A Brief Discussion on Venture Capital #1: Common Forms of Participation

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 also refers to the financial industry involved in funding these early-stage companies or projects. Organizations engaged in venture capital are known as venture capital funds or venture capital firms.

The purpose of venture capital is to generate substantial investment returns by providing capital and other forms of support to early-stage companies, helping them achieve success.

Venture capital typically occurs in the early stages of startups.

Venture capital is characterized by high risk and high returns.

Venture capital not only offers financing but often also provides strategic, operational, and management advice.

If you’re considering getting involved in venture capital, you usually have several options: investing as an individual investor, joining organizations in the venture capital field for collective investment, or investing through financial products issued by venture capital organizations. This is our first topic of discussion: the various ways to participate in venture capital.

In this article, we will try 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 typically belong to a relatively wealthy demographic. They provide funding to startups on a personal basis using their own money and manage their own investment risks.

Since it’s often difficult for startups to secure institutional investment in their early stages and the financing needs of these startups are relatively smaller compared to later stages, many startups opt to seek financial support from wealthy individual investors or friends and family. Many wealthy individuals are active in angel or seed rounds and are often referred to as angel investors. (Institutions participating in angel rounds are also considered angel investors.)

Well-known angel investors include Peter Thiel (PayPal co-founder, 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), and Lei Jun (founder of Xiaomi) among others.

However, being an individual investor often requires professional judgment, abundant funds, and access to projects, meaning the barriers to becoming a successful individual investor are relatively high. Therefore, many people choose to join investment institutions or purchase products issued by venture capital firms to participate.

Note: Different legal jurisdictions have different regulations regarding investor qualifications. For example, the U.S. Securities and Exchange Commission (SEC) defines an accredited investor as someone who has earned income exceeding $200,000 (or $300,000 together with a spouse) in the past two years or has a net worth over $1 million (excluding the value of the person’s primary residence).

Investment Fund

An Investment Fund is a pool of funds established for investing. It collects capital from numerous investors and is managed by a professional fund management team that makes investment decisions and manages the funds.

Investment Fund is a very broad concept. Depending on different dimensions, investment funds can be classified into many different types. Venture capital funds are just a tiny subclass among many categories.

Venture capital funds are usually products issued by venture capital firms. These fund products typically adopt the Limited Partnership (abbreviated as LP) as their legal entity (this will be specifically introduced in the second article of this series). In a Limited Partnership structure, there are two roles: the general partner and the limited partner. The general partner is usually a professional fund manager or team, responsible for investment decisions and management. Limited partners are the investors who do not participate in decision-making and are only involved for financial returns.

Investment Club

An Investment Club refers to a group that pools funds together for collective investment. That is, many people jointly contribute to a pool of funds, research projects together, and make investment decisions (usually through voting). You can view the introduction to investment clubs by the U.S. Securities and Exchange Commission here.

Compared to investment funds, investment clubs are relatively simpler in terms of operation, legal, and regulatory aspects, and usually have a much smaller amount of capital.

Investment clubs are typically self-managed, with members taking turns to research and analyze investment opportunities. In this process, members also learn from each other and share knowledge.

Usually, 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 setup and operational costs of an investment club are usually lower than those of investment funds. Potential costs for members include meeting space, research materials, and legal fees, whereas investment funds typically charge higher fees, including management fees, administrative fees, and performance rewards to the fund manager. Over time, these costs can erode the returns of fund investors.

Self-Directed Investment Club

There is also a type of investment club known as a Self-Directed Investment Club. Different from typical investment clubs, members of a Self-Directed Investment Club also research and select investment projects together, but they execute investment actions individually based on their own judgments instead of pooling funds for collective investment.

Syndicate

A syndicate refers to a form of alliance between companies where multiple institutions jointly contribute capital and share common profits. Typically, when a transaction exceeds the capability of an institution or individual, they may invite other participants to form a syndicate to complete the transaction together. Syndicates can be used in many financial scenarios, such as corporate acquisitions or real estate purchases. In the venture capital domain, a syndicate is a temporary alliance formed for a specific investment project. The initiator of a syndicate is commonly known as the Lead Investor. This individual or organization usually has extensive industry experience and can provide valuable guidance, connections, and insights, as well as business assistance. A Lead Investor can be either an individual or an institution.

Investment Community

Different from the traditional financial sector, the Crypto space is vibrant with more Investment Communities, some of which are formed by one or several individuals proficient in venture capital, while others are groups of like-minded people gathered based on the concept of decentralized venture capital. These communities often have diverse mechanisms and typically adopt forms like Investment Clubs, Self-Directed Investment Clubs, or Syndicates for different specific investment projects.

Many crypto investment communities also choose to tie investment opportunities to community benefits through ERC20 or NFT formats. For example, Global Coin Research (abbreviated as GCR), where $GCR serves as a ticket to investment opportunities and is also used to incentivize community contributions. Such mechanisms can maximize community value and enhance community sustainability.

Investment DAO

Investment DAO represents a typical Decentralized Autonomous Organization (DAO) that can help communities or institutions establish more trustworthy and secure fund operation and management systems. It also enables a democratic investment mechanism.

Compared to Investment Communities, Investment DAOs usually employ blockchain technology to raise and custody funds and empower different participants (investors, managers) through automatically executable code programs (smart contracts), and then make investable decisions through them. This represents a risk investment operation method based on emerging technology. Some typical Investment DAOs include The LAO, MetaCartel Ventures, Flamingo DAO, Barbarian DAO, etc.

However, compared to Investment Communities, the threshold for initiating and participating in Investment DAOs is higher, mainly due to technical barriers. For example, they need to learn how to launch an investment proposal and set relevant technical parameters. Nevertheless, this situation is changing, as solution providers focused on this field, such as DAOSquare, are dedicated to making it easier for traditional venture capital funds and investors to use DAO tools and leverage their advantages, thereby propelling venture capital into the next era. Moreover, tools adopted by many Investment DAOs, like DAOhaus, are continuously evolving. I believe that as more and more excellent tools emerge, an increasing number of venture funds and investors will begin to try and embrace Investment DAOs.

If you’re interested in Investment DAOs, you can follow DAOSquare, DAOhaus, and other solution providers in the field. Of course, you’re also welcome to ask us any related questions, and we’ll be happy to help.

Summary

Individual Investor: Refers to individuals who participate in venture investments on their own, making investment decisions personally. They are usually wealthy individuals with the ability to make professional judgments.

Investment Fund: Involves multiple individuals pooling their money together, entrusting it to a professional team to manage. This team is responsible for finding, screening, and making investment decisions on projects.

Investment Club: A group of individuals pool their funds to collectively search for, discuss, and screen investment projects, making investment decisions together.

Self-Directed Investment Club: Similar to an investment club, individuals pool their funds together to search for, discuss, and screen projects. However, each member makes their own investment decisions and invests independently.

Syndicate: In the context of venture investment, a syndicate is a temporary alliance formed for a specific investment project.

Investment Community: A community formed with the purpose of investing, where members come together to invest in a manner that references and combines traditional financial investment forms. This is particularly popular in the Crypto domain.

Investment DAO: Similar to an investment community, it is a community formed for the purpose of investing. What sets it apart is the use of blockchain technology to make fund management and investment decisions more trustworthy, secure, and democratic.

These are some common methods of participating in venture investments. The most suitable method varies depending on the industry, investment targets, and the investors’ circumstances. If you are currently or planning to participate in any of these, hopefully, this article has been helpful. In the next article, we will briefly discuss the common types of legal entities in the venture investment field. For example, what legal entities are typically used by Investment Funds and Investment DAOs? Stay tuned!

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