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What is venture capital?
Venture capital (VC) is a form of private equity that provides financial support for startups and companies with growth potential in the early stages of development.
For example, Binance Labs, the venture capital arm and accelerator of Binance, invests in new projects on the blockchain ecosystem.
The capital will be allocated to startups or developed companies that have a strong competitive advantage and want to scale their operations.
The goal of venture capital is to invest in potential projects, provide financial resources and strategic direction to support projects.
VC will own shares of the company (less than 50%), in return the companies will receive support in capital, technology and management training program. Besides, companies have access to the fund’s network of partners and they are advised by investment experts.
How does venture capital work?
Venture capital process
- Search and select potential projects to invest.
- Support companies by providing technology, consulting corporate governance strategy.
- Divest from companies by listing on the stock market, initial public offering (IPO), selling shares on the secondary market or transferring them to third parties.
Structure of venture capital
- Limited Partners (LP): provides funding for funds and investment financing for companies.
- Managing Partners (General Partners – GP): directly manage and allocate investment budgets.
- Principals: identify investment opportunities, look for potential promising companies, evaluate business ideas, negotiate acquisitions and divestments, lead the conduct of due diligence and analysis based on business models, products, financial capabilities, operational history of companies.
- Venture Partners: Veteran investment professionals define the strategic vision and advise the fund’s operations
Venture capital fee
- Management fee: Calculated as a percentage of assets under management (AUM), usually around 2% of the total committed capital.
- Organization fee: Application fee for projects range from $500 to $2,000. Besides, the fee is related to the development of a legal framework, the revision of documents, negotiations,…
- Operating fee: Calculated as a percentage of the return on investment, about 20%.
Investment stages of venture capital
Seed stage
This is the first round of VC, the investment fund provides a minimum amount of capital that helps companies develop business plans, do market research, and create viable products.
Early stage
Investment capital is allocated in series A, series B and series C rounds, companies are supported with capital greater than the seed stage to implement and develop business activities when product and service are available.
Late stage
This period was divided into series D, series E and series F. VC invest in more mature companies which are generating revenue. While the company may not yet be profitable, it promises strong growth prospects.
Benefits and risks of venture capital
Benefits
Projects that receive the support of venture capital will have the opportunity to promote their financial potential and develop business activities:
- Capital support: Projects and startups will receive the necessary capital support to implement business plans.
- Advisor: Projects will be supported by experienced experts from expertise to operation and corporate governance.
- Build and develop brands in the community with effective marketing strategies.
- Technical support, providing optimal technologies to operate the project.
- Access to the fund’s network of customers and partnerships, building sustainable collaborative communities.
- There is no need to fulfill the obligation to repay the capital even if the project succeeds or fails.
Risks
- Control: VC owns a large portion of equity, so it can participate in governance and have a great influence on the direction of operations and development of companies. Sometimes, projects will lose creativity because they have to pursue the profit goals that VC requires.
- Conflicts of interest: VC can pressure projects to pull out of the investment instead of long-term growth. Besides, VC is not bound to build the competitive position of startups, so they can invest in rival companies.
