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What Is a Venture Capitalist?

Understanding venture capitalists, venture capital structure, the bottom line.

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Venture Capitalists Definition: Who Are They and What Do They Do?

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

venture capitalist business model definition

Skylar Clarine is a fact-checker and expert in personal finance with a range of experience including veterinary technology and film studies.

A venture capitalist (VC) is a private equity investor that provides capital to companies with high growth potential in exchange for an equity stake. A VC investment could involve funding startup ventures or supporting small companies that wish to expand but have no access to the equities markets .

Key Takeaways

A venture capitalist (VC) is an investor who provides young companies with capital in exchange for equity.
Startups often turn to VCs for funding to scale and commercialize their products.
Due to the uncertainties of investing in unproven companies, venture capitalists tend to experience high rates of failure.
However, the rewards are substantial for those investments that do pan out.
Some of the most well-known venture capitalists are Jim Breyer, an early investor in Facebook, and Peter Fenton, an investor in X (formerly Twitter).

Investopedia / Joules Garcia

Venture capitalist firms are usually formed as limited partnerships (LPs) where the partners invest in the VC fund. A committee is usually tasked with making investment decisions. Once those promising emerging growth companies are identified, the pooled investor capital is deployed to fund these companies in exchange for a sizable equity stake.

Contrary to common belief, VCs do not normally fund a startup at its outset. Instead, VCs seek to target firms bringing in revenue and looking for more money to commercialize their ideas. The VC fund will buy a stake in these firms, nurture their growth, and look to cash out with a substantial return on investment (ROI) .

Venture capitalists typically look for companies with a strong management team, a large potential market, and a unique product or service with a strong competitive advantage. They also look for opportunities in industries that they are familiar with, as well as the chance to own a large percentage of the company so that they can influence its direction.

VC firms control a pool of various investors' money, unlike angel investors , who use their own money.

VCs are willing to risk investing in such companies because they can earn a massive return on their investments if they are successful. However, VCs experience high rates of failure due to the uncertainty involved with new and unproven companies.

Wealthy individuals, insurance companies, pension funds , foundations, and corporate pension funds may pool money in a fund to be controlled by a VC firm. The venture capital firm is the general partner (GP), while the other companies/individuals are limited partners (LP). All partners have part ownership of the fund.

The general structure of the roles within a venture capital firm varies among firms, but they can be broken down into roughly three positions:

Associates : These individuals usually come to VC firms with experience in either business consulting or finance and, sometimes, degrees in business. They tend to do more analytical work, analyzing business models, industry trends, and sectors. They also work with the companies in a firm's portfolio. Although they do not make key decisions, associates may introduce promising companies to the firm's upper management.
Principals : A principal is a mid-level professional. They usually serve on the boards of portfolio companies and ensure that they operate without major hiccups. Principals are also in charge of identifying investment opportunities for VC firms and negotiating terms for both acquisition and exit. Principals are on a "partner track" that depends on the returns they can generate from the deals they make.
Partners : The higher profile partners primarily identify areas or specific businesses to invest in, approve deals (whether investments or exits), occasionally sit on the board of portfolio companies, and generally represent their VC firms.

The VC firm, as the GP, controls where the money is invested. Investments are usually in businesses or ventures that most banks or capital markets avoid due to the high degree of risk.

Venture capitalists must follow regulations as they conduct their business. Private equity firms and venture capitalists fall under U.S. Securities and Exchange Commission (SEC) regulatory control. Banks and other financial institutions must follow anti-money laundering regulations.

Venture capital fund managers are paid management fees and carried interest . Depending on the firm, roughly 20% of the profits are paid to the company managing the private equity fund, while the rest goes to the limited partners who invested in the fund. General partners are usually due an additional 2% fee.

History of Venture Capital

The first venture capital firms in the U.S. started in the mid-twentieth century. Georges Doriot, a Frenchman who moved to the U.S. to get a business degree, became an instructor at Harvard's business school and worked at an investment bank. In 1946, he became president of American Research and Development Corporation (ARDC), the first publicly funded venture capital firm.

ARDC was remarkable in that, for the first time, a startup could raise money from private sources other than wealthy families. Previously, new companies looked to families such as the Rockefellers or Vanderbilts for the capital they needed to grow. ARDC soon had millions in its account from educational institutions and insurers. Firms such as Morgan Holland Ventures and Greylock Partners were founded by ARDC alums.

Startup financing began to resemble the modern-day venture capital industry after the passing of the Investment Act of 1958. The act enabled small business investment companies to be licensed by the Small Business Administration (established five years earlier).

Venture capital, by its nature, invests in new businesses with great growth potential (but also an amount of risk substantial enough to scare off lending by banks). Fairchild Semiconductor (FCS), one of the earliest and most successful semiconductor companies, was the first venture capital-backed startup, setting a pattern for venture capital's close relationship with emerging technologies in the San Francisco Bay Area.

Venture capital firms in that region and period also established the standards of practice used today. They set up limited partnerships to hold investments, with professionals acting as general partners. Those supplying the capital would serve as passive partners with more limited control. The number of independent venture capital firms increased in the following decade, prompting the founding of the National Venture Capital Association in 1973.

Venture capital has since grown into a hundred-billion-dollar industry. Today, well-known venture capitalists include Jim Breyer, an early Facebook ( META ) investor, Peter Fenton, an early investor in X, and Peter Thiel, the co-founder of PayPal ( PYPL ).

$348 billion

The record-setting value of all U.S. venture capital investments in 2021. The following two years posted other impressive figures, with 2022 venture capital activity valued at $242.2 billion and total capital in 2023 at $170.6.

How Are Venture Capitalist Firms Structured?

VC firms typically control a pool of funds collected from wealthy individuals, insurance companies, pension funds, and other institutional investors. Although all of the partners have partial ownership of the fund, the VC firm decides how the monies will be invested. Investments are usually made in businesses with attractive growth potential that are considered too risky for banks or capital markets. The venture capital firm is referred to as the general partner, and the other financiers are referred to as limited partners.

How Are Venture Capitalists Compensated?

Venture capitalists make money from the carried interest of their investments, as well as management fees. Most VC firms collect about 20% of the profits from the private equity fund, while the rest goes to their limited partners. General partners may also collect an additional 2% fee.

What Are the Prominent Roles in a VC Firm?

Each VC fund is different, but their roles can be divided into roughly three positions: associate, principal, and partner. As the most junior role, associates are usually involved in analytical work, but they may also help introduce new prospects to the firm. Principals are higher-level and more closely involved in the operations of the VC firm's portfolio companies. At the highest tier, partners are primarily focused on identifying specific businesses or market areas to invest in and approving new investments or exits.

Venture capitalists are investors who form limited partnerships to pool investment funds. They use that money to fund startup companies in return for equity stakes in those companies. VCs usually make their investments after a startup has been bringing in revenue rather than in its initial stage.

VC investments can be vital to startups because their business concepts are typically unproven and, thus, they pose too much risk for traditional providers of funding.

Harvard Business School, Baker Library Historical Collections. " Georges F. Doriot ."

Cambridge Historical Society. " Innovation in Cambridge ."

Small Business Administration. " Small Business Investment Act of 1958 ."

Small Business Administration. " Organization ."

Fairchild Semiconductors. " History of Fairchild ."

U.S. Securities and Exchange Commission. " Speech by SEC Staff: The Future of Securities Regulation ."

National Venture Capital Association. " NVCA Celebrates 50 Years of Empowering the Entrepreneurial Ecosystem ."

National Venture Capital Association. " About Us ."

National Venture Capital Association. " PitchBook-NVCA Venture Monitor Q4 2023 ," Page 6.

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Understanding The VC Business Model Investor Dany Farha addresses the business model of venture capital, and what it takes to for VCs to take calculated risks investing in startups: a strong entrepreneurial team that is mission-driven.

By Dany Farha • May 29, 2016

Opinions expressed by Entrepreneur contributors are their own.

You're reading Entrepreneur Middle East, an international franchise of Entrepreneur Media.

Firstly, we need to address the business model of venture capital (VC), and in doing so, dispel the myth that VC is a "gamble," where we invest and hope for the best. The business model of more traditional investment asset classes such as private equity and asset management is governed by the mathematical concept of outperforming on a normal distribution graph. That means that most investments end up slightly below or ahead of the mean/median, and those investors that outperform an index, end up with a slightly higher weighting of their investments to the right of the mean/median. In VC, our business model is governed by the "power law:" what this means in essence, is that out of every ten early-stage investments , around two will create all the returns and the rest will underperform by generating little to no returns. Once this concept has been understood, it is then easier for our investors to understand our business model.

We are in the business of taking calculated risks investing in strong entrepreneurial teams. The other key mathematical driver to understanding our business model is that we invest in <1% of the deals that we see every year. That means if we see 1000 deals, which we are on track to see this year, we will invest in <10 deals at the early stages. It is worth noting that we have waited four years for the MENA ecosystem to grow and mature to a level whereby we will see 1000 deals this year. The final mathematical concept for investors to understand is that of "discipline," which is the discipline we have to maintain in only following on with further funds in those teams who demonstrate strong execution amongst other business drivers.

Related: Middle East VCs Give You Three Industry Insider Rules To Note

How the deal flow works

Top quartile VC funds generate strong returns of > 30% internal rate of returns (IRRs). The top one percentile, meaning those that generate better returns than 99% of their peers, generate outstanding returns of 70%, and even 90% in some cases. These top one percentile firms invest in 0.5% of the deals they see, have three or four companies generating multiple times the entire size of the vintage in question, and a small proportion of their dry powder goes to the investments that don't perform, in some cases as little as 20%, which comes down to a rigorous and disciplined approach to deploying follow-on funds.

These top one percentile firms receive the best deal flow which comes down to having a team of partners who hail from entrepreneurial backgrounds, being ex-founder's matched by functional experts, who work tirelessly to grow their ecosystem and specifically their portfolio companies. We at BECO have configured ourselves accordingly and are building out a family of mission-driven entrepreneurs and functional experts to make a significant impact in finding and funding the best teams to build large businesses that can make a tremendous impact on our region and make it a better place to live and work.

Related: Making Monetary Sense: How To Understand Your VC Term Sheet

Why your mission matters

This brings us to the next extremely important matter: mission. We believe that the best entrepreneurs are mission-driven which drives them with the passion required to obsess about solving a big problem, no matter how hard things get. We ourselves at BECO are mission-driven. Our mission is to leapfrog our region to participate in the technological revolution that is upon us and is only going to accelerate over the coming decades.

We believe that investors have bought into our vision, mission and strategy, and once on board, they will support us when they can, but broadly, they give us the freedom to execute. We have a strong fiduciary obligation to our shareholders and with this ensure a very high level of governance around keeping our shareholders updated on our progress. We do this by sending out regular business updates, newsletters, detailed semiannual and annual reports, audited financial statements, and we organize an annual general meeting where we present the past, present and future with detailed updates from the BECO team, portfolio companies and the professional service providers that we work with to produce accurate and high quality reporting. All this is supported by a very high quality board of directors, who meet at least quarterly and work tirelessly to steer, ensure shareholder value creation and accountability through a strong best in class governance framework.

This is no different to what we as investors expect from our portfolio companies and hence, we lead by example, and expect the same excellence.

Related: Swaying A VC In Your Favor: Five Questions That Can Make Or Break The Deal

Co-founder and CEO, BECO Capital

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Venture Capitalist (VC)

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on November 23, 2023

Get Any Financial Question Answered

Table of contents, venture capitalist definition.

A Venture Capitalist is a private investor that provides early capital to new companies that exhibit a strong potential for growth and success. This is typically in exchange for a significant equity stake.

Venture Capitalists can provide funding for startups or small businesses in need of capital that do not have access to equities markets because the companies are too new.

The projects they invest in are usually high risk / high reward ventures.

As such they are unappealing investments to most investors, especially those who are risk averse, but prime targets for venture capitalists who are willing to accept a greater risk for a potentially greater payout.

What Does a Venture Capitalist Do?

Venture capital investors usually come together to create limited partnerships, or LPs , where members contribute to a pool of funds .

These funds will often be overseen by a committee tasked with identifying companies with emerging growth potential, making investment decisions, and deploying investor capital.

Identify and Nurture Promising Startups

VCs possess a keen eye for spotting potential. They sift through thousands of startup pitches, seeking out those golden ideas with disruptive potential.

Once they identify a promising startup, they don't just provide funds; they nurture these companies, guiding them through the treacherous waters of the business world.

Not all startups are created equal. It's the VC's role to pinpoint those with the best chances of success, often relying on a combination of market analysis, intuition, and experience.

They then help these startups refine their vision and strategy, setting them on a path to success.

Provide Capital and Strategic Support

While funding is essential, VCs offer more than just capital . They bring a wealth of experience, industry contacts, and strategic insight to the table.

This support can be invaluable for a fledgling company, providing mentorship and opening doors to partnership opportunities. Venture capitalists can also play a pivotal role in guiding a startup's growth trajectory.

From organizational structure to hiring decisions, the strategic support offered by VCs can help startups navigate complex decisions and avoid common pitfalls.

Facilitate Growth and Scaling Opportunities

As startups mature, they face the challenge of scaling — growing their operations to meet increasing demand without compromising on quality or efficiency.

VCs play a crucial role here, leveraging their resources and network to help these businesses expand responsibly and sustainably.

Furthermore, venture capitalists may introduce startups to potential partners, clients, or even future employees.

These introductions can propel a startup's growth, helping them reach new markets and tap into larger customer bases.

Types of Venture Capitalists

Angel investors.

Angel investors are affluent individuals who provide capital to startups in exchange for ownership equity or convertible debt.

Often, they're the first external investors in a new business, stepping in when the risk is highest.

While they invest smaller amounts than other types of VCs, angel investors can offer invaluable mentorship and guidance.

Many are seasoned entrepreneurs themselves, eager to give back to the next generation of innovators.

Corporate Venture Capitalists (CVCs)

Corporate Venture Capitalists (CVCs) are subsidiaries of larger corporations that invest in startups.

They often seek startups that align with the parent company's strategic goals, providing not just funds but also access to resources, distribution channels, and a vast network.

CVCs differ from traditional VCs in that they typically prioritize strategic returns over financial ones.

Their investments are a way to foster innovation, explore emerging markets, and maintain a competitive edge.

Venture Capital Firms

Venture capital firms are professional groups that manage pooled funds from many investors to invest in startups and small businesses.

They come with a team of professionals experienced in various aspects of business, from technology to marketing.

Such firms typically have a more extended investment horizon and can provide larger amounts of capital compared to angel investors or CVCs.

They also bring rigorous due diligence processes and a vast network of resources and contacts to their portfolio companies.

Venture Capital Process

Deal sourcing and screening.

VCs constantly search for promising startups, attending pitch events, networking sessions, or even tapping into their networks. Once potential deals are sourced, they're screened to shortlist the most promising candidates.

During the screening process, VCs look for startups that fit their investment criteria. This could be based on the startup's industry, stage of development, market potential, or any other specific criteria the VC prioritizes.

Due Diligence and Evaluation

Once a startup is shortlisted, VCs dive deep into due diligence . They assess the startup's business model, financial projections, management team, market potential, and more.

This rigorous evaluation is crucial to determine the startup's valuation and potential return on investment .

It's during this phase that VCs might consult industry experts, conduct market research, or even visit the startup's operations. The goal is to ascertain the potential risks and rewards of the investment.

Term Sheet Negotiation

If a VC decides to move forward, they draft a term sheet. This document outlines the terms of the investment, including the amount of capital, the equity offered in return, and other conditions of the investment.

It serves as a blueprint for the official investment contract. Negotiating the term sheet can be intricate, as both parties work to protect their interests.

Common points of contention include valuation , equity stake, and clauses related to governance or exit strategies.

Investment Decision and Funding

With the term sheet agreed upon, the VC makes the official investment decision. If the decision is positive, funds are transferred to the startup in exchange for equity or other agreed-upon terms.

This capital injection often serves as a lifeline for startups, allowing them to scale operations, hire key personnel, invest in marketing, or develop new products.

Post-investment Monitoring and Value Addition

The VC's role doesn't end with funding. They continually monitor their investments , often taking board positions to influence the startup's direction.

They also seek to add value, providing mentorship, opening networking opportunities, and guiding the startup through challenges.

For VCs, this active involvement maximizes the chances of a successful exit, be it through an initial public offering (IPO) , a merger, or an acquisition .

Financing Methods of Venture Capital

Seed funding.

Seed funding is the initial capital that startups raise, often used to validate their business idea or develop a prototype.

It's a small amount of capital, provided when the risk is high but the potential for growth is evident.

This financing helps entrepreneurs bridge the gap between ideation and creating a market-ready product.

For VCs, seed funding offers an opportunity to invest early, securing a larger equity stake for a smaller investment.

Series A, B, C, etc.

As startups grow, their capital requirements evolve. Series A, B, C, and so on represent successive rounds of financing, each catering to a specific growth phase.

Series A typically focuses on optimizing the business model and scaling operations. By Series B, the startup has a proven track record, and funds might go towards expanding into new markets.

Series C and beyond often target further scaling, acquisitions, or even preparations for an IPO.

Mezzanine Financing

Mezzanine financing is a hybrid of debt and equity financing, typically used by startups preparing for an IPO.

It provides immediate capital without diluting ownership, as the funds are structured as debt that can convert to equity if not repaid by a specified date.

For VCs, mezzanine financing offers a final opportunity to invest before a company goes public. It comes with higher risks but can offer substantial returns if the IPO proves successful.

Bridge Financing

Bridge financing is a short-term loan that provides immediate capital to startups facing a temporary cash crunch.

It's called "bridge" financing because it bridges the gap between immediate financing needs and long-term funding solutions, such as the next round of equity financing.

For VCs, bridge loans can be a way to support their existing investments, ensuring that the startup remains solvent and continues to grow until the next financing round.

Venture Capital Investment Strategies

Sector focus.

Different VCs have distinct areas of expertise and interest. Some may focus exclusively on technology startups, while others may be drawn to the healthcare or clean energy sectors.

This specialization allows VCs to harness their expertise and network, maximizing the potential for successful investments.

Having a sector focus also means VCs can offer targeted support to their portfolio companies, guiding them through industry-specific challenges and trends.

Geographic Focus

Just as VCs may specialize in sectors, they can also have a geographic focus. Some might prioritize local startups, believing in the potential of their home market.

Others might have an international focus, seeking out the best opportunities worldwide. This geographic strategy shapes a VC's investment decisions, deal sourcing methods, and post-investment support.

For instance, a VC focused on international investments might have a network that spans multiple countries, aiding startups in global expansion.

Stage Focus

Different startups require different support. Early-stage startups might need guidance refining their product, while late-stage ones might seek help navigating the complexities of an IPO.

VCs often have a stage focus, aligning their expertise with startups at a particular development phase.

This focus dictates the size and type of investments a VC makes, as well as the kind of support and mentorship they provide to their portfolio companies.

Portfolio Diversification

Like all investors, VCs aim to diversify their portfolios . By investing in a mix of sectors, geographies, and stages, they spread their risk, increasing the chances of a few high-performing investments offsetting any underperformers.

Diversification isn't just about spreading risk. It's also a way for VCs to tap into various markets, trends, and opportunities, ensuring they're always at the forefront of innovation.

Challenges Faced by Venture Capitalists

Market volatility and economic conditions.

Venture capitalists operate in a world of uncertainty. Market volatility can significantly affect a startup's prospects, with economic downturns, geopolitical events, or industry shifts turning a promising investment sour.

VCs must constantly monitor these factors, adjusting their strategies and providing guidance to their portfolio companies on navigating these turbulent waters.

Startups' Failure Rate

The harsh reality is that many startups fail. Whether it's due to market conditions, poor management, or simply a product that doesn't resonate, VCs face the risk of their investments not yielding returns.

This inherent risk is why VCs conduct rigorous due diligence before investing and remain actively involved post-investment. However, even with these measures, the failure rate remains a persistent challenge.

