Discussing Venture Capital: What are the common forms of participation?

Different industries, different investment targets, and different investor situations lead to different suitable ways of participation.

Written by: LoliFox Typto

What is venture capital?

Venture capital (VC) refers to a form of financing provided by institutions or individuals to early-stage, high-potential, high-growth startups or projects. Venture capital can also refer to the financial industry that participates in funding these early-stage companies or projects. The organizations involved in venture capital are called venture capital funds or venture capital firms.

The purpose of venture capital is to invest in early-stage companies and help them succeed, in order to achieve substantial investment returns.

Venture capital typically appears in the early stages of startups.
Venture capital usually has high-risk, high-return characteristics.
Venture capital not only provides financing, but also typically offers strategic, operational, and management advice.

If you intend to participate in venture capital, you usually have multiple options: invest as an individual investor, join organizations in the venture capital field for collective investment, or invest through purchasing financial products issued by venture capital organizations. This leads us to the first topic we want to discuss: the various ways to participate in venture capital.

In this article, we will attempt to introduce some common venture capital participants, including: Individual Investor, Investment Fund, Investment Club, Self-Directed Investment Club, Syndicate, Investment Community, Investment DAO.

Individual Investor

Individual investors are typically relatively wealthy individuals. They provide financial support to startup companies as individuals and manage their investment risks.

Since it is often difficult for companies to obtain institutional investment at the early stage, and the funding needs of these early-stage companies are usually much smaller than in later stages, many startups choose to seek financial support from wealthy individual investors or friends and family. Many wealthy individuals are active in the angel round or seed round, often referred to as angel investors. (In addition, institutions participating in the angel round investment are also considered angel investors.)

Familiar angel investors include Peter Thiel (Co-founder of PayPal, invested in Facebook, Airbnb, SpaceX, etc.), Ron Conway (invested in Google, Twitter, etc.), Marc Andreessen (Co-founder of Andreessen Horowitz), Reid Hoffman (Co-founder of LinkedIn), as well as domestic figures like Lei Jun (founder of Xiaomi).

However, as individual investors, one often needs professional judgment, substantial funds, and project sources. This means that the threshold for becoming an outstanding individual investor is high, so more people may choose to join investment institutions or purchase products issued by venture capital companies to participate.

Note: Different legal jurisdictions have different regulations regarding investor qualifications. For example, the U.S. Securities and Exchange Commission (SEC) defines accredited investors as individuals who have earned income that exceeded $200,000 in each of the two most recent years (or joint income with a spouse exceeding $300,000) or have a net worth over $1 million (excluding the value of the individual's primary residence).

Investment Fund

An investment fund is a pool of funds established for investment purposes, which gathers funds from numerous investors and is managed by a professional fund management team for investment decision-making and fund management.

Investment funds are a very broad concept, and depending on different dimensions, investment funds can be divided into many different types. Venture capital funds are just a small subset among numerous categories.

Venture capital funds are usually products issued by venture capital institutions, and these fund products typically use Limited Partnership (LP) as the legal entity (this will be specifically discussed in the second article of this series). Limited Partnership funds have both general partners and limited partners. General partners are usually professional fund managers or teams responsible for investment decision-making and fund management. Limited partners are typically investors who do not participate in decision-making and only participate for financial returns.

Investment Club

An investment club refers to a group that pools funds together for collective investment. In other words, a group of people jointly contributes to establish a fund pool, conducts joint research on projects, and makes investment decisions (usually through voting). You can find the U.S. Securities and Exchange Commission's introduction to investment clubs here.

Compared to investment funds, this form of investment organization, investment clubs, is relatively simple in terms of operation, legal matters, and regulation, and the fund size is usually much smaller than that of investment funds.

Investment clubs are usually self-managed, with members taking turns to research and analyze investment opportunities, during which members also learn from each other and share knowledge.

Typically, investment clubs are not regulated by the Securities and Exchange Commission (SEC) and may not have the same level of transparency as investment funds.

