep up with changing regulations. As a firm grows, the costs associated with maintaining this infrastructure can quickly add up. 

Outsourcing to a third-party fund administrator like Alter Domus, allows VC firms to leverage professional services and technology without the overhead of managing these functions internally.

Access to specialized expertise and evolving best practices

Outsourcing gives VC firms access to professionals who are highly experienced in private fund structures and up to date with the latest regulations, best practices, and financial technologies. This ensures higher accuracy and professionalism across key fund activities, including accounting and investor reporting.

Freeing internal teams to focus on core investing activities

Perhaps one of the most significant benefits of outsourcing fund administration is that it frees internal teams to prioritize sourcing, evaluating, and managing investments. 

By offloading the time-consuming and often complex administrative tasks deal teams can dedicate their expertise and energy to identifying promising investment opportunities and actively supporting their portfolio companies. This ensures that the core value-creation activities of the VC firm remain the central focus.

Alter Domus: A partner in venture capital fund administration

If you’re looking for a fund administration partner that offers deep industry expertise, great flexibility, and tailored solutions to support your growth, Alter Domus could be a good fit.

Here’s what you can expect when you partner with Alter Domus:

Comprehensive fund accounting:

Expert management of fund accounting, including investment tracking, valuations, waterfall and carried interest calculations, and much more.

Investor reporting:

Detailed and transparent reporting to keep your investors informed about the performance and health of their investments and the fund in general..

Capital call and distribution processing:

Streamlined management of capital calls and distributions to ensure accuracy and timely execution.

Regulatory compliance support:

Comprehensive guidance on meeting regulatory requirements and maintaining compliance across different jurisdictions.

Tech-driven solutions:

Integration of advanced fund administration solutions designed to automate workflows, enhance operational efficiency, and provide real-time transparency.

Full fund lifecycle management:

End-to-end support, from fund formation through to exit, with tailored services to ensure smooth operation at all stages.

Audit support:

Comprehensive audit assistance, including the preparation of relevant documentation and coordination with auditors to ensure a smooth audit process.

Wrapping up: How venture capital fund administration supports growth 

Fund administration plays a key role in the growth of venture capital firms by providing the structure and expertise needed to manage increasing operational demands and complexity. It takes care of administrative tasks like fund accounting, investor reporting, and compliance management, which frees internal teams to focus on what matters most: identifying high-potential investments and driving growth.

With deep industry knowledge and a commitment to excellence, Alter Domus is the ideal venture capital fund administration partner to help streamline operations and support your firm’s growth. Explore Alter Domus venture capital solutions and fund administration solutions to learn more.

Key compliance obligations for VC firms

Let’s look at some of the key compliance requirements for starting and managing a venture capital firm or fund.

SEC registration and reporting

Most venture capital funds in the US are typically “private funds,” which means they don’t need to register with the Securities and Exchange Commission (SEC) as ‘investment companies”.. 

What’s more, many VC firms are classified as Exempt Reporting Advisers (ERAs) under the Dodd-Frank Act, and as such, they are not required to register with the SEC as investment advisers. 

However, VC firms are still subject to certain obligations. This includes completing specific sections of Form ADV Part 1A, such as information about their business, ownership, and any sanctions they or their personnel have faced. 

In addition, VC firms that qualify as ERAs are required to regularly update their Form ADV to ensure the SEC has accurate and timely information. This includes 2 key obligations.

• ERAs must file an update to Form ADV at least once annually, within 90 days of the end of their fiscal year.
• In addition to the annual filing, firms must promptly amend Form ADV whenever there are material changes to the information previously disclosed, such as changes or updates in ownership, business structure, or disciplinary history.

Fundraising and marketing

Most VC firms raise capital from investors through “exempt offerings,” which essentially allows them to sell securities without registering with the SEC.The most commonly used exemption is Regulation D, particularly Rule 506(b) and Rule 506(c).

Rule 506(b) allows VC firms to raise an unlimited amount of money from accredited investors and up to 35 non-accredited investors. However, this rule forbids general solicitation, meaning that firms cannot publicly advertise their offerings or use broad marketing tactics. All fundraising efforts must be done privately, typically through existing relationships or direct outreach.  

Rule 506(c) offers a different approach by permitting general solicitation and public advertising, opening up the possibility of reaching a wider pool of potential investors. However, this flexibility comes with a significant condition: all purchasers of the fund’s interests must be accredited investors, and the venture capital fund must undertake reasonable measures to confirm each investor’s accredited status.

Regardless of whether a venture capital fund uses Rule 506(b) or 506(c), a critical compliance requirement under Regulation D is the timely filing of Form D with the SEC. This brief notice, which provides basic details about the offering, including the amount being raised and the type of investors targeted, must be submitted within 15 days after the first sale of securities.

In addition to the aforementioned SEC regulations, venture capital funds must also be mindful of state-level securities laws, often referred to as “blue sky laws,” in each state where they solicit investors. These state regulations may impose additional requirements that firms must meet alongside the federal rules of Regulation D. 

It’s crucial to consult legal counsel to ensure compliance with state requirements.

Anti-Money Laundering (AML) and Know Your Customer (KYC) Requirements

Previously, many venture capital firms, particularly those that qualified as ERAs, were not required to follow comprehensive Anti-Money Laundering (AML) regulations in the same way as banks or broker-dealers under the Bank Secrecy Act (BSA). 