Illiquidity and Exit Challenges

Venture capital investments are typically illiquid, meaning VCs can't easily convert them into cash. They rely on exit strategies like IPOs, mergers, or acquisitions to realize their returns.

However, successful exits aren't guaranteed. An IPO might underperform, acquisition offers might be lower than expected, or a merger might fall through.

These challenges highlight the importance of a VC's strategic guidance, ensuring their portfolio companies are positioned for successful exits.

Regulatory and Legal Risks

Venture capitalists must navigate a complex web of regulations and legal considerations.

From ensuring compliance with investment laws to navigating international regulations when investing abroad, VCs face constant legal challenges.

Moreover, as the regulatory landscape evolves, VCs must adapt, ensuring their investments remain compliant and that they're aware of any new opportunities or constraints these changes might bring.

Venture Capital Investment Strategies and Challenges

Common Misconception About Venture Capitalists

Contrary to popular opinion, venture capitalists do not commonly fund startups from the onset.

Rather, they look for companies that are at the point of preparing to commercialize their idea, when they have the highest potential for growth.

When evaluating a company, venture capitalists look for strong management, a significant potential market, and unique products or services that have a competitive edge.

Venture Capitalists are private investors who provide early capital to new companies in exchange for significant equity stakes.

By identifying and nurturing promising startups, venture capitalists ensure that innovative ideas get the financial backing and strategic support needed to succeed.

They offer more than just capital, their vast experience, industry contacts, and strategic insight guide startups through the challenges of the business world.

Moreover, venture capitalists facilitate growth and scaling opportunities, leveraging their resources and network to help businesses expand responsibly.

However, venture capital investing comes with its challenges, such as market volatility, startups' failure rate, illiquidity, and regulatory risks.

Nonetheless, by employing diversified investment strategies and thorough due diligence, venture capitalists aim to generate attractive returns while supporting the growth of the next generation of innovators.

Venture Capitalist (VC) FAQs

What is a venture capitalist.

A venture capitalist is a private investor who provides early capital to new companies that exhibit a strong potential for growth and success.

What do Venture Capitalists do?

Venture capital investors usually come together to create limited partnerships, or LPs, where members contribute to a pool of funds that are used to invest in companies with emerging growth potential.

When do Venture Capitalists usually invest in companies?

Contrary to popular opinion, venture capitalists look for companies that are at the point of preparing to commercialize their idea, when they have the highest potential for growth.

Is it risky to be a Venture Capitalist?

Investments from venture capitalists are usually high risk/high reward. As such they are unappealing investments to most investors, especially those who are risk averse,. These are prime targets for venture capitalists who are willing to accept a greater risk for potentially greater payout.

What do Venture Capitalists look for in a company?

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Exploring the Ins and Outs of Venture Capital (VC)

Venture Capital (VC) is an essential pillar of the startup ecosystem, providing vital funding, expertise, and strategic guidance to promising companies in their early stages. It is the fuel that empowers entrepreneurs to transform bold ideas into disruptive realities.

In this blog, we invite you to explore the captivating world of Venture Capital (VC) and discover the driving force behind its success—Venture Capitalists. These visionary investors possess a unique ability to identify and nurture high-potential startups, propelling them towards market dominance and exponential growth.

What is Venture Capital (VC)?

The concept of venture capital (VC) centres around supporting these companies during their early stages when they have limited access to traditional funding sources. Venture capitalists not only provide financial investment but also offer strategic guidance, mentorship, and industry expertise to help these companies succeed.

Venture Capital Meaning and Definition

VC is a form of private equity financing provided to early-stage and high-growth companies. It involves investors, known as venture capitalists, who provide capital in exchange for an ownership stake in the company. This type of financing is typically provided to startups and small businesses that have innovative ideas and significant growth potential.

Features of Venture Capital

Venture Capital (VC) possesses distinct features that differentiate it from other forms of financing:

Equity Investment: Venture Capitalists provide funding in exchange for equity ownership in the company, becoming shareholders.
High-Risk, High-Reward: VC involves investing in early-stage or high-growth companies, offering the potential for significant returns but also carrying risks.
Active Involvement: Venture Capitalists go beyond capital, actively participating in strategic decision-making, mentoring, and providing industry connections.
Long-Term Perspective: Venture Capitalists embrace a long-term outlook, recognizing that startups require time to grow and achieve profitability.
Sector Focus: Venture Capitalists often specialize in specific industries, leveraging their expertise and networks for informed investment decisions.
Funding Stages: Venture Capital supports companies at various growth stages, including seed funding, series funding, and later-stage funding.
Exit Strategy: Venture Capitalists seek exit opportunities through IPOs, acquisitions, or secondary market sales to realize their returns.

History Of Venture Capital (VC)

Venture capital (VC) has a long and storied history that originated in the mid-20th century in the United States. It was designed to provide funding to innovative and high-growth companies. The industry gained momentum in the 1970s and 1980s with the establishment of prominent venture capital firms.

Throughout its evolution, venture capital (VC) has played a crucial role in fueling the growth of successful companies like Apple, Google, and Facebook. These notable successes have contributed to the popularity of venture capital as an investment asset class, attracting an increasing number of investors and entrepreneurs to participate in the sector.

Latest Venture Capital Trends

In recent years, the venture capital (VC) landscape has witnessed several trends and developments. Here are some notable trends:

Sustainable investing: Venture capital is increasingly focused on funding companies that prioritize environmental, social, and governance (ESG) factors.
Disruptive technologies: Investments are directed towards startups leveraging emerging technologies like artificial intelligence, blockchain, and renewable energy.
Remote work and digital solutions: The pandemic has accelerated the adoption of remote work and digital solutions, attracting venture capital investments in areas like remote collaboration tools, telemedicine, and e-commerce.
Diversity and inclusion: Venture capital is recognizing the importance of diversity and investing in companies led by underrepresented founders to foster a more inclusive startup ecosystem.
Impact investing: Investors are seeking opportunities that generate positive social or environmental impact alongside financial returns.
Regional startup ecosystems: Besides traditional startup hubs, venture capital is expanding into emerging markets and nurturing regional startup ecosystems worldwide.
The blurring of sector boundaries: Startups are disrupting traditional industries by integrating technologies, creating new business models, and redefining sector boundaries.
Early-stage funding growth: There is a continued emphasis on early-stage funding, supporting startups in their initial phases of development and growth.

Types of Venture Capital (VC)

Venture capital (VC) can be classified into various categories depending on the stage of investment, industry focus, and funding structure. Here are some common types:

1. Seed Capital

Seed capital refers to the initial investment provided to startups during their early stages. It is one of the stages of Venture Capital that helps entrepreneurs convert their ideas into viable businesses. Seed capital is typically sourced from angel investors or early-stage venture capital firms.

2. Early-Stage Venture Capital

This type of venture capital targets startups that have progressed beyond the seed stage and have a proven concept or prototype. It aims to support startups in refining their products, building their team, and preparing for market entry.

3. Expansion or Growth Capital

Expansion or growth capital is provided to established companies seeking to expand their operations, enter new markets, or scale their business. It helps companies in the growth phase to accelerate their growth trajectory.

4. Mezzanine Financing

Mezzanine financing involves a combination of debt and equity financing. It is commonly offered to mature companies that are close to going public or undergoing significant events such as acquisitions or management buyouts. Mezzanine financing bridges the gap between equity and debt financing.

5. Sector-Specific Venture Capital

Sector-specific VC focuses on particular industries or sectors such as technology, healthcare, clean energy, or biotechnology. These venture capital firms have specialized knowledge and networks within their target sectors, allowing them to provide tailored support to startups operating in those industries.

6. Corporate Venture Capital (VC)

Corporate VC refers to investments made by established companies into startups that align with their strategic objectives. It enables corporations to gain exposure to innovative technologies, expand into new markets, or diversify their product offerings.

When Should One Go For Venture Capital (VC)?

Determining the right timing for seeking VC funding depends on various factors and the specific circumstances of your business. Here are some considerations to help you make an informed decision:

1. Scalability and Growth Potential

Venture capital funding is typically sought by startups with high growth potential and scalable business models. If your business operates in an industry with significant market opportunities and requires substantial funding for rapid expansion, VC funding may be worth considering.

2. Proof of Concept and Traction

Venture capitalists often look for startups that have demonstrated a validated proof of concept and some level of market traction. This could include a strong customer base, revenue generation, or notable partnerships. Having evidence of your business’s viability can increase your chances of attracting VC investment.

3. VC Funding Requirements

Venture capital (VC) is well-suited for businesses that require a significant amount of capital to fuel growth, develop new products, expand into new markets, or invest in research and development. If your funding needs surpass what can be achieved through traditional loans, personal savings, or smaller investors, VC may be a suitable option.

4. Expertise and Network

In addition to financial resources, venture capitalists often bring valuable industry expertise, mentorship, and networking opportunities. If your business can benefit from strategic guidance, introductions to potential partners or customers, or access to specialized knowledge, venture capital can provide these additional advantages.

5. Long-Term Vision and Alignment

Venture capital investment usually involves dilution of ownership and sharing control of the business. Therefore, it’s crucial to align your long-term vision with the expectations of venture capitalists. If you are open to collaboration, receptive to working with a board of directors, and focused on creating substantial long-term value, venture capital financing may be a viable option.

How Venture Capital Works?

Interested in knowing about how VC works? Here you go:

A. Sourcing and Evaluating Investment Opportunities: Venture capital firms actively search for investment opportunities through networking, industry events, and thorough analysis of business proposals. They assess factors like market potential, team capabilities, and growth prospects to identify promising startups.

B. Due Diligence and Investment Decision-Making: Once a potential investment is identified, extensive due diligence is conducted. This involves assessing the company’s financials, business model, market position, intellectual property, and competition. Based on the findings, the venture capital firm makes an informed investment decision.

C. Financing Structures and Investment Terms: Venture capital investments can take various forms, including equity shares , convertible debt, or preference shares . The specific terms of the investment, such as the amount invested, ownership percentage, and exit strategies, are negotiated between the venture capital firm and the startup. Additionally, venture capitalists often provide strategic guidance and mentorship to entrepreneurs.

In a nutshell, venture capital firms provide financial support, industry expertise, and valuable resources to startups in exchange for an ownership stake. This partnership aims to fuel the growth and success of the startup, with the ultimate goal of achieving a profitable exit strategy, such as an initial public offering ( IPO ) or acquisition.

What is the Role of Venture Capital (VC) in the Startup Ecosystem?

VC plays a critical role in the startup ecosystem by providing essential funding, strategic guidance, and fostering innovation. Its impact can be summarized as follows:

Funding High-Potential Startups: VC offers financial support to startups with promising growth prospects and limited access to traditional funding sources. This funding enables them to develop their products, expand operations, and enter new markets.
Driving Innovation: Venture capital fuels innovation by supporting startups that introduce disruptive ideas and technologies. These startups often operate in emerging sectors and have the potential to transform industries and drive economic progress.
Strategic Mentorship: Venture capitalists bring more than just funding. They offer valuable industry expertise, guidance, and mentorship to startups. This assistance helps startups navigate challenges, refine their business strategies, and accelerate their growth.
Long-Term Partnership: Venture capitalists become long-term partners with the startups they invest in. They provide ongoing support, actively monitor performance, and contribute insights and connections to help startups achieve their goals.
Job Creation and Economic Impact: Venture-backed startups have the potential to create jobs and contribute to economic development. By expanding their operations, hiring talent, and engaging in research and development, these startups generate employment opportunities and stimulate local economies.
Risk Management: Venture capitalists understand the risks associated with investing in startups. They perform thorough due diligence, diversify their investment portfolios, and actively support their portfolio companies to mitigate risks and increase the likelihood of success.

Benefits of Venture Capital (VC)

Some of the benefits of VC include:

Access to Capital: VC provides startups and early-stage companies with essential funding to support their growth and development. This capital can be used for various purposes, such as product development, expansion into new markets, and talent acquisition.
Strategic Guidance: Venture capitalists bring not only financial resources but also valuable expertise and industry knowledge. They offer strategic guidance, mentorship, and advice to entrepreneurs, helping them navigate challenges, make informed decisions, and optimize their business strategies.
Extensive Network: Venture capitalists often have extensive networks in the business and investment community. This network can provide startups with valuable connections to potential customers, partners, and industry experts. It opens doors to new opportunities, collaborations, and market insights.
Credibility and Validation: Securing venture capital funding or VC funding can provide validation and credibility to a startup. It demonstrates that the business has undergone thorough due diligence and has been deemed worthy of investment by experienced professionals. This credibility can attract further investors, customers, and partners.
Long-Term Partnership: Venture capital firms typically take a long-term perspective and aim to build long-lasting partnerships with the companies they invest in. They provide ongoing support, guidance, and resources to help the startup succeed at different stages of its growth journey.

Risks of Venture Capital (VC)

Along with the benefits, VC also brings in some amount of risks, including;

Business Failure: Startups and early-stage companies face a higher risk of failure, which can lead to a loss of invested capital.
Lack of Liquidity: Venture capital investments are illiquid, making it challenging to convert them into cash quickly.
Dilution of Ownership: Entrepreneurs may experience ownership dilution as additional funding rounds are raised.
Regulatory and Legal Risks: VC investments are subject to compliance with securities laws, tax regulations, and contractual obligations.
Market Volatility: Investments in high-growth sectors are exposed to market shifts, economic downturns, and changes in consumer preferences.

Venture Capital Investment Strategies

Venture capital investment strategies involve:

A. Specializing in specific industries or sectors: Venture capital firms concentrate their investments in particular industries or sectors where they possess deep knowledge and expertise. This focused approach allows them to identify promising startups and provide tailored support and guidance.

B. Considering geographic preferences and global investment trends: Venture capital firms may have preferences for specific regions or countries with vibrant startup ecosystems. They also keep an eye on global investment trends to spot emerging markets or sectors with high growth potential, ensuring they stay ahead of investment opportunities.

C. Utilizing different investment types: Venture capital firms employ various investment instruments, such as equity and convertible debt. Equity investments involve acquiring partial ownership in startups, while convertible debt allows for conversion into equity at a later stage. These investment types are chosen based on the specific needs of startups and the risk-return profile sought by the venture capital firm.

Role of Venture Capital in Startup Growth

Venture capital plays a crucial role in driving the growth of startups. Here are key aspects to consider:

A. Support provided beyond financial investment: Venture capital firms go beyond providing funding. They offer valuable support through mentorship, guidance, and networking opportunities. Experienced investors bring industry knowledge and strategic insights, helping startups navigate challenges and seize growth opportunities.

B. Impact on innovation, job creation, and economic growth: Venture capital fuels innovation by funding disruptive ideas and technologies. It leads to job creation as startups expand and hire talent. The growth of venture capital-backed startups contributes to economic growth, driving prosperity in various sectors.

C. Success stories and notable examples: Many successful companies owe their growth to venture capital investments. Companies like Airbnb, Uber, and SpaceX have received significant funding in their early stages, enabling them to achieve remarkable milestones, disrupt industries, and generate substantial returns for investors.

Challenges and Opportunities in Venture Capital (VC)

VC presents both challenges and opportunities in the investment landscape. Here are some key aspects to consider:

A. Managing risk and uncertainty in early-stage investments

VC often involves investing in startups and early-stage companies, which carry a higher level of risk and uncertainty. VC firms face the challenge of assessing the viability and potential of these ventures, as well as managing the risk associated with their investments. However, successful investments in such companies can lead to substantial returns and significant growth opportunities.

B. Navigating regulatory and legal considerations

Venture capital investments are subject to various regulatory and legal considerations. VC firms need to stay informed about regulatory frameworks, compliance requirements, and legal obligations. Navigating these complexities requires expertise and careful due diligence to ensure compliance and mitigate legal risks.

C. Emerging trends and opportunities in venture capital (VC)

Venture capital (VC) is a dynamic field that continually evolves with emerging trends and opportunities. Factors such as impact investing and sustainability are gaining prominence in the VC industry.

Investors and VC firms are increasingly looking for opportunities to support companies that have a positive social or environmental impact. This presents new avenues for investment and the potential to drive positive change while generating financial returns.

Venture Capital vs Angel Investing: What are the differences between the two?

Venture capital and angel investment are two distinct forms of funding for startups and early-stage companies. While they share similarities, there are key differences between the two. Here’s the comparison:

1. Source of Funding

Venture capital funding is typically provided by institutional investors, such as venture capital firms or corporate entities, who pool their resources to invest in startups.

Angel investment, on the other hand, Funding comes from individual angel investors who invest their personal funds in startups.

2. Investment Size

VC investments are usually larger, ranging from millions to billions of dollars, as venture capital firms seek substantial equity stakes in companies.

On the other hand, Angel Investments are typically smaller, ranging from thousands to hundreds of thousands of dollars, as individual angel investors provide seed capital to early-stage companies.

3. Stage of Investment

VC primarily focused on later-stage startups that have demonstrated market traction and potential for rapid growth.

Angel investment, on the other hand, is often targeted at early-stage startups or entrepreneurs with promising ideas, providing seed funding to help them get off the ground.

4. Control and Involvement

VC firms often play an active role in the management and strategic decision-making of portfolio companies, leveraging their expertise and networks.

On the other hand, Angel investors may offer guidance and mentorship to startups but typically have less direct control over the company’s operations.

5. Investment Criteria

VC emphasizes the potential for high returns on investment, scalability, and market disruption. Thorough due diligence is conducted to assess the business model, market potential, and team.

Angel investment, on the other hand, focuses on personal interest, passion, and belief in the entrepreneur or idea. Investment decisions are often influenced by the angel investor’s domain expertise or personal connection.

What is the Meaning of Venture Capitalism?

Venture capitalism is a form of investment in which venture capitalists provide capital to early-stage or high-growth companies in exchange for an ownership stake. It involves taking calculated risks and offering support to startups to facilitate their growth and profitability.

Besides funding, venture capitalists also bring industry expertise, networking opportunities, and guidance to the companies they invest in. The objective of venture capitalism is to generate substantial returns by identifying and supporting companies with strong growth potential.

To Wrap It Up…

In conclusion, venture capital plays a pivotal role in driving innovation, fostering economic growth, and supporting the development of startups. It provides essential funding, expertise, and valuable networks to early-stage and high-growth companies.

Additionally, venture capitalists take calculated risks and actively contribute to the strategic growth of their portfolio companies. However, venture capital investments come with inherent risks, they offer the potential for substantial returns.

Venture capital (VC) refers to an investment approach where investors provide financing to early-stage or high-growth companies in exchange for an ownership stake. It involves taking calculated risks and offering support to startups to help them grow and achieve profitability.

Venture capitalists generate returns through successful exits. They invest capital in startups and aim to sell their ownership stake at a higher value when the company reaches a significant milestone, such as an initial public offering (IPO) or acquisition.

The three main types of venture capital are: – Seed Stage Funding – Early Stage Funding – Late Stage Funding

Venture Capital fund receives capital from various sources, including institutional investors such as pension funds, endowments, and foundations. They may also raise funds from high-net-worth individuals, corporate investors, and government entities.

The key elements of venture capital include: – Risk-taking – Long-term perspective – Equity participation – Value-added support – Exit strategies

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Home > Finance > Venture Capitalists Definition: Who Are They And What Do They Do?

Venture Capitalists Definition: Who Are They And What Do They Do?

Modified: February 21, 2024

Discover the role and purpose of venture capitalists in the world of finance. Learn who they are and how they contribute to startup growth and investment opportunities.

Definition starting with V

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Venture Capitalists Definition: Who Are They and What Do They Do?

When it comes to the world of finance, venture capitalists play a crucial role. But who exactly are these individuals, and what do they do? In this blog post, we will delve into the definition of venture capitalists and unravel the mysteries around their work.

Key Takeaways:

Venture capitalists are investors who provide capital to startups and small businesses in exchange for an equity stake.
They not only provide funding but also offer mentorship, guidance, and industry connections to help startups succeed.