The establishment and operation costs of investment clubs are usually lower than those of investment funds. Potential costs that members need to pay include meeting space, research materials, and legal fees. Investment funds typically charge higher fees, including management fees, administrative fees, and performance incentives for fund managers. Over time, these costs can erode the returns of fund investors.

Self-Directed Investment Club

There is also a type of investment club called a Self-Directed Investment Club, which differs from common investment clubs in that members, while also researching and selecting investment projects together, individually implement investment actions based on their own judgment rather than collectively investing funds.

Syndicate

Syndicate refers to a form of alliance between companies where multiple institutions jointly invest and share common returns. Typically, when a transaction exceeds the capacity of a particular institution or individual, that institution or individual will invite other participants to form a syndicate to jointly complete the transaction. Syndicates can be used in many financial scenarios, such as acquiring companies, purchasing real estate, etc. In the venture capital field, a syndicate is established for a specific investment project. The initiator of the syndicate is usually called the Lead Investor. This person or organization typically has extensive industry experience and can provide valuable guidance, contacts, insights, and help in business operations. The Lead Investor can be an individual or an institution.

Investment Community

In the crypto space, there are more active Investment Communities compared to the traditional financial sector. Some are formed by individuals skilled in venture capital, while others are groups of like-minded people based on decentralized venture capital concepts. These communities often have diverse mechanisms and typically adopt forms such as Investment Club, Self-Directed Investment Club, and Syndicate for specific investment projects.

Many crypto investment communities also choose to bind investment opportunities with community benefits through ERC20 or NFT. For example, Global Coin Research (GCR) uses $GCR as a ticket to investment opportunities and as an incentive for community contributions. This mechanism can maximize community value and make the community more sustainable.

Investment DAO

Investment DAO is a typical Decentralized Autonomous Organization (DAO) that can help communities or institutions establish a more trustworthy and secure fund operation and management system, while also enabling a democratic investment operation mechanism.

Compared to Investment Community, Investment DAO typically uses blockchain technology to raise and manage funds, and empowers different participants (investors, managers) through self-executing code (smart contracts) for automatic investment decisions. This is a risk investment operation based on emerging technology. Some typical Investment DAOs include The LAO, MetaCartel Ventures, Flamingo DAO, Barbarian DAO, and others.

However, compared to Investment Community, the initiation and participation threshold for Investment DAO is higher, mainly due to technical barriers. For example, they need to learn how to initiate an investment proposal and set relevant technical parameters. However, this situation is changing, as solution providers like DAOSquare are working to make it easier for traditional venture capital funds and investors to use DAO as a new tool and leverage its advantages, thus propelling venture capital into the next era. Additionally, the tool DAOhaus, adopted by many Investment DAOs, is also evolving. I believe that as more excellent tools emerge, more venture funds and investors will start to try and embrace Investment DAO.

If you are interested in Investment DAO, you can follow solutions dedicated to this field such as DAOSquare and DAOhaus. Of course, you can also reach out to us at any time with any related questions, and we will be happy to help.

Summary

Individual Investor: Individuals participating in venture capital, making investment decisions on their own, usually wealthy and with professional judgment.

Investment Fund: Multiple individuals pooling funds and entrusting them to a professional team for management, with the team responsible for finding and screening projects and making investment decisions.

Investment Club: Multiple individuals pooling funds, collectively searching, discussing, and screening projects, and making investment decisions together.

Self-Directed Investment Club: Multiple individuals pooling funds, collectively searching, discussing, and screening projects, but each making investment decisions and investments independently.

Syndicate: In the venture capital field, a temporary alliance established for a specific investment project.

Investment Community: A community formed by multiple individuals for investment purposes, referencing and combining traditional financial investment forms to invest, popular in the crypto space.

Investment DAO: Similar to Investment Community, a community formed by multiple individuals for investment purposes, but using blockchain technology to make fund management and investment decisions more trustworthy, secure, and democratic.

These are some common ways to participate in venture capital. Different industries, investment targets, and investor situations lead to different suitable ways of participation. If you are currently or planning to participate, I hope this article is helpful to you. In the next article, we will briefly discuss the common legal entity types in the venture capital field.

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