While the SEC could take enforcement actions related to misleading statements about voluntary AML procedures, there was no direct mandate under the BSA for these VC firms to establish full-fledged AML programs.

However, a significant regulatory shift is on the horizon with a final rule issued by the Financial Crimes Enforcement Network (FinCEN) on August 28, 2024.

This new rule amends the BSA regulations to include certain SEC-registered investment advisers (RIAs) and ERAs within the definition of “financial institution” under the BSA. This means that a significant portion of venture capital fund managers will now be directly subject to AML obligations.

Specifically, from January 1, 2026,  VC firms must establish formal AML compliance programs that include procedures for identifying and reporting suspicious activities, conducting risk assessments, and maintaining thorough records. Additionally, firms must implement Know Your Customer (KYC) protocols to verify the identity of their investors and assess the source of their funds.

Environmental, social, and governance (ESG) considerations

Although Environmental, Social, and Governance (ESG) reporting isn’t yet a formal compliance requirement for many venture capital firms, it has rapidly become a significant area of focus for both regulators and investors. 

In regions like the EU, regulations such as the Sustainable Finance Disclosure Regulation (SFDR) are already pushing firms to disclose how they integrate ESG factors. Though these regulations are currently more applicable to larger firms, they signal a shift that may expand to all VC firms over time.

In the U.S., the SEC has adopted rules for public companies to disclose climate-related risks. Similar frameworks could eventually extend to private funds, including venture capital firms. 

What’s more, LPs are increasingly demanding greater ESG data reporting from firms, with some even willing to pay more for it. For example, according to a report by PwC Luxembourg, two-thirds of surveyed LPs indicated a willingness to pay higher management fees if it leads to significant improvements in ESG data reporting by their GPs.

Additionally, nearly 45% of respondents said they would consider a fee increase of 5% to 9% if it resulted in more comprehensive and higher-quality ESG reporting practices.

Proactively adopting ESG policies and reporting frameworks can prepare VCs for future regulatory changes and at the same time help gain a competitive edge in the market by demonstrating to investors that they are forward-thinking, transparent, and responsible in their approach to managing investments.

Strategic importance of compliance

Builds trust and credibility:

A strong compliance record signals to investors and portfolio companies that the VC firm operates ethically and with integrity. This fosters trust and enhances the firm’s reputation, which is crucial for attracting and retaining both investors and promising startups.  

Prevents legal and financial penalties:

Non-compliance can lead to significant fines, legal battles, and even the loss of licenses to operate. A sturdy compliance program minimizes these risks.  

Protects against financial crime:

Implementing strong KYC and AML procedures, as mandated by regulations, safeguards the firm and its investors from financial crimes and reputational damage.

Challenges of managing compliance internally

High resource demands:

Effectively managing compliance internally demands significant time and personnel. For smaller venture capital firms, this can stretch resources thin and lead to oversight gaps where certain regulatory requirements are missed or misunderstood.

Constantly changing regulations:

The regulatory environment for venture capital is complex and frequently shifting, with new rules, reporting standards, and jurisdictional requirements. Keeping pace with these changes internally is difficult, especially for firms operating across multiple regions. This increases the likelihood of inadvertent noncompliance.

Insufficient internal expertise:

Compliance requires deep knowledge of specialized areas, such as financial regulations, anti-money laundering policies, and evolving trends like ESG disclosures. Many firms, particularly smaller ones, lack professionals with expertise in these areas. This lack of sufficient in-house expertise could lead to misinterpretations of regulatory requirements and thus non-compliance.

Rising operational costs:

Maintaining compliance internally can be expensive. Firms may need to invest in additional staff, ongoing training, continuous monitoring, and internal audits.  For smaller firms, these added costs can divert resources away from other important business activities, such as deal sourcing and portfolio management.

How Alter Domus supports venture capital compliance

Alter Domus provides specialized compliance services that help venture capital firms meet regulatory requirements effortlessly. Key areas of support include:

Regulatory filings:

Assistance with the preparation and submission of crucial filings such as Form ADV, Form D, and other jurisdictional reporting obligations.

Ongoing monitoring and support:

Continuous monitoring of regulatory changes and updates relevant to VC firms, proactive communication of these changes, and ongoing support in adapting compliance programs accordingly.

AML and KYC support:

Assistance with creating, implementing, and maintaining KYC and AML programs.

ESG reporting support:

Assistance with ESG data collection, aligning with relevant ESG frameworks, and preparing ESG disclosures to meet the expectations of limited partners and comply with any relevant regulations.

Audit support:

Assistance with audit preparation, including organizing required documents, coordinating with auditors, and addressing audit-related questions or issues.

Final thoughts: Venture capital compliance requirements

Compliance management is a critical function in venture capital firms. Besides helping firms meet legal requirements, it builds investor trusts, reduces risk exposure, and contributes to long-term operational stability.

However, for firms with lean teams, staying on top of compliance can be time-consuming and complex. This is where specialized support, like that provided by a fund administrator like Alter Domus, can make a big difference.

Alter Domus takes care of your compliance requirements and operations, including regulatory filings, AML/KYC implementation, and ESG reporting, so you and your team can focus on your core business of finding and nurturing high-potential startups without having to worry about meeting your regulatory obligations.

Explore Alter Domus administration and governance solutions or reach out to our team today to learn more about how we can support your firm’s compliance strategy today.