Venture capitalists, often referred to as VCs, are individuals or firms that invest in early-stage startups or companies that have high-growth potential. These investors provide the capital needed to fuel the growth and development of these businesses. In return for their investment, venture capitalists receive an equity stake in the company.

So, what does the work of a venture capitalist entail? Let’s take a closer look:

Evaluating Investment Opportunities: Venture capitalists are constantly on the lookout for promising investment opportunities. They review business plans, perform due diligence, and assess the potential for growth and profitability.
Providing Funding: Once a venture capitalist identifies a suitable investment opportunity, they provide the necessary funding to the startup or business. This funding helps the company cover operating expenses, hire talent, develop new products, and expand their market reach.
Offering Strategic Guidance: Venture capitalists don’t just invest money; they also offer valuable guidance and mentorship to the entrepreneurs they support. They share their expertise, industry knowledge, and networks to help startups navigate challenges and make strategic decisions.
Driving Growth: Venture capitalists play an active role in the growth of the businesses they invest in. They work closely with the founders and management teams, providing guidance and resources to accelerate growth and maximize the company’s potential.
Exit Strategy: Venture capitalists aim to generate a return on their investment. They help companies navigate options such as mergers and acquisitions or initial public offerings (IPOs) to create an exit strategy that allows them to realize their financial gains.

As you can see, venture capitalists are not just financial backers but also strategic partners for startups. They bring more to the table than just funding , offering a wealth of expertise, guidance, and connections that can significantly increase the chances of success for aspiring entrepreneurs.

If you are an entrepreneur or a startup looking to take your business to the next level, seeking out venture capitalists might be a viable option for financial backing and mentorship. However, it’s important to do your due diligence and find the right venture capitalists who align with your vision and goals.

In conclusion, venture capitalists are investors who provide financial backing and strategic support to startups and small businesses. Their role extends beyond funding as they actively contribute to the growth and success of the companies they invest in. With their expertise and guidance, venture capitalists play a significant role in shaping the future of the entrepreneurial landscape.

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Venture capital (VC) is a type of private equity and financing for startups believed to have the potential for long-term growth.
Venture capitalists fund startups in exchange for ownership stake in the company.
Accredited investors can invest in venture capital through VC firms, which operate and manage VC funds.

Venture capital investments are the epitome of the bigger the risk, the higher the rewards. But what does it mean to be a venture capitalist? How does venture capital actually work? And how can you invest?

Venture capital funding is an important economic stimulant that helps give new industries and ideas the chance to thrive. In turn, this can generate new job growth, create new business models, and encourage innovation in the current market.

Here's everything you need to know about venture capital, VC funds, and more.

Venture capital (VC) is a type of private equity and financing for entrepreneurs, and startups. In exchange for preferred equity in the startup, investors (aka venture capitalists) support startups believed to have the potential for long-term growth with the hope of getting outsized returns.

Matt Malone, the head of investment management at Opto Investments , explains, "These companies may not have a proven product or revenue stream, so traditional funding sources are not an option for them. Venture capitalists are willing to assume and manage the risks associated with startups."

VC is an alternative investment, like hedge funds or managed futures , often only available to certain high-net-worth investors and institutions. Keep in mind that investing in venture capital comes with significant risk.

Venture capitalists are typically accredited and wealthy individuals, financial institutions, or investment banks that are able to provide significant capital funding, managerial guidance, or technological expertise to early-stage companies and startups.

Before earning any revenue, new businesses and early-stage companies can collect funding and expertise from these venture capitalists. Unlike a bank loan, the capital given to these startups isn't required to be paid back. This allows startups to get a jumpstart toward establishing a successful business. But investors may lose most, if not all, of their investments

This probability of loss is generally anticipated by venture capitalists who are aware that they are likely to lose most of their money. Although the chance of success is slim and a company may take years to become profitable, venture capitalists can't seem to resist the potential of discovering a "unicorn."

Venture capital funds are pooled funds from investors, called limited partners (LPs), looking to get equity from startups and early-stage companies with long-term growth potential. Instead of investing in a single startup, venture capital funds invest in multiple companies with a time horizon between six and 10 years.

Venture capital funds tend to follow a single idea that targets a section of the market or a certain stage of investment. Depending on the maturity of the business, venture capital investments are either considered seed capital, early-stage capital, or expansion-stage financing.

Managers of venture capital funds are called general partners (GP) and are in charge of selecting investments, raising capital from outside investors, and performing accounting and legal operations.

"The GP develops the fund's investment strategy. This includes the industries and types of companies that they will invest in, such as technology, consumer goods, etc. The strategy may define whether the investments are targeting seed, early-, mid-, or late-stage companies," says Malone.

Typically, limited partners have to be accredited investors (someone with a net worth of at least $1 million). The minimum needed to invest in a venture capital fund varies by fund. Minimums can range, for example, anywhere from $1,000 to $500,000 or higher.

Venture capital firms are companies that raise funds and manage and operate venture capital funds in exchange for partial ownership of the startup company (generally under 50% ownership stake). In simple terms, venture capital firms are the middlemen between startups and venture capitalists. New and early-stage companies go to VC firms for access to capital funds, managerial expertise, and LPs.

The goal of venture capital firms is to sell the stake in an emerging company or exit the investment through an initial public offering ( IPO ). VC firms take a chunk of the VC fund's profit, often between 20% and 50%. They also make money from management fees and performance fees.

"VC firms get paid to provide their expertise in identifying and evaluating potentially promising startups. They are looking for innovative ideas that solve a real problem and capable founders who can make those ideas a reality," Says Malone. "These funds may vary in sizes from a few million to several billion dollars, depending on the strategy."

A popular fee structure for venture capital funds is the two and twenty model, which is when a VC firm charges a 2% assets under management (AUM) fee and a 20% of the profits' performance fee.

Some of the top venture capital firms are:

Sequoia Capital
Andreessen Horowitz
Kleiner Perkins
Bessemer Venture
Intel Capital
New Enterprise Associates

Startups seek out venture capital firms in order to obtain funding and access to resources. Startups begin by submitting a thorough business plan. Business plans should include a business model, operation history, product plans, and other essential information regarding the proposed business idea.

VC firms will then conduct an extensive analysis of the proposed plan (referred to as due diligence) to determine the quality of the plan and whether or not it shows growth potential. VC firms may also examine personal information, such as your professional experience, educational background, and other relevant information

If the business plan is approved, VC firms offer startups funding in exchange for equity in the business. They may also become more hands-on.

"Once they invest, the fund managers take an active role in supporting their portfolio companies. They provide guidance, expertise, and regular monitoring to ensure that their companies are growing, " states Malone. "Further support comes from large networks, which they can use to connect startups to potential customers, suppliers, and others who can help accelerate growth."

Stages of venture capital funding

1. Pre-seed capital funding

The first stage of funding (aka the friends and family stage) is when a start-up company or small business obtains funds from the founder's personal network of friends and family.

2. Seed funding

A startup or new business gets funding from venture capitalists to further develop a business plan and begin production of a product or service. This stage is also commonly referred to as the Series A funding round. Only a small amount of capital is given to the business to create a minimum viable product (MVP).

3. Early-stage funding

Funding during this stage, which may be referred to as the Series B or C rounds, is mainly used by startups to manufacture goods, ramp up marketing efforts, and start growing as a business. VCs provide higher funding amounts compared to the Seed funding stage

4. Late-stage/expansion stage

As the business gains traction and maintains steady customer support, more investors become interested in the company or small business. Revenue is growing and the outlook appears profitable and promising.

5. Mezzanine

During this stage, the startup may have an IPO or acquisition. Investors and VC firms may begin frequently selling stocks .

"When the companies are ready for an exit, the fund managers will help them prepare for a sale or potential initial public offerings (IPO). Investors (LPs) are paid the capital remaining after the manager and fund expenses are paid," says Malone.

Venture capital: Pros and cons

"Venture capitalists invest in seed and early-stage companies that are inherently risky, as they generally have yet to find a product-market fit and are frequently operating at a loss at the time of investment," states Malone.

There are various things that can go wrong in a venture capital investment. As Malone further explains, "portfolio companies may underperform or fail for many reasons. The market for the company's products may shift or disappear. The founders may not be able to execute the plan, or an exit may not be possible."

You can invest in venture capital either through a venture capital firm or directly through a VC fund. Historically, you had to be an accredited investor, but now venture capital is accessible for nonaccredited individuals through crowdfunding platforms, like:

StartEngine
Yieldstreet
Groundfloor

To be an accredited investor you either have to have an annual income of at least $200,000 ($300,000 for married individuals), or have a minimum net worth of $1 million. If you don't meet this criteria, you're considered a nonaccredited investor.

However, the SEC limits the amount nonaccredited investors can contribute toward venture capital. The amount you contribute depends on your individual net worth and annual income. Accredited investors don't have this limit.

"Most countries regulate who and how someone may invest in private offerings, "explains Malone, "These regulations are designed to ensure that investors have the financial sophistication and means to both understand and assume the risks associated with these investments."

Check out our Yieldstreet review and invest in venture capital crowdfunding

Private equity refers to investment opportunities in private companies and business ventures such as leveraged buyouts, distressed funding deals, and specialized limited partnerships. Venture capital is considered another type of private equity.

While many of the investment characteristics overlap, venture capital and private equity target different companies. Private equity invests in established businesses, whereas venture capital specifically invests in startups and early-stage companies.

Another key difference is that venture capital investments tend to request under 50% ownership stake in the company (otherwise referred to as a minority stake) and a shorter holding period. Private equity, on the other hand, tends to require a majority stake and a longer holding period.

Venture capital — Frequently asked questions (FAQs)

A venture capitalist is a type of private equity investor who funds startups, entrepreneurs, or early-stage companies with potential for long-term growth. Venture capitalists are often accredited investors (someone with a net worth of at least $1 million) or high-net-worth individuals.

Venture capitalists (VCs) make money by contributing funds to startups and new businesses in return for a stake in the company. VCs will then sell their stake in the company once the startup is showing revenue growth. Venture capitalists also often charge management fees and performance fees.

Some of the most successful venture capital investments include Twitter, Uber, Airbnb, and Skype.

The amount of money you need to invest in venture capital investments varies by VC firm and investment. Minimum investment amounts tend to be on the higher side but can range anywhere from $1,000 to $500,000 or higher.

Should you invest in venture capital?

Investing in venture capital can be very risky, but most venture capitalists are up for the challenge. While most startups and new businesses funded by venture capital don't pan out, many consider the chance of discovering a unicorn too good of an opportunity to pass up.

Venture capital is largely dominated by accredited investors, but now nonaccredited traders can invest through equity crowdfunding platforms like SeedInvest and Fundable. However, nonaccredited investors are limited by the SEC on how much they can invest.

If you're interested in investing in venture capital investments, consider consulting with a CFP or private wealth manager for advice and guidance.

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What Is a Venture Capitalist?

Definition and Examples of a Venture Capitalist

Susan Ward wrote about small businesses for The Balance for 18 years. She has run an IT consulting firm and designed and presented courses on how to promote small businesses.

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A venture capitalist is a person or company that invests in a business venture, providing capital for a startup or expansion. The majority of venture capital comes from professionally managed firms. These venture capital firms seek higher rates of return than they could earn through other investment vehicles, such as the stock market.

Learn more about how venture capitalists work, the types of businesses they invest in, and a few basic tips for seeking venture capitalist funding for your business.

A venture capitalist (VC) is defined by the large investments they make in a promising startup or young business. A venture capitalist can work on their own, but it's more common for them to work for a venture capital firm that pools money from members.

Venture capital firms obtain investment capital from pension funds, insurance companies, wealthy investors, and the like. A team of analysts at the firm makes the decisions about which businesses to invest in, and they receive management fees (such as a percentage of the profits) as compensation for their scouting, analysis, and advising roles.

Facebook, Groupon, Spotify, and Dropbox are all examples of companies that received venture capitalist funding.

These firms range in size, but they typically wield massive capital power. That's what differentiates them from other investing groups like angel investors , in addition to their willingness to take risks on young businesses and new industries.

Venture capitalists aren't looking for stable, safe companies—they want to see a high potential for growth, which comes with extra risks. By one estimate, VC firms usually seek to multiply their investment by 10 within seven years.

If venture capitalists were content with meager gains, they would stick with traditional investments like blue-chip stocks and index funds. By taking risks on new businesses, technologies, and industries, venture capitalists expose themselves to significant risks in hopes of enjoying exponential returns. Typical sectors for venture capitalists to invest in include IT, bio-pharmaceuticals, and clean technology.

Acronym: VC

How Venture Capitalists Work

An investment from a venture capitalist is a form of equity financing . The VC investor supplies funding in exchange for taking an equity position in the company. Equity financing is normally used by nonestablished businesses that are unable to use debt financing , such as business loans from financial institutions.

Insufficient cash flow , lack of collateral , and a high-risk profile are some of the reasons why businesses may be unable to use debt financing. Many new businesses have issues in these areas.

There are downsides to losing some of your ownership in your business, and VCs may be a poor choice for entrepreneurs who want to retain control of their businesses. In exchange for providing funding, VC firms may obtain majority voting rights or special veto rights (either through obtaining a majority of the shares or a preferred class of shares ). VCs may also mandate priority rights for compensation in the case of a share sale .

However, there are some advantages to extending equity to venture capitalists, beyond the cash injection. Many VCs are veteran business experts. For those with an exciting idea, but not much business experience, it can be beneficial to add expertise to the company in the form of venture capital ownership.

Venture capitalists typically invest in businesses for the long-term. They'll stick with a young business for years until it matures to the point that its equity shares have value and the company goes public or is bought out. VC investors usually exit the company at this point, enjoying massive profits since they invested in the now-public company when it was just a fledgling startup.

How to Get Venture Capitalist Funding

The vast majority of businesses won't secure venture capital funding, so it may be a good idea to look for other funding options first. VC firms take risks, but they are very choosy about the businesses they take risks on.

According to the business magazine Inc., just 0.62% of startups manage to secure VC funding. Your odds for VC funding may improve if you're past the startup stage, and you can demonstrate a viable product or service, but you still have a lot of room to grow.

If you do decide that venture capital funding is right for you, you need to find a way to capture VC firms' attention. Recruit big names to your business, win an award, and do anything it takes to build momentum behind your business. With the right mix of momentum, promise, and story, you may be able to win over some venture capitalists.

Key Takeaways

Venture capitalists are entities—usually firms—that invest in businesses during startup or early expansion phases.
Venture capitalists differentiate themselves from other types of investors in that they invest large sums of money and seek massive returns.
Venture capitalism is a form of equity financing, and venture capitalists usually acquire significant power in the company in exchange for their funding.

CB Insights. " From Alibaba to Zynga: 40 of the Best VC Bets of All Time and What We Can Learn From Them ." Accessed July 16, 2020.

Inc. " 6 Steps to Get the Attention of Any Venture Capitalist ." Accessed July 16, 2020.

Inc. " Is It Time to Raise VC Funding? Ask Yourself These 4 Questions to Find Out ." Accessed July 16, 2020.

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What Is the Difference Between an Angel Investor and a Venture Capitalist?

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If you’re looking for financing for your startup, you’ve almost certainly heard about angel investors and venture capitalists—two of your most exciting financial options. But what’s the difference?

Both venture capitalists and angel investors invest money in businesses in exchange for equity—but angel investors tend to invest lower amounts earlier in the fundraising process, while venture capitalists invest more money (and require more equity) later in the fundraising process.

Which is all very well, but how do you actually know which one you should approach to finance your startup? That’s where we come in. In this article, we’ll explain all about angel investors and venture capitalists, highlight the differences between them, and help you figure out how to make your pitch.

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Comparing angel investors and venture capitalists

What is an angel investor, what is a venture capitalist, angel investors vs. venture capitalists, pitching to angel investors and venture capitalists, other business funding options.

An angel investor is someone who invests money (usually their own) in startup businesses in return for some equity in the company. While there are angel networks where several investors will pool their funds, many angels operate as individuals.

While angel investors won’t necessarily provide the seed money for a startup to get off the ground, they do tend to invest in companies pretty early on in the business funding lifecycle.

In theory, angel investors must be accredited investors according to the SEC definition. In practice, people often consider individuals like their family and friends to be angel investors.

Since they’re dealing with young, high-risk businesses, angel investors tend to invest relatively small amounts—an average of $330,000. 1 But unlike a small-business loan, that money never has to be paid back. Instead, angel investors will get company equity. We’ve seen angel investors ask for anywhere from 10% to 40%, but 20% to 30% is pretty typical.

But money isn’t the only thing angel investors provide; it’s common for angels to provide mentorship to the companies they invest in. So if you’re willing to give up a little equity, an investment angel could have a lot to offer your business.

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Much like angel investors, venture capitalists (VCs) fund startups by providing money in exchange for equity. But most venture capitalists are part of venture capital firms. And since those firms are often funded by investors, that means venture capitalists usually aren’t using their own money to invest. More importantly, since they have their own investors to answer to, it means VC investors expect a sizable return on investment.

So how does that affect their investment patterns? Well, for starters, they like more mature startups—venture capitalists tend to invest in businesses that have already gone through a couple rounds of funding.

Venture capitalists also invest more into those businesses—the average is a whopping $11.7 million. 2 But that money doesn't come cheap; venture capitalists ask for somewhere between 25% and 50% equity in the business.

Plus, VC investors usually insist on getting a seat on the company board of directors. That’s usually less about mentorship and more about getting the company to a point where it has an IPO so the venture capitalist can cash out and get a big return.

This is one of the reasons a business owner might avoid VC funding: you’re giving up more equity (sometimes enough that you lose control of the company) to someone who cares a lot about short-term profitability—not necessarily where the company goes in 20 years.

So how are angel investors and venture capitalists different? Well, if you’ve read this far, you’ve probably already figured a few things out:

Angel investors invest smaller amounts than venture capitalists.
Venture capitalists ask for more company equity than angel investors.
Angel investors fund younger, less established businesses than venture capitalists.
Venture capitalists look for a bigger return on investment than angel investors.
Angel investors spend more time working with and mentoring business owners than venture capitalists do.

Of course, there are some exceptions. You can probably find venture capitalists who love nothing more than mentoring business owners, and you’ll find angel investors who don’t want to get too involved with the business owners they invest in.

For the most part, though, the differences above hold true. So you can probably understand why angel investors get called, well, “angels,” while the VC industry often gets a bad rap.

But at the end of the day, both angel financing and venture capital can provide a valuable source of funding to startups.

So how do you get a piece of that investment pie?

Well, it might depend a little bit on whether you want to attract angel investors or venture capitalists. Business owners who have been there, done that tell us the process is a little different between the two.

But for both angel and venture capital, you’ll have to make a compelling pitch. And who better to tell you how to pitch to investors than business owners who’ve already done it?

They had advice on where to look for investors:

And they explained how to create a solid pitch:

Plus, they had some good advice on surviving the pitching process:

Sounds doable, right? That’s the (entrepreneurial) spirit.

Maybe you’ve realized that neither angel investors nor venture capitalists are the right choice for your business startup. Don’t worry! You’re in good company. Just 2% of US businesses raise money through those sources. 3 There are plenty of other small-business funding options out there.

If you’re still into the idea of other people giving you free money, you might want to give crowdfunding a whirl. Crowdfunding tends to work best for businesses that are selling products, rather than services. Just use one of the best crowdfunding sites to create a campaign that tells people why your product is cool, advertise it on social media, and people will donate (hopefully).

You’ll have to make a good campaign, complete with rewards for donors, but crowdfunding has successfully funded plenty of ideas. Why not yours?

And of course, there’s that old standby: business loans . Startups may have a hard time getting some business loans, as lenders have strict qualifications for borrowers. For example, most lenders want your business to have been around for a year or two and make a certain amount of profit. And yeah, you have to pay business loans back, which makes them less appealing than other types of funding.

But there are some good business loans for startups out there. So if investors and crowdfunding aren’t right for you, traditional borrowing might be the answer.

The takeaway

If you want to help your business grow, both angel investors and venture capitalists can help—for a price. If you’re willing to give up some equity, their financial aid can open lots of doors.

