Venture capital or VC is a kind of private equity and a kind of investing where investors(venture capitalists) provide funds to startups and smaller businesses that they believe will grow in the future. Generally, venture capital is provided in the form of money, however, it can also come in the form of managerial or technical expertise.
Broadly speaking, venture capital is only allocated to those companies that either show promise, or have shown outstanding results. With that being said, enjoying the benefits of venture capital is a faraway dream for most of us. It generally takes thousands of dollars to even approach the complex network of entrepreneurs, investors, stakeholders, and more that resides in the venture capital space.
However, recent Web3 advancements, with companies like Hectagon at their forefront, are trying to bring venture capital to the masses. In this article, we’ll be going over how venture capital firms make money, as well as how these companies are aiming to be the Robinhood of VC.
How Do Venture Capital Firms Make Money?
The core principle of how venture capitalists make money is quite simple- they invest in a company or startup they believe is undervalued, or is poised for significant growth at an early stage of development. In exchange, they get a share of equity at the company, which they later sell off when they feel that they’ve made significant returns.
There are two main reasons why venture capitalists have an advantage over the rest of us when it comes to investing in these companies:
They Come In At An Early Stage In Development
Venture capitalists invest in companies very early, sometimes even before they’ve finished their first product. This lets them get a great deal on pricing when it comes to equity, as startups are generally craving money at this stage.
For example, if a startup is looking to develop a project that costs $100,000, it’s quite likely they’ll rely on a good chunk of that money coming from venture capitalists. Once given funds to facilitate this, they’ll provide them with equity in return.
If the company is successful, the value of their share in the company will grow. Most venture capitalists, expect a growth of at least 25-30% before they feel that they’ve gotten their investment’s worth.
At this point, they’ll either trade their shares for money directly or wait for the startup’s IPO(initial public offering) and sell off their shares to the public.
Investing Before The Public
The IPO is generally when most of us first become able to invest in a certain company. However, this is long after venture capitalists have gotten their slice of the pie. Since the public only gets to invest after them, they get the unique advantage of being one of the only ones to be able to purchase equity in the company before they go public.
Now, it’s possible for a member of the public to invest in a VC. This is generally done through a venture capital fund. These funds are managed by general partners who essentially make decisions on which company to invest in, while the limited partners(the investors providing the fund money) reap some of the benefits.
However, if you want to do this, most funds will require a large initial investment, in addition to you only receiving generally around 80% of the fund’s profits, while the other 20% is pocketed by the general partners. However, this might be about to change.
Can DAO and Web3 make it easier for us normal people to invest?
It’s no secret that Web3 and DeFi have made massive changes in the financial landscape in the last few years. They’ve changed everything, ranging from many of us replacing banks with DEXs, to DAOs being one of the most popular business structures out there.
A DAO, or decentralized autonomous organization, is an organization ruled over by a transparent smart contract and is only governed by its members rather than any kind of central authority.
DAOs make it much easier for the public to hold equity in a Web3 firm. After all, all you need to do in order to have sway over a DAO’s decisions is to hold a significant number of tokens. From that point on, you can vote on decisions within the company, or decide to sell your tokens entirely.
Then you have firms like Hectagon, platforms that provide easy-to-use systems with no minimum buy amounts that allow you to engage in venture capital easily. Furthermore, since most of these platforms are DAOs themselves, you can invest in their tokens in order to hold sway over what decisions are made internally.
Venture capital is one of the most lucrative investment opportunities out there. However, due to the steep buy-in cost of investing in venture capital funds, most members of the public will never be able to afford it through conventional avenues.
Thankfully, DAOs like Hectagon are aiming to change this. With Web3 firms like this aiming to revolutionize the VC world by giving access to it to everyone. With Hectagon’s TGE coming on the 8th of August, we’re looking forward to seeing if they can make the project a success.If they’re successful, we have no doubts we’ll be looking at a new age of venture capital.