Understanding the Capital Behind Venture Capital

Cathay Innovation
Cathay Innovation
Published in
7 min readSep 2, 2022


VC Insights for Investors & Emerging Fund Managers

By: Daniel Balmisse, Managing Partner, Cathay InnoSquare (Fund of Funds)

At Cathay InnoSquare, we invest in the next-generation of early-stage venture capital firms across the world because today, the best innovations can come from any corner of the globe. However, competition is fierce among VC firms and economic capital (or financial capacity) is no longer a differentiator, it’s a commodity — at least for companies seeking funding.

While current market conditions have been difficult for many startups, the reality is that top early-stage founders are still able to be selective about the investors they want to work with. As founders now think about building out their balance sheet the same way they build their team, it’s critical for today’s VC firms to demonstrate their value beyond capital.

Revisiting “capital” in the intangible economy era

Productive capital, or material wealth (money, physical assets, etc.) was well suited to the old economy. Now that we’ve entered the “intangibles” era, it’s time to revisit how we define capital. The work of Pierre Bourdieu offers a better sense of the true nature of capital behind venture capital — very often referred to as a people business. Bourdieu developed a multidimensional view not restricted to material wealth. He defined three other types of capital: cultural, social and symbolic.

While cultural capital encompasses cultural references, knowledge and behaviour, social capital represents the set of social relationships that can be leveraged for development. Finally, symbolic capital is a conceptual form that qualifies other types of capital as being legitimate or prestigious in various ways.

Multidimensional capital: the founder perspective

Founders naturally need access to economic capital (e.g., cash) to sustain startup growth. At a minimum, the financial capacity of the venture fund must be consistent with the needs of the startup — but today it’s no longer enough. Founders are looking for more.

In an increasingly competitive and globalised economy, building a company has not only become a race, but an ecosystem play. As competing startups vie for the same market, founders are well aware that the limited resources of their startup must grow tenfold from inception. They need a level of support that, at each development phase, can increase the odds of success by winning the race and becoming a market leader. To that aim, other forms of capital are now essential for founders:

Cultural capital: represents the knowledge, expertise and experience a firm offers through its team as well as the values it incorporates. Most firms highlight cultural capital through blogs, interviews or podcasts geared towards the entrepreneur community. Early-stage founders tend to be drawn towards knowledgeable investors with a strong entrepreneurial background, able to speak the same language and quickly understand their business. Working with investors with higher propensity of understanding helps avoid future potential friction with founders — saving time and energy for both entrepreneur and VC which should be laser-focused on company development.

Social capital: refers to personal and professional relationships that venture capitalists have developed over time. Well connected VC firms have become an integral resource for founders as a means to unearth new business development opportunities or unlock market insights. These types of networks, when effectively mobilised, are effective in fostering the development of the company in terms of business expansion with clients and/or partners, accelerating future funding, hiring high-profile experts etc.

Symbolic capital: this includes any form of capital and the perception it imposes. For example, a venture fund created by a well known, successful fintech entrepreneur would be highly symbolic and attractive for new founders in the same space.

Of note, these types of capital are self-reinforcing over time. As an example, strong cultural capital may increase symbolic capital which in turn, can expand social and economic capital.

Self reinforcing types of capital of a VC firm

Multidimensional capital: the next-gen VC perspective

Today, venture capitalists need clear differentiating factors — beyond specialising in a specific development stage. This has led VC firms to build and consolidate various forms of capital apart from economic.

Cultural capital takes priority as it draws in (or pushes away) founders looking for a strong cultural fit. Over the last few years, there’s been a noticeable shift from a transactional process model to a relationship model with founders looking for investors who understand the business, are agile and entrepreneurially minded. The new generation of early-stage VC firms often are created by former entrepreneurs or investors from established VCs branching out on their own. These managers have also developed simplified and agile processes to bring value to portfolio companies and make decisions more quickly — such as direct contact from day one between founders and general partners. Worth mentioning that oftentimes, the name of a next-gen VC firm is, to some degree, a developer of its DNA or its cultural capital roots.

On the other hand, social capital is critical as entrepreneurs look for funds that can support scaling their business. Social capital plays two major roles for a VC firm:

  1. Sourcing: it enables VCs to meet and select the best entrepreneurs and assess the investment opportunities they bring. This explains the emergence of the multitude of different models of early-stage firms built around various sourcing networks (e.g., technical communities, entrepreneurial communities, scouting networks, etc.)
  2. Portfolio support: it enables VCs to connect founders and CEOs with other startups to share common issues and experiences, with corporations for business development opportunities, and with high-profile operators for potential new hires. These supporting capabilities are also vital during the exit process to identify suitable financial advisors for an IPO or M&A and / or to get exposure to potential acquirers.

Symbolic capital naturally comes with established or successful VC firms that have become iconic brands of the industry. But next-gen VC firms may also exhibit symbolic capital by leveraging renowned entrepreneurs or experts in specific verticals — which will become even stronger if the firm invests in breakout companies in that industry.

Multidimensional capital: the LP perspective

LPs (limited partners) who have a long-standing relationship with established firms often default to re-upping into oversubscribed funds due to symbolic capital — offering “safe exposure” to the VC asset class. These firms also offer strong cultural, social and economic capital, given their long-standing operations in the industry, and have expanded the size of their funds over time while moving to later-stage and growth investments.

However, next-gen fund managers likely lack significant economic (and symbolic) capital — leaving them to rely more heavily on cultural and social capital to develop their franchise. But the expertise these managers bring, very often as former operators, is highly valued by founders who consider them less as traditional investors and more like “entrepreneurs backing entrepreneurs.” Given their specialisation, these VC firms also have a powerful network of C-level profiles that can provide insights, advice and identify business development opportunities for portfolio companies.

Of note, social capital should be assessed not only through the size of the network — but by the people within it and the level of influence in their sector.

Over time, the success of next-gen funds will reinforce symbolic capital — this is why assessing cultural and social capital, while selecting those with the best product-market fit, should be integral to the due diligence process. Investing early in these kinds of funds is a good way to build strong relationships with the industry’s future stars while they are still accessible to new LPs — before they significantly reinforce symbolic capital.

Parting thoughts: cultural & social capital’s increasing role in the future of the VC industry

While we may be facing much uncertainty in the markets, you can always invest in global innovation — as this is where our future is built today more than ever. Nevertheless as the venture capital industry continues to evolve, GPs at next-gen early-stage VC firms must adapt by nurturing the multidimensional forms of capital. Firms that have solid cultural and social capital offer unique product-market fit for founders — competing with established firms who may have grown out of seed and early-stage investments.

The traditional due diligence process for LPs, primarily focusing on economic capital (fund size, investment strategy, portfolio construction), fund management team dynamics and track record, may prevent investment in next-gen VC funds. But while these elements are of importance, a limited track record can be counterbalanced by strong cultural and social capital as they both increasingly play a key role in sourcing and getting into the best deals early.

Venture Capital firms that understand the new forces at play will constantly assess and reinforce the true nature of their capital — helping them become more competitive, win the best deals and generate outstanding performances. Insightful LPs who understand the shifting dynamics of the VC industry will consider cultural and social capital when assessing next-gen VC firms — helping them select the best up and coming firms.



Cathay Innovation
Cathay Innovation

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