You’ll just have to decide if your business is better suited to angel investors (as a younger business that needs less money) or venture capitalists (as a more mature startup that needs more money). Then come up with a compelling pitch and—ta da!—with any luck, you’ll get the money you need.

Before you head out to pitch to investors, make sure you have a solid business plan with the best business plan software and tools .

Check out these related topics: GoFundMe Alternatives , Fora Financial Review , Snapcap Review , Kabbage vs Ondeck , Opportunity Fund Review , Effective Interest Rate , Fundbox vs Kabbage , Can Personal Loans Build Credit , or How to Get Equipment Financing .

At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.

U.S. Small Business Administration, “ Small Business Finance Frequently Asked Questions .” Accessed March 29, 2022.

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Venture Capital

Keith Arundale 5 , 6
Living reference work entry
First Online: 16 October 2020

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Venture capital (VC) is medium- to long-term finance that is invested by professional fund managers in potentially high-growth unquoted companies in return for equity stakes in those companies (Arundale, 2007 ; Lerner, Pierrakis, Collins, & Biosca, 2011 ). It is a subset of private equity which also includes equity finance for much later stage established businesses often provided to assist management teams to buy out businesses from their existing owners (Arundale, 2010 ; Gilligan & Wright, 2014 ).

Introduction

Venture capital helps companies grow quickly and successfully (Gompers & Lerner, 2001 ), is regarded as a key component both in the development of an entrepreneurial economy (Mason & Harrison, 2002 ) and in the innovation process (Powell, Koput, Bowie, & Smith-Doerr, 2002 ). The supply of venture capital is an important component of the so-called funding escalator for business growth (Mason, Botelho, & Harrison, 2016 ). This commences with the initial equity finance often...

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Arundale, K. (2021). Venture Capital. In: Harris, P., Bitonti, A., Fleisher, C.S., Skorkjær Binderkrantz, A. (eds) The Palgrave Encyclopedia of Interest Groups, Lobbying and Public Affairs . Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-13895-0_187-1

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Understanding Venture Capital

edition e1.1.4

You’re reading an excerpt of The Holloway Guide to Raising Venture Capital , a book by Andy Sparks and over 55 other contributors. A current and comprehensive resource for entrepreneurs, with technical detail, practical knowledge, real-world scenarios, and pitfalls to avoid. Purchase the book to support the author and the ad-free Holloway reading experience. You get instant digital access, over 770 links and references, commentary and future updates, and a high-quality PDF download.

When it comes to raising venture capital for a startup, many founders find themselves grasping at all the terms and language that get thrown around. What actually is a startup? Heck, what’s a founder? How is venture capital different from other kinds of investment? Who are venture capitalists? How do they make money? If you’ve ever nodded along to a conversation, hoping to get from context a definition of a term you think you should already know, this section is for you. Experienced entrepreneurs may wish to skip it.

What Is Venture Capital?

Venture capital is a kind of investment raised by startups—typically by startup founders—to fund growth. Now let’s break that down.

A startup is an emerging company, typically private, that aspires to grow quickly and substantially in size and revenue. * Once a company is established in the market and has been successful for a while, it usually stops being called a startup.

confusion The term startup does not have legal significance, and in fact, there is no formal, consistent definition for what a startup is.

Startups are not the same as small businesses. Small businesses, like coffee shops or plumbing businesses, typically intend to grow slowly and organically, while relying much less on investment capital and equity compensation. Distinguished startup investor Paul Graham has emphasized that it’s best to think of a startup as any early-stage company intending to grow quickly. * Similarly, The Kauffman Foundation , devoted to encouraging entrepreneurship, categorizes startups as “innovation-driven enterprises” that require innovation in “product, process, or business model,” whereas small and medium-sized enterprises (SMEs) “tend to be individual or family owned with little outside investment.” *

Definition An entrepreneur is an individual who starts a company, and a founder is a type of entrepreneur whose company is a startup. Solo founders start their companies alone, whereas co-founders share the founder status between two or more people. Many founders also run their companies in at least the first years. *

confusion Occasionally individuals describe themselves as entrepreneurs—but not as founders—if they have key roles at a company they did not, in fact, start. Some would call these entrepreneurs “early employees” instead.

In almost every case, the term founder is used to describe the people who started, or founded , a company. It is rare but sometimes possible for a senior person to negotiate a co-founder title when joining a company after it’s founded or to be given a co-founder title if they contributed profoundly to a company’s mission or development early on.

Definition Fundraising (or financing) is the process of seeking capital to build or scale a business. Forms of fundraising include selling shares in a business, loans, initial coin offerings , and selling securities that convert into shares.

While public companies can finance their operations through revenue or by selling equity in the public markets, private companies need to bring in cash in other ways. Typically, it is the startup founder (or one of the founders) who does the work of securing financing for the company. In the case of raising venture capital, this broadly means developing a business plan, researching and meeting with investors, and negotiating a deal.

Definition Venture capital is a form of financing that individual investors or investment firms provide to early-stage companies that appear capable of growing quickly and commanding significant market share. This financing is generally offered in exchange for equity in the company. Venture refers to the risky nature of investing in early-stage companies—typically startups—with unproven businesses. Investors who provide this financing are called venture capitalists (or VCs) .

confusion The term VC is often used to refer to venture capital firms, individual venture capitalists, and the broad category of investment into risky businesses.

Venture capital is, by its nature, a dance between the interests of founders and investors. Venture capitalists aim for the capital (financial assets or money) they invest in a startup to dramatically increase in value over time, as the company grows. That value will be paid out to investors, founders, employees, and others who hold stock in the company in the event of some kind of exit . To maximize the chances of an increase in the value of a company’s stock and in a successful exit , venture capitalists often provide mentorship, connections, and more to the founders they fund.

On the other hand, the venture capital business model doesn’t care if your company fails—it relies, as we’ll explain, on the massive success of only a few companies . Venture capital pushes companies to grow very big, very quickly, and venture capitalists can pressure or even force founders into making decisions for their businesses that serve that growth over all else. No matter which financing structure is used in an investment deal, venture capitalists are always purchasing part of a company. Founders want to hold on to as much ownership as they can—because more equity usually (though not always ) means more control—while raising sufficient money for their company to achieve desired growth.

Where investors and founders are usually aligned is in building an innovative company. Startups seek to provide something—like a product or technology—that is new to a market and has the potential to transform that market. Different investment mechanisms evolved to serve different purposes, and the venture capital firm exists to finance truly innovative companies that need the capital to experiment with a new idea.

These innovative companies are rarely obvious to spot early on and it takes a highly skilled VC (or a very lucky one) to do so. In 2007, Logan Green, the founder of Lyft, was vaguely excited about carpooling—so much so that he got beaten up in New York for commenting on five men crowding into a Mercedes late at night. * Still, it wasn’t until 2010 that either Lyft (called Zimride at the time) or Uber (UberCab back then) raised a $1M+ round. * * By that point, Zimride had gained traction with carpoolers on university campuses, and UberCab was targeting San Franciscans tired of notoriously unreliable taxis—neither had yet launched the peer-to-peer ridesharing services used today. While the success of these companies looks obvious in retrospect, only a small handful of investors took a risk on either of these companies early on.

Figure: Historical Monthly U.S. Venture and Angel Funding

Loading chart…

Source: Crunchbase *

VC Firms and Funds

Definition A venture capital firm (VC firm or venture firm) is a collection of legal entities formed for the purpose of generating substantial returns for its investors by investing in high-risk companies that have yet to prove that their business models work and are sustainable in the marketplace.

Definition A venture capital fund (or venture fund) is a legal entity, created by—but separate from—a VC firm, that pools money from outside investors and directs investments to companies seeking capital. Venture capital funds are typically structured as partnerships. *

It is helpful to understand venture firms as institutional investors to differentiate them from other kinds of startup investors, such as angels, and when contrasting institutional venture rounds from angel rounds.

confusion Venture capital firms and venture capital funds are not the same thing. A venture firm is the perpetual legal entity under which many individual venture funds can be raised and closed over time. For example, Hunter Walk and Satya Patel run Homebrew, their venture firm. In a post on the Homebrew blog, Hunter and Satya announce that they’ve raised $50M for “Homebrew Fund II,” the second venture fund raised and managed by Homebrew.

controversy Venture capital firms and institutional investors also are not technically the same thing, although many refer to venture capital firms as institutional investors. Both make investments from pooled resources, but institutional investors typically act as intermediaries, rather than investing directly in companies. For example, an institutional investor may become a limited partner in a venture capital firm. * Traditional examples of institutional investors include investment banks, endowments, hedge funds, and insurance companies. *

A new VC fund is kind of like a startup, just one that writes checks instead of code. Hunter Walk and Satya Patel, Partners, Homebrew *

Stage of Investment

Venture capital firms and funds are semi-formally divided into stages of investment that reflect the maturity of the businesses they invest in. Many VC firms focus on particular stages, and a few focus on many stages. The types of VC firms are inextricably linked to the terminology of rounds.

important Keep in mind that none of these terms are standardized in any legal or universally recognized way.

Over time, venture firms may invest in startups outside their typical stage range. A firm could be in the seed stage for a few years, investing in seed-stage companies, but later, they might raise a larger fund to invest in later-stage companies. NextView Ventures provides data on how investment stages shifted from 2002 to 2016. *

Additionally, many firms may continue to invest in a company that has performed well over time, even if that company has matured outside the VC fund’s typical range.

Pre-seed and seed stage investments. The term pre-seed is relatively new, * likely coming into use around 2015. *

Pre-seed firms invest in pre-product companies that do not yet have a product or service ready for client or consumer use. These companies might have a lightweight prototype, or nothing more than an idea on a napkin. Pre-seed investors write checks ranging from $50 to $500K.

confusion Not everyone has embraced the pre-seed term, which some consider overly specific and constraining. Until recently, a company’s earliest venture capital investors were simply called seed stage firms. Some firms that consider themselves seed-stage will invest pre-product, all the way up to the last check before a Series A round.

Early stage investments. Some firms that call themselves early stage will invest all the way from pre-seed to Series A, while others will only do seed-stage deals.

important If a firm describes itself as early stage, it’s worth asking how many deals the investors have done in pre-seed, seed, and Series A in the last year, to get an idea of where their sweet spot is.

Mid-stage investments. These firms invest at or right after a company reaches product-market fit , which is usually around Series A or Series B rounds .

Late stage or growth stage investments. These firms invest in companies that have reached product-market fit . Companies usually spend the money they raise at this stage to help them get to IPO .

Type of Investment

Definition Generalist firms , thematic firms , and thesis-driven firms are types of venture capital firms that differ in how they choose companies in which to invest. Generalist firms invest in companies in almost any sector (healthcare, FinTech, automotive, et cetera) or business (data aggregation, human computer interaction, marketplaces, et cetera) within the stage the firm typically invests in. Thematic firms invest in companies operating in particular sectors or working on particular types of problems. * Thesis-driven firms are a narrower version of thematic firms, investing only in companies that fit a hypothesis about where an area of focus is heading. *

confusion Classifying venture capital firms according to these three types isn’t always straightforward, and firms can drift between types—particularly between thematic and thesis driven—over time.

Examples of thematic firms are Psilos , which invests in healthcare companies; The Water Council , which focuses on clean-water based opportunities; Kapor Capital , which invests in tech companies serving low-income communities and communities of color; and Backstage Capital , which funds companies founded by entrepreneurs from underrepresented backgrounds. An example of a thesis-driven firm is Union Square Ventures , whose thesis as of April 2018 is “USV backs trusted brands that broaden access to knowledge, capital, and well-being by leveraging networks, platforms, and protocols.”

Some funds take a geographic focus, like Chicago Ventures , which focuses on tech companies in Chicago and the Central region of the U.S., Drive Capital , which focuses on the Midwest; and Steve Case’s seed fund Rise of the Rest , which focuses on companies outside the “big three” VC markets of Silicon Valley, New York, and Boston.

Figure: The Geography of U.S. Venture Capital Investment

Source: National Venture Capital Association *

Roles at a VC Firm

In the process of raising venture capital, you’ll interact with a lot of different people at VC firms. When you stalk them on LinkedIn or see a title in their email signature you don’t recognize, you can revisit this section to better understand what that individual is likely responsible for at their firm. This will help you know what kind of relationship you might have with them and what questions they can answer for you.

Typically, some individuals have the ability to make an investment unilaterally (that is, write a check), while others might need consent or consensus among senior partners before making a deal. Some staff may focus only on sourcing deals, analysis, operations, or other tasks besides investment decisions.

Most venture capital firms have some form of hierarchy, with associates and analysts at the entry level and managing directors and partners near the top, but not all of them follow this formula. What’s important to know is that some people can make a decision to invest, and others cannot. When you’re starting to fundraise, you should try to get a meeting with someone who has the authority to make an investing decision. Some venture firms prefer to observe a process where every company, unless it’s exploding with growth, meets with an associate or principal before a decision-maker.

important Do not assume that structures and titles used at one firm will be the same at another, even if they seem similar. Roles, titles, and decision processes vary significantly. The list that follows gives an indication of common meanings of these titles, but it’s generally wise to ask a given individual about their role and confirm whether they can invest unilaterally. Given the ego involved in titles, some investors may inflate their influence. The best way to handle this is to ask investors the following:

Can you walk me through the process of how a deal gets done at your firm?

Do individuals at the firm have the ability to write checks unilaterally? If so, who has that ability?

If not, are decisions made by majority vote or unanimous approval? Who has the power to vote in either circumstance?

Be wary of investors who get prickly when you go down this line of questioning. It’s perfectly reasonable for a founder to expect to get answers to these questions.

caution Although awareness of seniority is key to understanding the operation of VC firms, watch out for any tendency to devalue more junior partners. It is both good karma and good business to treat everyone you work with, including junior associates, with respect. As a founder, doing otherwise can be rude and is almost certainly not in your own interest. Every person at a firm can have influence, and a more junior partner may have more time to give you as they search for the risk that will propel their own career. On the other hand, despite being unable to actually execute any deals and having the primary job of collecting information, some junior partners or lower-level individuals may present themselves as having more autonomy than they do, which can be maddening to deal with as a founder.

Top-Level Roles

Managing directors (MDs) and general partners (GPs). Individuals with these titles are almost always the ones who make the final decisions on investments and sit on boards. As a rule, no firm will have managing director and general partner titles. A GP title carries formal legal liability, while an MD title does not. Many firms, in lieu of the legal distinction around the GP title, have opted to simply use the title partner .

Partners. The partner title has a lot of variability. In some firms, especially those that forego using managing director or general partner titles, the partners are the most senior employees who have the authority to write checks. On the other hand, some firms have eliminated hierarchy from their titles and refer to all employees as partners. In between, some firms use the partner title more broadly to describe individuals with influence over decision-making but who are not necessarily able to write a check.

Mid-Level Roles

Principals and directors. Individuals holding one of these titles will rarely be able to make an investment decision without approval from a more senior person at the firm. In some cases, associates may be promoted to principal before being promoted to partner. While they may not be able to write checks, individuals with these titles wield more influence on a deal than analysts or associates.

Lower-Level Roles

Associates and analysts. These persons generally take on a wide range of supportive functions at a venture firm. * Many associates are hired out of top MBA programs, but some firms prefer to hire individuals before they’ve gone to business school. Associates may stay at a firm for two to three years and then go on to work at a portfolio company, start a business, or get their MBA, and in some cases, they’re promoted within the firm. *

Other Roles

Platform. Many venture capital firms employ a variety of individuals with specific subject matter expertise, in an effort to add value beyond capital to portfolio companies. Stephanie Manning Cohen , the director of platform at Lerer Hippeau, lists talent, business development, content, marketing and communications, community and network, operations, and events as six of the common buckets that platform roles typically fall into.
Venture partners and operating partners. At some firms, venture partners and operating partners have a similar standing to those of principals and directors, with the venture partner title acting similarly to a junior partner title. In other cases, venture partners may be experienced angels or entrepreneurs who work part-time for the firm, similar to EIRs.
Entrepreneurs in residence (EIRs). Every now and then, a venture capital firm will extend an offer to an entrepreneur to work out of the firm’s offices while they develop their next idea. Usually, there’s some form of a handshake agreement that the founder will let the venture firm invest in their company, should they decide to raise. Venture firms sometimes ask EIRs for their opinions on potential investments.
Scouts. In 2012, Sarah Lacy at Pando broke a story about Sequoia Capital giving cash to well-connected individuals, called scouts , via a limited liability company that doesn’t appear to be affiliated with the firm. * Most scouts don’t have enough money to invest in companies on their own; otherwise, they probably would do just that. By 2017, The Wall Street Journal reported that Accel Partners, CRV, First Round Capital, Flybridge Capital Partners, Founders Fund, Index Ventures, Lightspeed Venture Partners, Social Capital, and Spark Capital all had scout programs up and running. *
Student VCs. A small group of VC firms have begun hiring students on a part-time basis to source deals on college campuses, and some have even started student-focused funds. Prominent student-run VC firms are First Round Capital’s Dorm Room Fund and General Catalyst’s Rough Draft Ventures . *

Limited Partners: Investors’ Investors

In many cases, individual partners at venture firms invest their own money into each fund. All VC firms require senior members to invest their own money into funds they raise and eventually deploy into companies. In some funds, the total amount invested by the partners can be as small as 1%, but you rarely see more than 5%. Most of the money a VC firm invests has itself been raised by investors outside the firm, called limited partners . (It really is turtles all the way down .)

Definition Limited partners (LPs) provide capital for venture firms, similarly to the way VCs fund startups—they invest in companies in exchange for equity (or part ownership of the business). The vast majority of money a VC invests is money raised from LPs, who often manage sums in the billions. LPs invest in a range of different asset classes , each with a different profile of risk and expected returns.

Venture capital is one of the riskiest asset classes for an LP , which means the right investment into a VC firm can generate the greatest returns for LPs . LPs only invest a small portion of the money they manage into venture capital firms. For example, Harvard’s endowment was worth $39.2B in 2018, and it may invest a small percentage of that into a number of different venture firms, say, 5–10%. * But the word small can be misleading, given that 5% of a $39B endowment is almost $2B.

Definition Limited partnership agreements (limited partner agreements or LPAs) are contracts that investors sign with venture capital firms to become limited partners . These agreements outline how the relationship will operate, including how the capital will be invested and distributed back to the partners of the firm. *

Some LPAs or side letters with LPs restrict investors from investing in controversial industries, * such as recreational cannabis or pornography.

Definition Anchor LPs are limited partners that invest early into a venture fund , set the terms of the investment, and in some cases get preferential terms.

A venture firm’s LPs can be any of the following:

Family offices. These are money managers employed by wealthy individuals to ensure their money is safe and growing.

Fund of funds. These LPs take money from other LPs and invest it in multiple venture capital funds .

Insurance companies. With large numbers of individuals or companies paying premiums into an insurance company, these companies can quickly accumulate vast sums of cash that they want to make sure grow.

Public or corporate pension funds. Retirement funds for government institutions and companies.

Sovereign wealth funds. Government institutions that invest a country’s surplus capital.

University and non-profit endowments. Universities and non-profits collect and hold donations in endowments. The institution that’s set up to manage that endowment is tasked with making sure the money grows at least beyond the rate of inflation.

Wealthy or high-net-worth individuals (HNWIs). These are individual investors who are investing their own money.

caution In 2018, many founders—especially those with SoftBank as an investor—found themselves in an ugly spot in the wake of the murder of Saudi journalist and Washington Post columnist Jamal Khashoggi when they realized that Public Investment Fund of Saudi Arabia was one of their investor’s LPs . * Unsurprisingly, in the same month as the Khashoggi assassination, Fred Wilson penned a post on how VCs should question whether it’s right to take money from certain LPs .

Exits and Returns

When founders and investors disagree about scale or speed of growth, it often comes down to what VCs expect in returns (and need to deliver to their LPs), and how they chase them. In this section, we’ll explain how VCs generate returns through exits . To learn how VCs measure returns before and after a company’s stock has become liquid, visit Appendix B .

