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Alternative Investments: Pros and Cons As with any other investment, understand the risks before putting money in the pot.

By Rosalind Resnick

Opinions expressed by Entrepreneur contributors are their own.

Successful entrepreneurs--especially those who have sold companies or taken them public--are frequently offered investment opportunities that most investors can only read about in the paper.

And I can't say those alternative investments aren't tempting. After all, who wants to settle for the kind of lukewarm returns that you typically get from putting your money in a large-cap mutual fund when you can invest your money in a fund that may produce the next Google or Microsoft? And why should you sit in the bleachers with the other retail investors when you can put your money in private equity deals alongside pension funds and university endowments that have the inside track?

But, as with any other opportunity for creating wealth, you need to understand the risks before you put your money in the pot. VC funds, which have produced some of corporate America's biggest winners, have given birth to their share of dogs. Anybody remember And once you put your money in a VC fund, you may not be able to take it out for the next 10 years--and only if the companies the fund invests in are acquired or go public. Private equity funds, which typically invest in larger, more mature companies with positive cash flow, are less risky than VC funds and often produce higher returns. But private equity funds rely heavily on leverage, or borrowed money, and when the credit crisis hit last year, several large private equity-financed deals went bust.

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