Venture capital (or “VC” for short) is a type of financing for startup companies.
Venture capitalists invest money in young companies they believe have big growth potential. In exchange, the investors receive ownership stakes (i.e., equity), which could be worth a whole lot more down the line if those companies prove to be successful.
Here’s what the typical life cycle of a VC investment looks like:
Startup submits a business plan to VC firm or investor
VC does due diligence on company and business model
If it decides to invest, VC and startup agree to terms of the investment
(like what percent of the company the new VC investors own)
Startup uses this funding to grow its business.
The company (hopefully) takes off!
Other VC investors may also buy into the company
in subsequent “funding rounds”
Eventually, VC investors
cash out of the company through an “exit”
VC investors typically don’t receive a dime back on their investments until they reach an “exit.” That’s the VC investors’ chance to cash out and finally profit from the startup’s growth. Here are the main ways they usually do so:
Finally, while it’s not the exit any VC investor dreams about, there’s always a real possibility that a given startup could fail. If this happens, VC investors often lose their entire investment.
A VC investment always comes with potential risks and rewards for both parties. Here are some of the main ones:
|For VC investors
Venture capital is technically a type of private equity. But investors typically refer to them as separate categories due to their different focus and strategies. For example:
Here are some other points to keep in mind about VC investments:
Venture capital is a type of financing in which investors buy directly into a young, fast-growing startup. VC investors then have an ownership stake, which they may sell for a profit if the startup eventually IPOs or gets acquired. For founders and companies, VC funding can provide much-needed cash to fuel growth. For well-heeled investors, it can be a high-risk, high-return investment option.