Definition In finance, a return is the profit an investor receives from an investment. Returns can be expressed as absolute sums (“the fund returned $30M to investors”), multiples of the original investment (“the investment returned 3X”), or as percentages (“the fund boasts a 300% return”).

Limited partners expect venture capital firms to generate net IRR (internal rate of return) in the neighborhood of 20% annually—no small task when you’re talking about tens or hundreds of millions or even billions of dollars. Venture capital funds aspire to generate 3X net IRR . Most firms end up in the 2X category, 5X is the breakpoint for a top-tier fund, and 10X is exceptional (and rarely repeats in the next fund).

So how do venture capital firms generate these kinds of numbers? Through liquidity events .

Definition Liquidity events (or liquidation events) , also known as exits , convert equity held in a company into cash or freely tradable public company stock. Liquidity events are called exits because the conversion of ownership stock into cash is an “exit strategy” for owners. Liquidity events include when a company is acquired by another company, begins trading its stock on the public markets in an IPO , or if the company discontinues or shuts down, resulting in a sale of “substantially all” * of the assets of a company.

There are three types of liquidity events , all of which are essential to the venture capital business model:

Definition A merger or acquisition event (M&A event or M&A) takes place when two companies combine their assets into a single new company or one of the existing companies. The legal distinction between mergers and other types of acquisitions depends on the way the transaction is structured. An M&A event allows a company’s shareholders to cash out some or all of their shares in exchange for cash or equity in the acquiring company.

confusion Many people use the terms merger and acquisition interchangeably because the details that distinguish them can be complex and technical. However, they are distinct legal concepts and financial transactions. Acquisition is the more expansive term, encompassing asset acquisitions, stock acquisitions, and mergers. Mergers are a form of acquisition in which one company is legally collapsed into another.

Definition An initial public offering (IPO) is the first sale of a company’s stock to the public where the sale is registered with the SEC, specifies an initial trading price for the stock, and is generally financed by one or more investment banks. * An IPO is not the only way for a company to first sell its stock publicly, but it is the most common. *

After an IPO or other form of public offering, a company is referred to as a public company , as it is traded on open exchanges where anyone can use a broker to purchase shares of that company. Before a public offering, a company is referred to as a private company , as the company controls who is and isn’t able to purchase shares of the company.

Definition A secondary sale (or secondary) is when a shareholder in a private company sells some or all of their stock to a third party outside the context of an M&A event. Secondaries are common at late-stage startups as investors seek liquidity but do not want to wait for an M&A or IPO . The term secondary can also be used to refer to a secondary offering , which is an additional issuance of stock to the public, via either an existing large shareholder selling their shares or the creation of new stock for issuance after an IPO has taken place.

Why VCs Seek Outliers

Silicon Valley is a system for running experiments. It’s the nature of experiments that some fail—the key is for the ones that work to really really work. Benedict Evans, Partner, Andreessen Horowitz *

Venture capitalists take risks on a lot of untested companies because the venture capital business model depends on the extravagant success of a small number of those companies. Most of a firm’s investments are expected to “fail”—that is, not return money to the investors—because the success of a single company can make up for the risks that don’t pay out. Companies that make up that small number are called outliers .

LPs are looking to get net 3X their original investment back from a venture capital fund , so outliers must generate enough capital to return 1X+ the original sum of the entire fund of each of their investors. Due to their ability to produce a return equal to or greater than the sum of a whole fund, investors also call these outliers fund returners .

There’s one description out there of the venture capital business model that a lot of people take as gospel:

…[ We] expect to lose our entire investment on 1/3 of our investments, we expect to get our money back (or maybe make a small return) on 1/3 of our investments, and we expect to generate the bulk of our returns on 1/3 of our investments. Fred Wilson, Partner, Union Square Ventures *

However, in 2014, Seth Levine of Foundry Group shared data from Correlation Ventures that told a different story:

…a full 65% of financings fail to return 1X capital. And perhaps more interestingly, only 4% produce a return of 10X or more and only 10% produce a return of 5X or more. Seth Levine, Managing Director , Foundry Group *

Returning a fund once, let alone five or ten times, is no easy task, and the challenge of doing so only increases with a fund’s size. For example, Steve Anderson’s Baseline Ventures raised a combined $70M for its first three funds. Anderson invested $250K into Instagram and owned 12% when Facebook bought the company for $1B, valuing Anderson’s shares at $120M, enough to return nearly 2X the value of his first three funds. * However, had Anderson’s fund been a $250M fund, the $120M from Instagram wouldn’t even get the fund to break even on their LPs’ investments.

Much of the math around venture capital fund returns comes down to ownership percentage. With 10% ownership, a $250M fund needs a company to exit for $2.5B to return the fund once, but with a 20% stake, the fund needs the company to exit for half of that. When venture capitalists talk about ownership targets, they’re talking about reducing the hurdles to getting a meaningful return out of an acquisition or IPO .

important Given the variance in fund sizes, it’s not necessary for every company to generate a $1B or greater exit for their investors. But most of the bigger funds do need these $1B+ exits to make their business model work.

The National Venture Capital Association’s 2018 Yearbook, one of the most comprehensive annual reports on the venture capital asset class, reported that there are 1,047 venture capital firms in existence. * But according to CB Insights, there are only ~363 companies with valuations over $1B * (the so-called unicorns ).

The highly uneven distribution of venture capital returns, where most returns come from a tiny number of companies, is a power law . According to the NVCA Yearbook, more than 8,300 companies raised venture capital in 2018, and only ~1900 are capable of returning funds for more than 1,000 venture firms. The power law that governs returns in venture capital gets a lot of attention, and this is a simple explanation of the complicated math and economics involved. (If you’re interested in going deep on power laws, we highly recommend you read Jerry Neumann’s “ Power Laws in Venture .”)

So if venture capital as a business depends so much on outliers, investors must be geniuses at finding hugely successful companies, right? Not so much . One criticism of venture capital is that the number of investments a VC makes means that they don’t have to be experts on picking winners at all—odds are, one of those risks will pay off, but investors don’t know who it’s going to be. But certainly, some venture capital firms are better at picking and getting access to fund-returning companies than others.

In 2017, PitchBook reported that Fidelity invested in 34 of these unicorns, while Sequoia Capital and Andreessen Horowitz each invested in 30. * The same data suggested that only 18 venture firms have portfolios with 15 or more unicorn investments. While the firms’ ownership percentages are not public, these data indicate that venture capital returns are not only skewed regarding how few companies can generate returns, but they’re also skewed to benefit only a small number of firms.

Assessing a fund based on the number of unicorns in a portfolio is misleading, however. What really matters is at what stage the fund invested and how much ownership they received for that investment. If, like Fidelity, a fund invests at the late stages, their return will be much lower than if the fund invested when the company was only worth single-digit millions.

Knowing how venture capitalists make money investing in risky businesses will help founders understand how their companies are viewed by VCs, what they’re looking for in the long term, and what motivates them in negotiations. Ultimately, understanding how the business of venture capital works is important for founders when they’re considering whether or not raising venture capital is the right decision.

Angel Investors and Micro VC Firms

Definition Angel investors (angels or individual investors) are wealthy individuals who invest their own money directly into companies. Angels are almost exclusively active at the pre-seed and seed stages. The most comprehensive list of angel investors can be found on AngelList . Super angels are angel investors with a proven track record of successful investments as angels, but there is no agreed threshold distinguishing them from other angels.

controversy A lot of people don’t consider angel investors to be venture capitalists. In principle, angel investors are a kind of venture capitalist—they’re hoping to make money through returns on their investments into risky, early-stage businesses. But angels and VCs who work for firms with other investors’ money do have a different set of practices and priorities that set them apart from angel investors , including when they invest and how much. In practice, founders and investors generally do not refer to angels as venture capitalists.

Angel investing offers individuals an alternative model to institutional investment, in which they provide money to an entity, which in turn invests in companies. While some angel investors create business entities out of which they invest their money, the term institutional investor is rarely used to refer to them.

Definition Accredited investors are individuals, banks, corporations, or other institutions that hold unique investor status, because their accreditation is regulated by the Securities and Exchange Commission (SEC) and they meet net worth and income thresholds. Their status is based on asset thresholds (typically an individual net worth of more than $1 million or annual income more than $200,000 or $300,000 with spouse, for each of the last two years; or an entity with assets exceeding $5 million). Accreditation is meant to prevent unregulated investors from losing a meaningful percentage of their money on a risky investment.

important Not all angel investors are accredited, so it’s a good idea to check before accepting money from an investor. You can check with your legal counsel if individuals interested in investing don’t meet the standards, or use a qualified third party like VerifyInvestor.com or Early IQ to verify the status of an accredited investor .

Angel Investments

According to 2018 data from AngelList, only 35 of more than 12K angel investors have made 50 or more angel investments, and only 116 have made 20 or more investments. * This list includes notables such as Esther Dyson, Reid Hoffman, Mark Cuban, Marc Benioff, Ashton Kutcher, Peter Thiel, Keith Rabois, Paul Buchheit, Alexis Ohanian, Ron Conway, and Naval Ravikant. Investing in 20 companies at a check size of $50K apiece comes out to $1M. Compare that with Ravikant’s reported 130+ investments at the same check size, and you’re looking at an individual who may have put as much as (or more than) $6.5M of their own money into high-risk ventures via angel investments.

Founders often raise some of their earliest funding from angel investors , in angel rounds, before moving on to entities like VC firms. We’ll discuss this in greater detail in our section on rounds . In general, the larger the check size, the more likely the check is coming from an entity.

Micro VC Firms

Many super angels go on to start micro VC firms. Depending on whom you ask, these firms usually invest out of funds that are less than $100M and can invest at the pre-seed and seed stages. * When angel investors prove they’re able to repeatedly make investments into high-growth, successful companies at the earliest stages, other investors are interested in investing their money for the angel to manage in one of these micro VC funds. Ron Conway founded SV Angel for this purpose, Peter Thiel founded Founders Fund, and Naval Ravikant founded AngelList.

Accelerators and Incubators

Many founders don’t start companies with pre-existing networks of venture capitalists and a wealth of knowledge on how to hire a team, build a product, get customers, and raise capital. Accelerators and incubators aim to fill this gap in network, knowledge, and skills. Accelerators and incubators have nuanced differences. Some invest small sums of money in exchange for equity, while others are just physical spaces that offer discounted or free space for founders to work while in the early stages of their businesses. If you’re a first-time founder, accelerators and incubators are worth considering.

caution When considering an accelerator or incubator , be wary. Most accelerators ask for 2–10% of your company in exchange for capital and connections. Make sure the connections will actually be worth 2–10% of your company! The amount of equity you sign over to an accelerator or incubator is literally a price you are paying for a service. Treat it as such.

Accelerators

Definition An accelerator is an institution that offers typically fixed-term, cohort-based programs for early-stage, growth-driven companies, investing capital in and offering services to these companies in exchange for an ownership stake. * Common services include offering access to investor networks, mentorship, office space, and an opportunity to pitch directly to investors at the end of the program. Accelerators differ from traditional venture capital firms in that they focus on investing in very early-stage teams. * Paul Graham and Jessica Livingston pioneered the accelerator model with Y Combinator. *

danger Some accelerators charge companies fees for the office space and other services they provide. Founders should read accelerator term sheets carefully, as a $50K investment may only actually give you $30K of capital after you fulfill your obligation to the investor.

There are hundreds of accelerators out there that all flaunt the power of their networks, but the quality of these networks ranges widely. Almost every accelerator will tell you they can give you access to a network of investors and mentors. You’ll hear about how the mentors in the network have built and sold successful companies, and they’ll tie that back to those individuals being able to help you build yours. In an ideal world, accelerators can offer you access to expertise via mentorship in go-to-market strategy, sales, product development, recruiting, fundraising, and more. In reality, few accelerators have networks strong enough to be very helpful. One thing to be wary of with accelerator mentor networks is the applicability of mentors’ experiences to yours. Someone who built a business in a different industry 20 years ago will definitely be able to draw upon a successful career for generalized coaching, but their tactical experience may simply be out of date.

Accelerators also vary in the amount of funding they offer and size of the ownership stake they take. According to the 2017 Seed Accelerator Rankings Project Report , the average cash investment is $39,500 in exchange for a 6% ownership stake.

Companies apply to accelerators via online applications and are accepted into rolling batches that are usually broken up by year, quarter, or season. Many accelerators accept applications via AngelList or F6S .

The Corporate Accelerator Database regularly updates a full list of startup accelerators .

Most accelerators invest in companies in a wide variety of areas (hardware, software, energy, and so on), but a few choose to focus on one specific area such as:

Highway1 (hardware)

Rock Health (healthcare)

IndieBio (biotech)

Matter (media)

Others focus on supporting specific groups of founders:

Pear Accelerator (students and recent graduates)

Manos Accelerator (Latinx founders)

Startup52 (founders from underrepresented communities)

FundingSage offers a list of accelerators supporting startups led by women

37 Angels offers a list of resources for women founders, including accelerators that support women.

Seed Accelerator Rankings

As of October of 2018, the Seed Accelerator Rankings Project has analyzed data on outcomes and ranked accelerators on a scale from Silver to Platinum Plus.

The Seed Accelerator Rankings Project is based on valuation , qualified exits , qualified fundraising , survival rates , and alumni network data.

Definition An incubator is an institution that offers some combination of office space, cash, and expertise to new companies. Some incubators offer these things in exchange for equity, some for a fee, and some for free. Incubators almost always offer coworking spaces, where entrepreneurs can rent a desk to begin hatching plans for a new company.

An important distinction between accelerators and incubators is that accelerators have a graduation date or demo day after a short period (usually under three months), whereas incubators can work with companies for much longer periods of time.

Some incubators are willing to invest in the companies they provide office space to, but terms from incubators are often convoluted, unsophisticated, and disguised as competitive with accelerators like Y Combinator.

caution Founders should beware of incubators touting expertise and mentorship as a benefit, especially if the incubator is charging a significant fee or asking for equity. Ask specific questions about who the mentors are, research them online, and make your own assessment as to whether you believe they could add significant value to your company. Many incubators around the country have a standing group of well-intentioned “mentors” who have had some minor business success but offer little to no value when advising companies interested in solving large problems. Make sure the mentors in an incubator’s network are actually qualified to help you out.

There are many steps that founders and investors have to go through to find each other and partner up in an investment. Throughout your company’s lifetime, you will continue to develop your network and deepen the self-awareness and market research required to draw up a convincing pitch . Each time you seek funding, you will be tasked with researching potential investors , getting meetings with investors, making the case for your company , and finally negotiating and signing a term sheet .

Definition Each separate instance of a company raising money—by selling equity, a convertible note , or convertible equity like a safe—is referred to as a venture round (or round) .

Definition A priced round (or priced equity) is a direct transaction where an investor purchases a fixed portion of ownership in a company, in the form of shares, in exchange for a fixed amount of capital. This results in a transparent price per share for the company and the investor and giving the term “priced round” its name.

In the context of raising venture capital, founders typically raise a priced round to finance the company for 12–24 months, to achieve a set of clear milestones.

When raising a priced round , founders need to find an investor willing to lead the round.

Definition A lead investor (or lead) is the first investor to commit to a given round of funding and agrees to set the terms for any other investors who participate in the financing. This is called “leading the round.” The lead investor always makes the largest investment in the round and usually takes a board seat as part of the deal.

confusion When raising venture capital through a convertible instrument, finding a lead investor is not necessary. Founders need to decide what kind of investment they want to raise , which can change depending on the stage the company is in.

When raising a priced round , subsequent investors, like other VC firms or angels, “follow on” to “fill out the round.” For example, a lead investor may put $1M in a round where four other investors invest $250K each, for a total round size of $2M.

“Once you have a lead, we’re in for $X.” This can be one of the most frustrating phrases a founder encounters on the path of raising venture capital. Very few investors are willing to take the risk to set terms, write the biggest check, and sit on a company’s board. Some investment firms, such as Correlation Ventures, have even set up their funds to never lead an investment and only follow lead investors with good track records.

Types of Rounds

Rounds always have labels, which generally help outsiders benchmark a company’s stage. Unfortunately, these labels are not standardized, vary across industry, take on new meanings over time, * and some investors have even cast doubt on the validity of certain labels.

Have a headache yet? That’s normal. Here are some broad-stroke classifications of different labels you’re likely to see. Both the rounds themselves and their ambiguity will sound familiar from our section on VC firms : it is not a coincidence that the types of VC firms correspond to these labels.

Friends and family rounds. Sometimes referred to as FFF or “friends, family, and fools,” this round of capital is raised from individuals who have a close personal connection to the founders—venture capital investment is not a part of this round, which is usually the first capital a founder will raise from others. While not every founder will raise this round, of the $30K it takes on average to start a business, 80% of that comes from friends, family, and personal savings. * Pre-FFF round, personal savings and personal debt often go to cover incorporation costs and personal costs (rent, healthcare, et cetera), after which the money from friends and family goes to the costs of building the company off the ground. There’s no definition of how large this round typically is in terms of cash, as it depends on the liquidity and generosity of a founder’s personal connections.

Angel rounds. Many founders raise an early round of financing exclusively from angel investors . Angel investors often invest in pre-seed and seed rounds as part of a syndicate. Additionally, they may invest follow-on capital in Series A rounds, but only so many angels have deep enough pockets to continue investing into subsequent rounds. Angels that do participate in later rounds typically negotiate for pro rata rights in term sheets , to guarantee a right to continue to invest.

important Friends and family and angel rounds are sometimes called first money rounds. Rounds subsequent to the friends and family and angel rounds are institutional rounds —this is where venture capital firms come into play. As we stated above, angel investors sometimes participate in institutional rounds, especially at the early stages, but when the majority of the money comes from non-angels, it’s an institutional round.

Pre-seed rounds. Pre-seed rounds are usually between $50K and $500K, but can be up to $1M or beyond for highly competitive companies. * Pre-seed rounds are almost always raised when a company is pre-product (that is, they have not yet built a salable product or a product that anyone is using). It’s worth noting that the “pre-seed” label only came about between 2015 and 2016 and is viewed as having varying degrees of credibility—low * and high. * Some see the pre-seed label as the butt of a joke. *

Seed rounds. Seed rounds are typically the first round of funding founders take from entities like VC firms. Experts disagree on whether friends and family, angel rounds, and pre-seed rounds should be included under the umbrella of seed rounds. When considered a separate round, average seed rounds were $1.4M in 2018, and median seed rounds were $700K. * Corresponding valuations in the Bay Area ranged from $1.4M to $3.3M at pre-money valuations and $4.5M to $9.8M post-money in 2017. * Some firms that will invest in seed rounds are willing to do so pre-product, pre-traction, or pre- product-market fit , while others expect companies to have demonstrated some progress on product, traction, or product-market fit .

Any money raised before the Series A is often referred to as seed money , and it’s generally accepted that it is much harder to raise subsequent rounds of venture capital after seed rounds, starting with the Series A.

Series A rounds. After seed, rounds are labeled in alphabetical series (A, B, C, and so on). The Series A, however, represents a “moment of truth” for startups. According to Crunchbase News , 42% of seed-funded startups go on to raise Series A rounds—this is often referred to as the “Series A crunch.” * Median Series A rounds were around $6.1M in 2017. * In the Bay Area, Series A valuations ranged from $4.9M to $10.8M at pre-money valuations and $12M to $30M post-money in 2017. * Most companies that successfully raise a Series A have almost always launched a product, have clear indications of product-market fit , and are seeing significant growth (measured in different ways depending on the type of business model). Series A funding is most often used to prove these indications of product-market fit are real, build an executive team, and prepare to scale a business.

important Before Series A, investors are mainly looking at the promise of a company’s team. At Series A, they start looking for proof on that promise. Put another way, companies need to shift from selling the dream to showing the metrics. But each firm defines what constitutes “proof” differently, and some have a clear idea while others do not. Depending on the competitive landscape, the goalposts for what proof is can also move every year.

In general, you can think of it like this: investors look at a company raising Series A and say, “Is there a clear indication that something magical might be happening here?” In a B2B SaaS company, that might mean, “Are they selling the product? $1M in ARR?” In consumer companies, what indicates future success to an investor can be impossible to predict. Some VCs will say, “1M monthly unique visitors is good enough,” while others will say, “Wow, you have 250K students using this for five hours every week, but no revenue, let’s do the deal!”

As a founder, it’ll help to think of what would prove to you that your company is ready for Series A. It doesn’t have to be rock-solid proof, but there has to be some strong indication of magic.

Series B rounds , Series C rounds and beyond, or growth rounds. Once a company has demonstrated not just indications of product-market fit but clear proof of product-market fit in a large market, the company faces a choice to either expand quickly to dominate that market or expand slowly and invite competitors. By the Series B stage, most companies have hired a few key executives, like a VP of product or VP of sales, to lead part of the expanding company. Series B rounds are primarily used to fuel growth, meaning the company has figured out a way to make money, but they are limited from growing, either because they need cash to hire, acquire customers, or expand their business (new products, new geographic expansion, et cetera). Series B rounds in the Bay Area averaged $26M in 2015, according to Mattermark. *

Mega rounds. When companies raise rounds greater than $100M, they are referred to as mega rounds . Mega rounds are a relatively recent phenomenon. Mark Suster points out that $100M rounds accounted for only 13% of rounds in 2013, but now account for 47%. * In the same report, Suster points out that while there were only 20 or so mega rounds in 2009, there were 198 in 2019. Mega rounds break the traditional alphabetical naming sequence of rounds. Take GitHub, for example. In 2015, GitHub’s founders raised $250M after the company’s 2012 Series A; the next round would logically be a Series B. The average Series B size for the same period was ~$26M, though, making it dubious to say that a $250M round was in the same class as those in the range of $26M; doing so would clearly be comparing apples to oranges. In 2017, the Japanese conglomerate SoftBank announced the largest venture capital fund of all time, the $100B Vision Fund, to exclusively lead mega rounds. SoftBank’s strategy has been controversial—and not just because Saudi Arabia is a marquee LP . An argument can easily be made that they are picking winners on the path to IPO and giving those companies no choice but to take their money. SoftBank’s offer to invest can appear threatening. If a company refuses a $100M+ injection of capital to them, SoftBank may turn around and invest that money in their biggest competitor.

Bridge rounds. In a perfect world of raising venture capital, companies would raise a single seed round, go on to raise a Series A, then a Series B, and go public or become profitable enough to no longer need venture funding. This neat progression rarely happens, often because companies underestimate how long it will take to develop their product, take it to market, reach product-market fit , and grow to dominate that market. It is likely that they will need to raise additional capital in between traditional rounds. These are called bridge rounds . A bridge round between seed and Series A is called a second seed or seed+ . Some believe the need for a bridge round implies that a company was not able to reach the milestones necessary for the “traditional” venture round progression. But companies can use bridge rounds strategically in between major raises in order to extend their runway, get a better valuation at the next major round, and test the market’s appetite for what they’re offering.

Inside rounds and outside rounds. When a round is primarily funded by investors who invested in a company’s previous rounds, it’s called an inside round . The people putting money in are already on “the inside.” An outside round , in comparison, is a round led by a majority of new investors. Inside rounds can be great for founders, as the investors are already familiar with the company and can make decisions quickly. But as a company’s capital requirements grow, inside investors may not be able to meet the company’s needs, and an outside round may be the wiser choice.

Party rounds. Most venture rounds have one lead investor and a small group of other investors who follow on, called follow-on investors . Other rounds, called party rounds, do not have lead and follow-on investors but instead involve a larger number of investors writing smaller checks. But the rules on this term aren’t hard and fast. A $1M round composed of ten $100K checks would be considered a party round. A $1M round where one investor put in a $250K check and fifteen investors put in $50K checks could also be considered a party round. The main characteristic of a party round is that there is a long tail of investors who wrote small checks. Party rounds are not usually considered the best option for founders; investors willing to write larger checks tend to be much more committed than those who do not (though this is, of course, not universally true, and a smaller, newer fund can still be extremely committed to a startup’s success), and party rounds mean that a time-strapped founder will have to manage a greater number of investor relationships.

Figure: Bay Area Capital Investment and Deal Count (Series Seed)

Source: Silicon Valley Bank and PitchBook Data *

Figure: Bay Area Capital Investment and Deal Count (Series A)

Rounds and valuations.

In addition to labels referring to a company’s stage at the time of financing, venture rounds can also have a separate set of labels that refer to the valuation of that round in relation to the last round of financing the company raised. We’ll talk more about valuation in Determining How Much to Raise .

Definition Up round , down round , and flat round are descriptions of a company’s valuation in a new venture round as compared to the previous round. An up round occurs when the valuation of the new round is higher than the valuation of the previous round, and a down round occurs when the valuation of the new round is lower. A flat round occurs when the valuation does not change between the two rounds. Flat rounds are relatively rare .

caution Investors don’t want to have bad blood with other investors—they may have to work together in the future. This means they won’t, for example, be eager to throw in on a down round , because it puts them in the position of forcing prior investors to write down their investment. * Not all investors think a down round is a bad thing—Randy Komisar, author and general partner at Kleiner Perkins, for example, says they just reflect down markets. *

Definition A syndicate has evolved to have multiple meanings in the fundraising ecosystem, and may refer to the total group of investors who invest in a given company’s round, a group of investors who frequently invest together , or an AngelList syndicate .

Many rounds have more than one investor. At the earliest stages, angel and seed rounds usually have a mix of angel investors and VCs.

caution Jeff Bussgang, GP at Flybridge Capital Partners and Harvard Business School faculty, points out that having more than one firm involved with the company can have benefits and risks. * Benefits include diversity of thought and networks that comes from multiple VCs, and more bargaining power via competition between investors in future rounds of investment. On the other hand, each additional investor requires more time on the founder’s part to manage those relationships. And because investors usually want to own a meaningful amount of a company, the more investors you bring on, the more of your company you’re selling.

AngelList syndicates, launched in 2013, allow a single investor to create their own fund on the AngelList platform and then invite other investors to invest with them. AngelList handles all of the back-office fund administration in exchange for a percentage of the carried interest (or carry) on each deal done through AngelList. AngelList syndicates can be beneficial for investors with smaller funds, as they can choose to invest $25K in a deal and then ask anyone in their AngelList syndicate if they want to participate, with checks as small as $1K. Often, this can add up to many multiples of the original fund’s investment. You can read more about AngelList syndicates here .

Assessing Whether to Raise 34 minutes, 74 links

Venture capital can look dramatic. Bubbles, crashes, giant IPOs , $7B acquisitions, lecherous investors, and out-there founders with millions of devoted followers make starting a business seem like making the Kessel Run in less than 12 parsecs . This has led to a strange amnesia about how most startup business strategy actually works: selling a product to customers for a profit. This antiquated notion even has its own fancy new term: “fundraising from customers.” Contrary to the way it sounds, this does not refer to customers investing in the company. Rather, it’s encouragement for founders to consider selling their products to customers, rather than selling part of their company to an investor.

From the outside (and even from the inside, if you live in Silicon Valley), it can seem like venture funding is ubiquitous in the world of startups. The truth is, in 2013, .05% of startups received VC funding, while 57% were bootstrapped (these data from Fundable are compiled in a nice visual by Entrepreneur ). In 2018, though individual investments were growing in size stateside, the U.S. held 50% of the global startup investment pool, down from 95% in the 1990s. (These data are summarized in Inc. ; the full report was conducted by the Center for American Entrepreneurship.)

In the U.S., roughly 43% of public companies founded between 1979 and 2013 have been backed by venture capital firms. * But the majority of companies do not go public, and raising venture capital does not guarantee a company’s success. CB Insights even put together a list of more than 150 companies that raised venture capital and “failed,” some having raised more than $100M. * Venture capital is not the only form of financing for an early-stage company. There are several other sources of capital for startups, including revenue, debt, and revenue-based loans. In addition, a hybrid of VC funding, debt, and revenue is possible and likely.

Venture Capital: A History

by Laurence Siegel | Dec 10, 2020 | Articles , Finance , Newsletters

This post was originally published by Advisor Perspectives, http://www.advisorperspectives.com , under the title, “The History and Future of Venture Capital Investing,” on July 8, 2019.

Is venture capital a good investment? For long periods in the past, the best VC firms had spectacular returns, as their outside investors or “limited partners” – pensions, foundations, endowments, wealthy individuals – participated in the emergence of great companies such as Intel, Microsoft, Apple, and Amazon. But, going forward, can VC investors expect the same returns? Or are we in a new era of lower returns and a more challenging environment? Innovation and the implementation of new technology, through the support of new businesses, has always been at the heart of economic progress. For centuries, this work was done by wealthy families, monarchs, and governments. But, starting in the mid-twentieth century in the United States, the VC firm, a wholly new type of investment management enterprise, began to seek and use capital from outside investors, as well as by the firm’s owners, to fund and nurture new business ventures. Learning the history of this transformation helps us discern an answer to the questions I posed at the outset. The Harvard Business School professor, Tom Nicholas, has written a penetrating history of the industry that focuses on the early years and brings the story of VC up to the end of the last century. By “technology,” of course, I do not just mean computers, rocket ships, or the latest whiz-bang smart-phone app. I mean whatever makes it possible to do more with less : railroads and telecommunications in the 1800s, the fruits of electrification in the early 1900s, the automobile and airplane shortly thereafter, and the thousands of lesser innovations that added up to a highly productive economy instead of a survival-based one. Nicholas fully appreciates this economist’s definition of “technology,” and shows how venture-oriented investors have helped to fund and shape all kinds of technological innovations throughout modern history. (Don’t) save the whales If they don’t study the past, leaders of businesses cannot begin to understand the future in which they will be operating. While no one can predict the future with accuracy, students of business history find that there are patterns that repeat, over and over, shedding light on today’s challenges. The Harvard professor Tom Nicholas’ book on venture capital, VC: An American History , reaches far back in time and into activities that are alien to us to find such patterns: [N]ineteenth century whaling can be compared to modern venture capital… [W]haling was the archetypical skewed-distribution business, sustained by highly lucrative but low-probability payoff events… The long-tailed distribution of profits held the same allure for funders of whaling voyages as it does for a venture capital industry reliant on extreme returns from a very small subset of investments. Although other industries across history, such as gold exploration and oil wildcatting, have been characterized by long-tail outcomes, no industry gets quite as close as whaling does to matching the organization and distribution of returns associated with the VC sector. That’s a good start (and he has rate-of-return data for whaling!). Too often, business authors who are keen on history look back only a generation or two – or a century at most – to learn lessons of the past that they can apply to the future. I’m more impressed by parallels over very long periods of time, which identify aspects of business that don’t go away. For example, the desire to manage risk is universal. Thales of Miletus, who lived from 624 to 545 BCE, a century and a half before Socrates, invented the options market. He created a technology for hedging the price of olive oil that we still use today. Nicholas doesn’t reach quite that far back. His tale starts in the early days of the United States, as it should in order to keep the book length manageable and readers engaged. I’ll briefly recount Nicholas’ journey through history, then offer some opinions on what is good and what’s less good about the book. But, as I’ve long maintained, one needs a thorough understanding of “deep history” to capture the elements of human nature and collective action that don’t change much in principle over time, although they change profoundly in implementation. To understand this deep history, I’d refer readers to the works of Peter Bernstein and William Goetzmann, who have chronicled finance, including venture capital, all the way back to ancient times. [i] Before accompanying Nicholas on his journey, let’s ask why venture capital has become so important, and why serious study of the industry is revealing. A venture capital world We live in a venture capital world. All of the six U.S. “hot stocks” of the current decade – Facebook, Apple, Netflix, Microsoft, Amazon, and Google, which form the acronym FANMAG – were venture-backed. [ii] Tesla and Uber are also pretty hot stuff, despite struggling to make a profit, and they, too, are funded by venture capitalists. But it was not always thus. Most of the great corporations of the past – and many of the present – were financed through organic growth (retained earnings), accretion (mergers and rollups), bank lending, government funding, and stock and bond issuance. Venture capital, as an industry and not a rich men’s hobby, only begins with the founding of American Research and Development Corporation in 1946 by, among others, Georges Doriot, a Harvard Business School professor often considered the father of organized venture capitalism. That is not so long ago in the history of American industry, and mirrors the emergence of other modern business institutions – the captive research institute and the consulting firm – that characterized the postwar period. [iii] There was life (and money) in venture capital way before Doriot. While Nicholas could be forgiven for skipping ahead to the post-World War II period and the rise of institutional venture capital in the U.S., he’s a historian and doesn’t go for the easy path. Instead, Nicholas skips backward to 1783 and the funding of the Industrial Revolution, specifically the spinning jenny. On whales and long tails But first, let’s finish the whale story. It’s so good it deserves more detail, and the comparison of venture capital to whaling is the thread that ties Nicholas’ story together. The extreme financial risk associated with whaling ventures is not typical of the way that most businesses invest and grow. If a chain of hardware stores decides to open a new branch, it is not guaranteed to succeed, but it is not likely to harpoon (sorry) the whole business if it fails. The same applies to Toyota or Ford launching a new line of cars and trucks: it is a calculated risk that is more likely to succeed than fail. Whaling, gold exploration, and oil wildcatting are the opposite: they are more likely to fail than succeed, but the successes – at least in expectation – are so large that they more than make up for the failures. So far, the parallel is close, at least on paper . Exhibit 1, from Nicholas’ book, compares returns of the top 29 whaling ventures to returns, almost two centuries later, of the top 29 venture capital funds.

Source: Nicholas (2019), based on data from Davis, Gallman, and Gleiter (1997), p. 250, and from Preqin. [iv] This is the kind of detailed scholarship that makes VC a worthwhile read; the granularity enables you to learn, rather than just digesting platitudes, as is so often the case with popular business books. But what distinguishes whaling from modern venture capital is the risk taken by the entrepreneur . Failed whaling ventures often resulted in the sailors being drowned or, in the awful case of the whaling ship Essex, which was launched in 1799 and sank in 1820, eaten. (The voyage of the Essex was the inspiration for Herman Melville’s Moby-Dick .) It is said that 50% of sailors (not just whalers) who went to sea in the pre-modern era died on the job. That’s why elevated outdoor walkways on old East Coast houses are called widow’s walks. Failed tech entrepreneurs, in contrast, merely have to start another business or, in extremis , get a job. Financing the Industrial Revolution High-tech cotton A generation before the age of the great whaling ships, a remarkable invention – the spinning jenny – “allowed spinners to multiply their labor, deepening the use of capital in the economy,” Nicholas writes. Using a traditional spinning wheel, a spinner could produce only one spool of yarn at a time, but the jenny quickly made it possible to spin 12 at a time, and “incremental advances would further multiply the output of a single operator to…as many as 120.” That is a huge increase in productivity in a short time, bolstering Nicholas’ claim that the cotton industry was not the low-tech activity we now tend to think it is, but the leading edge of late-18 th century technology, and part of what launched the British and American economies into the self-sustaining growth they would enjoy in the next two centuries. This technological change also, of course, destroyed many jobs as it created others; and, just as importantly, made cotton goods much cheaper so that it took less labor to afford them. This parallels the wrenching – yet, on net, beneficial – changes we are experiencing through the Internet, artificial intelligence and other technological advances. Developing a new technology is not free, and Nicholas chronicles the proto-venture-capital deals that supported the development of the spinning jenny. The backers unsurprisingly included whaling families, because they were rich but also because they were accustomed to the idea of taking risk. In a series of appendices, Nicholas reprints the terms of the deals between backers and entrepreneurs, dated in the 1780s, that resemble, at least in their gross structure, similar deals that are concluded today. (The use of lawyers was much more sparing back then, so the agreements are quite short and readable.) Development of the railroads and modern industry The laying of the railroads, which began a half-century later, was one of the most massive infrastructure projects in the history of the world and required government financing as well as venture capital backing. Still later, the building of America’s great industrial corporations required a comparable blizzard of capital-raising, in which Andrew Mellon and J. P. Morgan were among the key figures on the capital provision side. Nicholas compares Mellon’s approach to modern VC practices: Richard Florida and Mark Samber argue that Mellon’s activities “mirror those of contemporary venture capitalists in many respects, by providing both financial resources and management assistance.” …First, while Mellon engaged in debt financing…he soon adapted his style to also include equity involvement and thereby long-tail returns. He engaged in equity participation across a portfolio of early stage ventures, often in new high-tech industries…[such as an efficient method of aluminum refining, which had eluded metallurgists for two millennia]. [v] The annus mirabilis of 1946, and beyond Corporations and informal networks of wealthy industrialists provided the bulk of venture-capital financing through the rest of the Second Industrial Revolution (roughly 1870-1940). But things were about to change as World War II came to an end. The bridge to the modern VC era was built by a half-dozen men who came to prominence right after the war. Here, I’ll focus on one of the best known, John Hay Whitney, known as Jock Whitney. Jock Whitney, the Renaissance man of venture capital [vi]

A wealthy jack-of-all-trades and scion of a highly accomplished family, Whitney was, with Benno Schmidt, [vii] the founder of J. H. Whitney & Co., which is widely considered the first venture capital firm (as opposed to private investor). In fact, the duo may

have coined the phrase “venture capital.” The reporter Gabe Kleinman writes that the firm “initially position[ed] itself as ‘a lender of “private adventure capital” ’— and legend has it, Schmidt abbreviated this to ‘venture capital’ so it would roll off the tongue more easily.” [viii] Nicholas dissents, saying the term was already in use. Kleinman adds that “[m]odern philanthropy and private equity have the same parents: the Wallenbergs, Vanderbilts, Whitneys, Rockefellers, and Warburgs.” Of this august crowd, Whitney was distinguished by his making a proper business out of it. He built an infrastructure that enabled J. H. Whitney & Co. to help its portfolio companies grow, improve their management practices, and achieve a successful exit. “By 1958,” Nicholas writes, “Whitney had thirteen partners whose experience spanned business, law, finance, and academia, and twenty additional support staff to help with investment due diligence.” It was the prototype of the modern venture capital firm, except for the raising of capital from institutional investors, which we’ll get to in a moment. J. H. Whitney & Co.’s first investment was Spencer Chemical, which “represented an archetypal VC investment because a single portfolio company returned the entire value of the fund,” writes Nicholas. Between horsemanship, boating, serving as president of the Museum of Modern Art, amassing one of the world’s great personal art collections, representing the United States at the Court of St. James’s, co-authoring a song with Fred Astaire, [ix] and romancing movie stars and marrying Betsey Cushing, the former daughter-in-law of Franklin D. Roosevelt, it’s hard to see how Whitney had time to run a company at all. But that is often what successful people are like. They have more energy than they know what to do with. Georges Doriot and American Research and Development The other key figures in the postwar VC boom were Laurance Rockefeller and Georges Doriot, the latter having helped to establish American Research and Development (ARD) in 1946. That year was the annus mirabilis (“wonderful year”) of venture capital, when all three of the best-known early firms – Whitney, ARD, and the Rockefeller Brothers Fund – were founded. Nicholas presents a table listing the seven VC firms established in 1946 and four more between 1947 and 1951. Doriot differed from the others in coming from academia rather than inherited wealth. He was a Harvard Business School professor. His great innovation was to take the existing venture tradition, created by wealthy families, and make an institutional investment product out of it. ARD raised funds from foundations, university endowments, and eventually pension funds as their legal authority and practical ability to invest in alternative assets grew over time. Eventually – in 1966 – the general public could invest, when ARD converted itself to a publicly traded closed-end fund. ARD’s big win was its 1957 investment in Digital Equipment Corporation, launching the marriage between the VC community and the computer industry. Nicholas quotes Doriot as saying that “we gave the man [who founded Digital] $70,000…and today we value that investment at $52 million.” Nicholas gives a lot of airtime to ARD and Doriot, because of the firm’s importance to the history of VC, without admiring him personally. He was not a nice man: he mistreated his employees, was overcautious in an enterprise where risk-taking is of the essence, and did not like women in business. And, although Doriot is usually given credit for founding ARD, the engineer and banker Ralph Flanders was the real founder. Flanders was appointed Senator from Vermont shortly afterward and handed the controls to Doriot. Private enterprise versus government Nicholas uses the story of ARD to launch an account of the rivalry, starting with the 1953 act by Congress that made Small Business Investment Companies (SBICs) possible, between business and government in capturing the opportunity from emerging businesses. “It was not clear that venture capital could be supplied by market mechanisms alone,” Nicholas writes. He shows, however, that the government-backed SBICs were often undercapitalized, had trouble attracting management talent, and consequently provided poor returns to investors. But the cloud had a very large silver lining: …SBICs created an entry point for talented startup investors who would later engage in the [VC] industry. One example is Sutter Hill Ventures, a Palo Alto VC firm created by William Draper III and Paul Wythes in 1964 out of two SBICs…. Sutter Hill…went on to generate annualized returns of 37% from 1970 to 2000. That is a cumulative return of 12,636 times your money, assuming the 37% is a compound annual rate of return and not an arithmetic mean. With Sutter Hill, the Silicon Valley gold rush (an appropriate metaphor given the firm’s name) had begun in earnest. Off to the races! Tom Perkins and the golden valley The southwestern corner of the San Francisco Bay basin is called the Santa Clara Valley. Few Californians today know that: they call it Silicon Valley, even though no silicon is mined or processed there and very little is used in manufacturing computers or other devices, which are built elsewhere; the Valley’s main product is software and data. But it’s still called Silicon Valley because, between about 1970 and 2000, the period when Sutter Hill made a great fortune, it was the world capital of the computer industry.

A wealthy kingdom must have a king, and Silicon Valley is probably the wealthiest kingdom in the world. For a generation its king was not Steve Jobs or any other entrepreneur but Tom Perkins, the best-known partner and public face of the VC firm of Kleiner, Perkins, Caufield & Byers. Just as merchants once petitioned the king for contracts and loans, entrepreneurs preferentially sought out Kleiner Perkins funding, because the venture firm provided not only a rich lode but, arguably, better management assistance than anyone else. And funding by Kleiner Perkins was perceived as a “Good Housekeeping Seal of Approval” that encouraged investment by other VCs and the trust of potential customers. The firm funded, among many other companies, AirBnB, Amazon, America Online, Compaq, Coursera, Genentech, Google, Intuit, Lotus Development, Netscape, Spotify, Sun Microsystems, and Uber. Of course, following the modern VC model, most or all of these companies were funded by multiple VC firms, not just one as in the prewar days. The kingship has since passed to John Doerr, current president of Kleiner Perkins (and the dominance of that firm has waned somewhat) but, in a business history book, the story of a founding partner is usually more compelling than that of a successor. Like Jock Whitney and many other VC leaders, Tom Perkins was known as a “character.” The reporter John Wilson, in The New Venturers , had him starting out in the 1940s as “a science-struck kid always tinkering with Tesla coils and ham radio equipment” only to be transformed, forty years later, into a “charismatic corporate gamesman…[who] with his actor’s looks and unruly mop of hair barely flecked with gray…[has] more the air of a yachtsman than a financier.” [x] He was respected but not exactly loved, with Nicholas describing him as having a “dominant” persona that could drift into “moments of complete derangement,” but those are traits often associated with mega-successful executives. And Perkins admitted that he founded a company – University Laboratories – just to run a company he did not like, his former employer Optics Technology, into the ground. Perhaps it takes a colorful personality to bet other people’s money, along with a very good chunk of one’s own, on speculations that are as risky as early 19 th -century whaling ventures. But beneath the bravado and panache of the leaders, the staff typically performs assiduous feats of due diligence to minimize that risk and concentrate their bets on potential winners. They do not put their finger in the air and invest. Despite all that effort, modern VC firms, like those in olden days, still lose much more often than they win, and often rely on very successful single investments to produce a positive return on the overall fund. Participatory management: A new VC investment style Perkins changed the VC industry by devising a new investment “style.” Nicholas characterizes the styles existing at the time as follows: There were essentially three types of venture investors at the time – east coast firms such as ARD (in its twilight years), Greylock, and [the Rockefellers’] Venrock, which were steeped in old money; west coast entities like Davis & Rock and Sutter Hill; and individuals who acted like modern-day angel investors. What Perkins did differently was to “provid[e] a more systematic approach to seed capital deployment and governance in high-technology industries.” This was described as “a new style of participatory, value-added investment.” While this sounds like a subtle difference, it’s not. Today’s VC industry is dominated by the Perkins model, in which the venture capitalist is an active management partner, not a silent partner whose role is mostly restricted to providing funding. The success of the Perkins model is part of what led to the gradual drift of VC’s center of gravity from Boston to the West Coast. Active participation in the management of companies in the VC investor’s portfolio simply turned out to be a better strategy. In addition, the more freewheeling general approach to business found on the West Coast was a better match for the pace of the technological explosion that was taking place. Bubble, bubble, toil and trouble This trend would persist into the twenty-first century, with the flourishing of Google and many other companies in its orbit. Nicholas’ long chapter, “The Big Bubble,” covers the familiar period in the late 1990s when venture-backed companies helped drive the stock market to record valuations and then crashed even more quickly than they had risen. But, as the author Peter Bernstein reminded us at the time, bubbles followed by crashes leave a legacy of new technology that does not go away when the stock prices go down. Bubbles can thus be a marker of progress, not failure. “Hurrah for bubbles,” Bernstein wrote. [xi] To sum up, there are many ways to invest in emerging businesses. The venture capital industry, Nicholas writes, can be separated into at least three, according to the style of the VC firm’s leader. The three chief ones are:

Investing in people – Arthur Rock
Investing in technology – Tom Perkins
Investing in markets perceived to have great potential – Don Valentine (Sequoia, not covered in this review)

By “markets,” Nicholas means consumer or product markets, not equity markets. What Nicholas does not do is to bring the story up to date. The recent (twenty-first century) history of VC is in large part a continuation of the model that made the 1990s productive and exciting, albeit with different kinds of companies and products such as social networking and artificial intelligence. Perhaps Nicholas will cover this period in a forthcoming book. Recommendations for readers VC: An American History could have been written as popular history or popular science, which in my mind are terms of respect: the highest calling of the non-fiction writer is to educate the public. But it’s not popular history. It is, instead, a serious work of scholarship. It’s also a heavy book, both physically (almost 400 pages) and in the density of the writing, thinking, and data presentation. That will be a positive for some readers and a negative for others. Very much on the plus side, VC is not a compendium of case studies, unlike many books written by Harvard Business School professors. Thank goodness! That hand has been overplayed. The twenty-first century, in which venture capital plays such an important part, is mostly left out of Nicholas’s story. He may believe that the recent history already well known and that the older stories are not. That is an understandable position to take, but on net it’s a weakness of the book. If Nicholas eventually writes a book about this most recent period, I’d most certainly like to read it. Venture capital has become a central feature of our economy, and of those outside the United States, particularly in China, which last year represented an astonishing 30% of global VC market capitalization. We would do well to understand this business, which operates beyond the view of most citizens and even some skilled investors. Tom Nicholas’ book provides the needed historical background. It is not for everyone, but if you’re one of the intellectually curious who are drawn to business history, I enthusiastically recommend it. Looking to the future Venture capital is now a mature industry flooded with talented and ambitious people. It is no longer the frontier, but part of the mainstream. VC won’t get another king like Whitney or Perkins, but it doesn’t need a king. It is a craft, and does not require geniuses to perform the work – although the entrepreneurs funded by VC firms still have to be pretty exceptional. Investment managers flatter themselves if they think that superior returns can only be produced, in the great hedge fund manager Cliff Asness’ sardonic description, by a “crazed genius” who generously shares his natural gift with a few lucky investors. High returns mostly result from a combination of hard work, good timing, and luck. Tom Nicholas does not attempt a forecast of future returns from VC, but the lessons of history learned by reading his book show that the conditions for spectacular returns from VC do not now exist. Consider the following:

There is plenty of money – a flood, some would say – chasing the available deals.
We are in a technological pause, where improvements are marginal rather than revolutionary. This concern is less serious in biotech and artificial intelligence (AI) than it is in computing and telephony. However, while biotech and AI are advancing quickly, their commercial payoffs tend to be both far in the future and uncertain.
The past success of VC has drawn in a lot of high-priced talent from other fields, including the tech firms themselves, other types of private equity firms, consulting firms, academia, and firms that manage publicly traded assets. This imposes a high cost structure on VC firms and makes it hard to retain key people, who now work in an environment that favors the talented employee, not the limited partner (investor) or even the general partner.

Thus, current conditions do not resemble the environment chronicled by Nicholas, when lean organizations led by charismatic adventurers could make outsized returns. Be cautious about future capital commitments to VC, especially if they cannot access the very best firms. When it comes to venture capital, those who fail to learn its history are more likely to be disappointed when investing in it now.

[i] Bernstein, Peter L. 1996. Against the Gods: The Remarkable Story of Risk. Hoboken, NJ: John Wiley & Sons. Goetzmann, William N. 2016. Money Changes Everything: How Finance Made Civilization Possible. Princeton, NJ: Princeton University Press.

[ii] FANMAG is my own creation, and it’s better than FANG or FAANG. Microsoft should be considered venture backed even though it only had funding from one venture capitalist (Technology Venture Investors).

[iii] The first captive research institute was probably Bell Laboratories, founded quite a bit earlier (1925), but we always find antecedents when we look for them; the big corporate push into research and development was postwar. General Electric’s NELA Park in East Cleveland, Ohio was research-oriented but started as a competitor to GE and was acquired in 1911, so it does not exactly fit the mold of a captive corporate research facility.

[iv] Davis, Lance E., Robert E. Gallman, and Karin Gleiter. 1997. “Whales and Whaling.” In Davis, Gallman, and Gleiter, eds., In Pursuit of Leviathan: Technology, Institutions, Productivity, and Profits in American Whaling, 1816-1906, pp. 20-56. Chicago: University of Chicago Press.

[v] The ancient Romans knew how to extract aluminum from bauxite but it was impossibly difficult and expensive. The problem was not solved until Carl Josef Bayer invented the modern process, still in us, in 1887. We take much technological knowledge for granted.

[vi] In one of those six-degrees-of-separation stories that I couldn’t make up, through an odd combination of circumstances I’m at two degrees of remove from Jock Whitney, two from Franklin D. Roosevelt, and five from Abraham Lincoln. My old boss, Franklin Thomas, who was president of the Ford Foundation from 1979 to 1996, asked me to do some investment consulting for his life partner, Kate Whitney, and her sister Sara Whitney, who control the Greentree Foundation in Long Island, New York. The Whitney sisters are Jock Whitney’s adoptive daughters and are also Franklin D. Roosevelt’s granddaughters. (FDR’s son James Roosevelt and his wife Betsey Cushing were Kate’s and Sara’s biological parents. After the younger Roosevelts divorced, Cushing married Jock Whitney, who adopted Kate and Sara.) Jock (John Hay) Whitney’s grandfather was John Hay, Abraham Lincoln’s personal assistant, who also served in cabinet or ambassadorial positions under four subsequent presidents.

[vii] Not the former president of Yale, but his father.

[viii] Kleinman, Gabe. 2017. “Why Aren’t Foundations Actually Helping Their Grantees Like VCs?” Medium (Nov 14), https://medium.com/newco/why-arent-foundations-actually-helping-their-grantees-like-vcs-77d4437648

[ix] “Tappin’ the Time.” The lyrics are credited to the prolific Gladys Shelley and dated 1936, but according to Kathleen Riley, a biographer of Astaire and his wife, they were authored by Whitney and Jimmy Altemus much earlier, and, Riley writes, “the number was used in the 1927 London revue Shake Your Feet .” Riley, Kathleen. 2012. The Astaires: Fred & Adele. Oxford, UK: Oxford University Press.

[x] Wilson, John W. 1985. The New Venturers: Inside the High-Stakes World of Venture Capital. Reading, MA: Addison-Wesley. [xi] This comment is from an issue of Bernstein’s privately circulated market commentary, Economics and Portfolio Strategy (Peter L. Bernstein, Inc., New York).

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Venture Capital Definition: What Is VC and How Does It Work?

Ever wondered what those wealthy investors on Shark Tank are all about? They’re venture capitalists, and they could be your ticket to turning your big idea into a thriving business.

How does this work?

Continue reading for a comprehensive venture capital definition and how you can also cash in to fund your startup business idea!

The Definition of Venture Capital

Venture capital investments or VC refers to financing provided by investors to early-stage companies and small businesses that exhibit substantial growth potential over the long term.

Venture capital fund managers raise money from institutions like pension funds, endowments, and wealthy individuals. They then invest that money in promising young companies in exchange for equity — a share of ownership. In summary, VC firms are one of the means to raise funds for your business startup and hope to cash in big if your company takes off.

While this may sound enticing, that’s not all to venture capital definition in the business world.

VC funding comes with strings attached. The firm will likely want a say in key business decisions and a share of the profits. But for many entrepreneurs, giving up some control is worth the opportunity to partner with a VC firm that can provide funding, connections, and expertise to help their startup succeed.

Some well-known companies that VC initially funded include Google, Facebook, Intel, FedEx, Microsoft, and Starbucks. The VC model has funded innovations that have shaped our world. While risky, VC funding enables progress that otherwise may not have been possible.

Having established venture capital meaning , we’ll proceed to give more details about their operations and why startups need them.

How Venture Capital Works and Why Startups Seek It

As an entrepreneur, you pitch your business plan to VC firms to try and get them interested in funding your startup . If a firm believes in your vision and growth potential, it will invest capital in exchange for equity in your company, like shares of stock. The VC firm then hopes that the value of that equity increases substantially over time.

For example, imagine you start a tech company and receive $1 million in seed funding from a VC firm in exchange for 25% equity in your business. A few years later, your company is worth $10 million. The VC firm’s 25% equity stake is now worth $2.5 million — a 150% return on its initial $1 million investment. Of course, many startups fail, so VC firms invest in many companies with the hopes that a few big winners will more than makeup for losses.

5 Reasons Why Startups Seek VC Funding

There are several reasons why startups pursue VC funding, including:

Capital: VC provides the money to fund product development, marketing, and other early startup costs. This capital allows you to focus on growth rather than worrying about generating revenue or becoming profitable too quickly.
Expertise: VC firms often provide strategic and operational guidance to help startups succeed. They have experience helping young companies navigate challenges and accelerate growth.
Connections: VC firms have networks that can connect startups to potential partners, customers, executives, and additional funding sources. These connections can help take a business to the next level.
Credibility: Landing VC funding provides credibility and validation that signals to others that an experienced investment firm believes in the startup’s potential. This credibility can open doors and attract top talent, partners, and customers.
Exit Strategy: VC firms provide startups a path to “exit” their investment, usually through an initial public offering (IPO) or acquisition. The VC firm helps guide the startup to a point where they can have a successful exit, generating a return on their investment.

For entrepreneurs with vision and ambition, VC could be the perfect catalyst to turn a small startup into a thriving, self-sustaining company. If you’ve been researching sources of investment, you must have come across other funding sources like angel investors and might be wondering if they form a part of the VC definition. The truth is that they don’t, and we’ll explore their key differences in the next section.

3 Key Differences Between Venture Capital and Other Funding Sources

Venture capital (VC) is different from other sources of funding in some key ways. Unlike a loan from a bank, a venture capital fund doesn’t need to be repaid; a venture capital firm receives equity or an ownership stake in your business instead. VCs also typically provide more money than other options like crowdfunding or angel investors.

The following 3 comparison criteria cover more detail on these differences:

1. Hands-On Support

VCs are actively involved in the companies they invest in; they provide strategic guidance to help businesses grow and succeed. VCs often have a lot of experience helping new companies scale, build teams, and overcome challenges. They join your board of directors and help make important decisions. If things go well, their equity in your company can become very valuable over time.

2. Longer-Term Focus

While a loan needs to be repaid quickly, venture capital funds are focused on long-term growth. Venture capital funding is aimed at companies that have the potential for high returns over 3–7 years or more. This longer time horizon allows companies the flexibility to focus on optimizing their business model and gaining major traction before worrying about generating profits to repay the investment.

3. Higher Risk, Higher Reward

VC deals are higher risk but potentially higher reward. VCs invest in innovative companies with a lot of promise but no guarantee of success; as a result, the failure rate for VC-backed startups is high — up to 75% . However, when successful, the returns on investment can be significant. The VC’s equity stake means they stand to benefit greatly if your company achieves an initial public offering (IPO) or is acquired.

Note: For more information, check out our guide on the advantages and disadvantages of venture capitalists .

The VC ecosystem is not just about the firm that invested. To effectively capture the meaning of venture capital, it’s important to also mention the role of founders and partner investors. Keep reading as we explore the VC ecosystem in more detail.

The Venture Capital Ecosystem: Investors, Firms, and Entrepreneurs

The venture capital industry consists of several key players that work together to fund new companies. As an entrepreneur, it’s important to understand the roles of each participant and how the process works.

1. Investors

The driving force behind venture capital is the investor group, also known as limited partners (LPs). These are typically large institutions, like pension funds, endowments, insurance firms, and high-net-worth individuals, who provide the capital to VC firms to invest in startups. Venture capital investors are willing to take on risky investments in hopes of high returns.

2. Venture Capital Firms

Venture capital firms, known as general partners (GPs), raise funds from investors that they then invest in promising startups. The firms are in charge of finding, evaluating, and selecting startups to invest in. They also provide strategic guidance to help the startups grow. Some of the top VC firms in the US are Sequoia Capital, Andreessen Horowitz, and Kleiner Perkins.

3. Entrepreneurs

Of course, the key players at the heart of venture capital are the entrepreneurs and their startups. Entrepreneurs pitch their business ideas to VC firms in hopes of raising funds to launch or scale their companies. If selected for funding, the VC firm provides capital in exchange for equity in the startup.

The end goal for the VC firm and entrepreneur is to build the company into a high-growth business and achieve a profitable exit, often through an acquisition or initial public offering (IPO).

As an entrepreneur, the only thing stopping you from being a part of this ecosystem is a great business idea and a strategic startup pitch deck . If you’re curious about the definition of venture capital, it’s safe to assume you already have a great business idea, but how do you pitch it to a venture capitalist? Read on for some helpful tips.

7 Tips to Successfully Pitch to a VC

Successfully pitching to venture capital firms is challenging but rewarding. To land funding from a VC, you need to convince them your startup is worth investing in.

Here are 7 tips to nail your pitch to VCs:

Do your research.
Have a stellar executive summary.
Build connections.
Focus on traction and growth.
Keep the pitch concise.
Convey passion and vision.
Follow up appropriately.

1. Do your research.

Learn as much as you can about the VC firm, their investment interests, and portfolio companies. Focus on firms likely interested in your industry and business model. Come prepared to explain how their investment could complement their existing portfolio.

2. Have a stellar executive summary.

This 1-page overview should hook the VC’s interest, conveying your vision, product, business model, target market, competitive advantage, financial projections, and funding needs. Keep it concise yet compelling.

3. Build connections.

Network to find mutual connections who can introduce you to the VC firm; warm introductions are more likely to get a meeting. Attend industry events where you might connect with VC partners or analysts. Work on developing genuine relationships over time instead of a quick meeting. That’s how to find investors that are interested in your startup business idea.

4. Focus on traction and growth.

VCs want to see a proven concept, initial customers, and the potential for massive growth. Highlight key milestones achieved and outline your plan to gain significant market share. Provide data and metrics demonstrating your progress and potential.

Extra Tip: Download our startup pitch deck template to get started with crafting a compelling presentation.

5. Keep the pitch concise.

You’ll have limited time to present your ideas, so stick to the essential points. When creating your startup pitch deck , focus on covering the problem you’re solving, your solution, business model, target market, competition, team, financials, key metrics, and funding needs. Be prepared to answer questions about risks, challenges, and your long-term vision.

6. Convey passion and vision.

Your energy and enthusiasm for the business should shine through. Share your vision for the company’s future and how the VC’s investment could help achieve major growth milestones. However, be realistic in your projections.

7. Follow up appropriately.

If there’s interest in a follow-up meeting or call, be prompt in your response. Provide any requested information quickly and professionally. Even if the firm passes, follow up to reiterate your interest in future opportunities and to get feedback on your pitch. Their input can help strengthen your next pitch.

We’ve been able to define venture capital and all it entails; however, the truth is you need adequate preparation and practice to deliver a compelling pitch that piques the interest of VCs. Remember, securing funding is challenging — even an amazing pitch is no guarantee. Nonetheless, stay determined, work with a professionally designed pitch deck template , and keep pitching until you get that pivotal “yes!”

Frequently Asked Questions

What is venture capital, in simple words.

Venture capital, or VC, refers to funding that is specifically aimed at supporting startups and businesses with high growth potential. VC firms gather funds from investors, known as limited partners, to invest in promising startups or larger venture funds. The goal is to provide financial support to businesses that have the potential for significant and rapid growth.

Is Shark Tank a venture capitalist?

Shark Tank features venture capitalists known as the Sharks. They invest capital in companies that show growth potential in exchange for an equity stake. The Sharks carefully consider the factors that could affect their return on investment before making million-dollar deals on the show.

What is the difference between private equity and venture capital?

Private equity involves making controlling investments in struggling companies with the aim of increasing their profitability. On the other hand, venture capital (VC), which is often considered a subset of private equity, focuses on early investments in promising companies or ideas that have strong growth potential. VC is more aligned with startups and high-growth businesses.

As an entrepreneur with a growth mindset, it’s important to research the different ways to fund your startup for growth. One major funding source is VC firms, and as you’ve learned from our guide on venture capital definition, they will not only support you with capital but also provide administrative support and mentorship to ensure your business grows to success. However, the key to success is crafting a stellar pitch deck to grab their attention. Download our pitch deck template to get started in your journey to securing VC funding for your startup idea.

Maximilian Fleitmann is a passionate founder and entrepreneur. For the last 12+ years he has successfully launched several businesses in the areas of education and digitalization. Max purpose is to enable growth and therefore he shares his experience in building startups.

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Make Decisions with a VC Mindset

Ilya A. Strebulaev

Venture capitalists’ unique approach to investment and innovation has played a pivotal role in launching one-fifth of the largest U.S. public companies. And three-quarters of the largest U.S. companies founded in the past 50 years would not have existed or achieved their current scale without VC support.

The question is, Why? What makes venture firms so good at finding start-ups that go on to achieve tremendous success? What skills do they have that experienced, networked, and powerful large corporations lack?

The authors’ research reveals that the venture mindset is characterized by several principles: the individual over the group, disagreement over consensus, exceptions over dogma, and agility over bureaucracy. This article offers guidance to traditional firms in using the VC mindset to spur innovation.

The key is to embrace risk, disagreement, and agility.

Idea in Brief

The opportunity.

Venture capitalists’ unique approach to investment and innovation has played a pivotal role in launching one-fifth of the largest U.S. public companies, demonstrating the power of the venture mindset.

The Challenge

Traditional companies often struggle to replicate the success of venture firms because of their aversion to risk and failure and their preference for consensus and stability.

The Solution

When faced with market changes or disruptive technology, big companies should adopt the venture mindset, prioritizing the individual over the group, disagreement over consensus, exceptions over dogma, and agility over bureaucracy.

Venture investors are the hidden hand behind the most innovative companies surrounding us. According to research conducted by one of us (Ilya), venture capitalists were causally responsible for the launch of one-fifth of the 300 largest U.S. public companies in existence today. They have played an essential role in unlocking the power of the internet, the mobile revolution, and now artificial intelligence in all its forms. Apple, Google, Moderna, Netflix, Airbnb, OpenAI, Salesforce, Tesla, Uber, and Zoom—these firms disrupted entire industries despite initially having fewer resources and less support and experience than their mature, successful, cash-rich competitors. All these businesses could theoretically have emerged from within an established company—but they didn’t. Instead, they were financed and shaped by VCs. Indeed, we estimate that three-quarters of the largest U.S. companies founded in the past 50 years would not have existed or achieved their current scale without VC support.

IS Ilya A. Strebulaev is the David S. Lobel Professor of Private Equity and a professor of finance at the Stanford Graduate School of Business. He is also the founder of the Stanford GSB Venture Capital Initiative and a research associate at the National Bureau of Economic Research.
AD Alex Dang is a venture builder and a digital strategy adviser. He was a partner at McKinsey and EY and launched numerous businesses at Amazon.

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Business Capital: Definition and Where to Get It

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money .

Business capital, or small-business capital, commonly refers to lump sums of money that come from external sources and are used to fund business purchases, operations or growth. These sources can include small-business loans , as well as free funding like small-business grants .

The right type of business capital for you depends on how established your business is, as well as other factors like your funding purpose and how fast you need it.

How much do you need?

with Fundera by NerdWallet

We’ll start with a brief questionnaire to better understand the unique needs of your business.

Once we uncover your personalized matches, our team will consult you on the process moving forward.

What is business capital?

Technically speaking, business capital is anything that generates value for your business. That can include financial capital like cash, human capital like employees and personnel or physical capital like real estate and intellectual property.

Business capital, or small-business capital, can also simply refer to external financing, or lump sums your business attains to fund operations or large purchases.

Types of business capital

There are several types of business capital that you can use to fund your business at various stages.

Debt funding

With debt funding — taking out a small-business loan — you borrow money from a third party and repay it, with interest, over a specific period of time. Debt funding can be a good option for a variety of small businesses, especially established companies looking to grow their operations.

Business term loans

With a business term loan , you receive a lump sum of capital upfront from a lender. You then repay the loan, with interest, over a set period of time — usually with fixed, equal payments.

Business term loans are well-suited for specific funding purposes, such as purchasing real estate or renovating your storefront. Some loans, like equipment financing , are designed to accommodate specific business purchases.

You can get business term loans from banks, credit unions and online lenders . Banks and credit unions will offer term loans with the most competitive rates and terms, but you’ll need to meet strict criteria to qualify. Online lenders are typically more flexible and may work with startups or businesses with bad credit. These companies will often charge higher interest rates.

» MORE: Compare the best banks for business loans

SBA loans are partially guaranteed by the U.S. Small Business Administration and issued by participating lenders, typically banks and credit unions. There are several types of SBA loans , but generally, these products are structured as term loans.

These loans usually have low interest rates and long repayment terms and can be used for a range of purposes, such as working capital, equipment purchases and business expansions.

This type of government funding can be a good option if you’re an established business with good credit but you can’t qualify for a bank loan.

>> MORE: Top SBA lenders

Business lines of credit

A business line of credit is one of the most flexible types of business capital — making it well-suited to meet the working capital needs of new and established companies alike.

With a business line of credit, you can draw from a set limit of funds and pay interest on only the money you borrow. After you repay, you can draw from the line as needed. Lines of credit are often used to manage cash flow, buy inventory, cover payroll or serve as an emergency fund.

Like term loans, business lines of credit are available from traditional and online lenders. Traditional lenders typically offer credit lines with the lowest rates but require an excellent credit history and several years in business to qualify.

Online lenders, on the other hand, may charge higher interest rates but generally work with a wider range of businesses. Some online lenders offer startup business lines of credit and/or options for borrowers with fair credit.

Business credit cards

Business credit cards work similarly to personal credit cards, although business cards typically offer rewards for spending on operational expenses, such as gas, internet, software purchases and more.

Business credit cards can be a good option for startups because they offer quick access to capital and most entrepreneurs with good personal credit can qualify. You may not want to completely fund your business with a credit card , however, because overspending can lead to expensive debt that’s difficult to repay.

In general, business credit cards can be useful for all types of entrepreneurs because they allow you to earn rewards (e.g., cash back, miles, points) for everyday spending on your business purchases. Responsible spending on a credit card can also help you establish business credit, which will allow you to qualify for more competitive loan products.

»MORE: Debt vs. equity financing

Equity funding

With equity funding , you receive money from an investor in exchange for partial ownership of your company. If you’re a startup that can’t qualify for a business loan or you want to avoid debt, equity funding may be a suitable option for your needs.

Angel investors and venture capital firms

Angel investors and venture capital firms are common forms of equity financing that involve receiving money in exchange for equity in your company.

With angel investors , you work with individuals who invest their money into your business. These individuals often invest in startups with high growth potential. In addition to the equity they receive, your angel investor may offer business expertise to help your company progress.

A venture capital firm, on the other hand, will be an individual or group that invests from a pool of money. VCs may require a higher amount of equity in your company as well as some operational control, such as a seat on the board of directors. Compared to angel investors, VCs tend to offer larger amounts of money and invest in businesses that are a little more established.

You can find angel investors and venture capitalists through organizations like the Angel Capital Association or the National Venture Capital Association . You can also search online for investors in your area as well as attend industry events and talk to other business owners.

Either of these startup funding options may be a good option for your business if you’re looking to avoid debt. Finding and receiving capital may take time, however, and some businesses may not be able to meet the requirements set out by an angel investor or venture capital firm.

Crowdfunding

With crowdfunding your business , you raise money online through public donations in exchange for equity or rewards, such as an exclusive product or early access to an event.

You can set up a campaign using a crowdfunding platform, which allows you to manage the process through the platform’s website.

With equity crowdfunding , you can use platforms like Fundable, StartEngine and Netcapital to receive capital in exchange for ownership of your business. For rewards-based crowdfunding , you can turn to well-known websites like Kickstarter or Indiegogo .

Crowdfunding can be well-suited for a range of businesses as long as they’re dedicated to managing and promoting a campaign. Rewards-based crowdfunding is usually a better option for small amounts of capital, especially for businesses with a unique product or service.

Equity crowdfunding, on the other hand, may give you access to larger funding amounts, but you may have to meet stricter eligibility requirements to use one of these crowdfunding platforms.

» MORE: How to fund your business idea

Free business capital

On top of these main sources of external financing, entrepreneurs can access free small-business capital through grants. Grants do not have to be repaid and are available from government agencies, corporations and nonprofits.

Small-business grants are available for new and existing businesses. You can get a business grant from a few sources:

Federal and state governments. Government agencies offer a range of small-business grants, including those designed for companies that focus on scientific research and technology innovation. Grants.gov provides a comprehensive list of business grants available from the federal government.

Private corporations. Many corporations offer annual small-business grant programs or competitions, such as the FedEx Small Business Grant Contest . In many cases, you have to meet specific criteria to qualify for one of these grants.

Nonprofits. Certain nonprofits offer grants designed for small-business owners. Among these organizations, some focus on providing business grants for women or business grants for minority groups .

Business grants are a good option for startups as well as companies that can’t qualify for other types of small-business capital. Because grants give you access to free capital, however, applications are competitive — and often time-consuming.

Bootstrapping

In addition to the previous external financing sources, many small-business owners also bootstrap, or self-fund, their business venture. Options for bootstrapping your business include using personal savings or tapping into their retirement account through a Rollover as Business Startup , or ROBS.

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How to get business capital

The right funding option is different for every small-business owner. And the best type of funding for you now might not be the best choice to meet your needs later.

Consider why you need business capital. Your funding purpose is a key component of which type of business capital is best for you, and how much money you need. Plus, any potential lender or funder will likely ask for this information.

Decide which type of funding is best for your business. Before you start researching, think about which type of business capital is best for you. Consider if you would rather take on debt or give up business equity, how fast you need access to funding and your current resources and qualifications.

Research lenders or funders. Once you’ve decided which type of capital your business needs, you can begin researching providers — either lenders, investors or funding platforms — to determine the best options.

Gather documents. It may vary based on your capital provider, but generally you’ll need documents like your business plan, filing information and financial information like profit and loss statements, tax returns or bank statements.

How you get small-business capital depends on why you need capital and how long you’ve been in business. Startups may consider self-funding, working with angel investors or applying for grants. Businesses with at least a year in operation and solid finances, likely have more options, such as SBA funding and other types of business loans.

Capital in business generally refers to anything the business uses to generate value, including finances, physical assets, human resources and more. It can also refer to external sources of financing, like loans or grants.

If you need money to get your business off the ground, you’ll likely have difficulty qualifying for traditional funding, like a term loan or line of credit. Instead, you might turn to alternative sources, such as friends and family, crowdfunding, small-business grants or angel investors for the startup capital you need.

On a similar note...

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COMMENTS

Venture Capitalists Definition: Who Are They and What Do ...
Venture Capitalist: A venture capitalist is an investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to equities markets ...
How Venture Capitalists Make Decisions
For decades now, venture capitalists have played a crucial role in the economy by financing high-growth start-ups. While the companies they've backed—Amazon, Apple, Facebook, Google, and more ...
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Venture capital (VC) financing is a high-risk, high-reward investment model that fuels start-ups in their later stages. The VC business model is unique in its approach as it seeks to provide funds to start-ups after gaining some traction but before they are ready to go public or be acquired. In this article, we will explain how a VC business ...
Venture capital
Venture capital (VC) is a form of private equity financing that is provided by firms or funds to startup, early-stage, and emerging companies that have been deemed to have high growth potential or which have demonstrated high growth (in terms of number of employees, annual revenue, scale of operations, etc.).Venture capital firms or funds invest in these early-stage companies in exchange for ...
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Investor Dany Farha addresses the business model of venture capital, and what it takes to for VCs to take calculated risks investing in startups: a strong entrepreneurial team that is mission-driven.
What Is a Venture Capitalist and How Do They Work?
Venture capital investments come with a risk of high failure rates, ranging from 25% to 40%. Factors that can lead to unsuccessful outcomes include insufficient demand for the product or service, inadequate funds for operations and development, poor management decisions as well as an ineffective business model.
Venture Capitalist (VC)
Venture Capitalist Definition. A Venture Capitalist is a private investor that provides early capital to new companies that exhibit a strong potential for growth and success. This is typically in exchange for a significant equity stake. ... They assess the startup's business model, financial projections, management team, market potential, and more.
What is Venture Capital (VC) & How Does it Work?
Venture Capital Meaning and Definition. VC is a form of private equity financing provided to early-stage and high-growth companies. It involves investors, known as venture capitalists, who provide capital in exchange for an ownership stake in the company. ... This involves assessing the company's financials, business model, market position ...
Venture Capitalists Definition: Who Are They And What Do They Do?
Venture capitalists are investors who provide capital to startups and small businesses in exchange for an equity stake. They not only provide funding but also offer mentorship, guidance, and industry connections to help startups succeed. Venture capitalists, often referred to as VCs, are individuals or firms that invest in early-stage startups ...
What Is a Venture Capitalist?
A venture capitalist is a person (or a company) who provides funding in exchange for an equity stake. Funding typically goes to companies that have a large potential for growth so the venture capitalists can make a profit from their investment.
What Is Venture Capital?
Venture capital (VC) is a form of private equity that funds startups and early-stage emerging companies with little to no operating history but significant potential for growth. Fledgling ...
Demystifying funding: Understanding the VC business model
VC Funds make their money in two ways. The first is a management fee (usually 2% of the fund/year) which helps them to run and manage the fund through hiring team members and having the resources ...
How Venture Capital Works. Part 2: Business Model
In venture capital, returns follow the Pareto principle — 80% of the wins come from 20% of the deals. Great venture capitalists invest knowing they're going to take a lot of losses in order to ...
What Is Venture Capital?
Venture capital (VC) is a type of private equity and financing for entrepreneurs, and startups. In exchange for preferred equity in the startup, investors (aka venture capitalists) support ...
Venture Capitalist: What Is It?
A venture capitalist is a person or company that invests in a business venture, providing capital for a startup or expansion. The majority of venture capital comes from professionally managed firms. These venture capital firms seek higher rates of return than they could earn through other investment vehicles, such as the stock market.
Angel Investors vs. Venture Capitalists
Venture capitalists ask for more company equity than angel investors. Angel investors fund younger, less established businesses than venture capitalists. Venture capitalists look for a bigger return on investment than angel investors. Angel investors spend more time working with and mentoring business owners than venture capitalists do.
Venture Capital
Venture capital helps companies grow quickly and successfully (Gompers & Lerner, 2001), is regarded as a key component both in the development of an entrepreneurial economy (Mason & Harrison, 2002) and in the innovation process (Powell, Koput, Bowie, & Smith-Doerr, 2002).The supply of venture capital is an important component of the so-called funding escalator for business growth (Mason ...
Understanding Venture Capital
Definition Venture capital is a form of financing that individual investors or investment firms provide to early-stage companies that appear capable of growing quickly and commanding significant market share. This financing is generally offered in exchange for equity in the company. ... On the other hand, the venture capital business model ...
Venture Capital: A History
Source: Nicholas (2019), based on data from Davis, Gallman, and Gleiter (1997), p. 250, and from Preqin. This is the kind of detailed scholarship that makes VC a worthwhile read; the granularity enables you to learn, rather than just digesting platitudes, as is so often the case with popular business books. But what distinguishes whaling from modern venture capital is the risk taken by the ...
Venture Capital Definition: What Is VC and How Does It Work?
Venture capital fund managers raise money from institutions like pension funds, endowments, and wealthy individuals. They then invest that money in promising young companies in exchange for equity — a share of ownership. In summary, VC firms are one of the means to raise funds for your business startup and hope to cash in big if your company ...
Venture Capital Due Diligence (VC)
Venture Capital Due Diligence: Business Model Viability Unit Economics Analysis. To assess the viability of a business model, the unit economics of the business must be closely examined - which consists of breaking down the revenue and cost structure into the smallest units possible.
Stages of Venture Capital
Key Takeaways. There are five stages of capital funding that range from the initial seed stage to the mezzanine stage that precedes an IPO. There are different funding sources available to help you scale at different points along your entrepreneurial journey. To gain funding, your company needs to be mature enough to draw investor interest.
Make Decisions with a VC Mindset
Venture capitalists' unique approach to investment and innovation has played a pivotal role in launching one-fifth of the largest U.S. public companies. And three-quarters of the largest U.S ...
Business Capital: Definition and Where to Get It
Business capital, or small-business capital, commonly refers to lump sums of money that come from external sources and are used to fund business purchases, operations or growth. These sources can ...

What Is a Venture Capitalist?

Venture Capitalists Definition: Who Are They and What Do They Do?

Key Takeaways

History of Venture Capital

$348 billion

How Are Venture Capitalist Firms Structured?

How Are Venture Capitalists Compensated?

What Are the Prominent Roles in a VC Firm?

Understanding The VC Business Model Investor Dany Farha addresses the business model of venture capital, and what it takes to for VCs to take calculated risks investing in startups: a strong entrepreneurial team that is mission-driven.

How the deal flow works

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What Does a Venture Capitalist Do?

Identify and Nurture Promising Startups

Provide Capital and Strategic Support

Facilitate Growth and Scaling Opportunities

Types of Venture Capitalists

Corporate Venture Capitalists (CVCs)

Venture Capital Firms

Venture Capital Process

Due Diligence and Evaluation

Term Sheet Negotiation

Investment Decision and Funding

Post-investment Monitoring and Value Addition

Financing Methods of Venture Capital

Series A, B, C, etc.

Mezzanine Financing

Bridge Financing

Venture Capital Investment Strategies

Geographic Focus

Stage Focus

Portfolio Diversification

Challenges Faced by Venture Capitalists

Startups' Failure Rate

Illiquidity and Exit Challenges

Regulatory and Legal Risks

Common Misconception About Venture Capitalists

Venture Capitalist (VC) FAQs

What do Venture Capitalists do?

When do Venture Capitalists usually invest in companies?

Is it risky to be a Venture Capitalist?

What do Venture Capitalists look for in a company?

True Tamplin, BSc, CEPF®

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