What Is Venture Capital? (2024)

What Is Venture Capital (VC)?

Venture capital (VC) is a form of private equity and a type of financing for startup companies and small businesses with long-term growth potential. Venture capital generally comes from investors, investment banks, and financial institutions. Venture capital can also be provided as technical or managerial expertise.

Key Takeaways

  • Venture capital (VC) is a form of private equity and a type of financing for startup companies and small businesses with long-term growth potential.
  • Venture capitalists provide backing through financing, technological expertise, or managerial experience.
  • VC firms raise money from limited partners (LPs) to invest in promising startups or even larger venture funds.

What Is Venture Capital? (1)

Understanding Venture Capital (VC)

VC provides financing to startups and small companies that investors believe have great growth potential. Financing typically comes in the form of private equity (PE). Ownership positions are sold to a few investors through independent limited partnerships (LPs). Venture capital tends to focus on emerging companies, while PE tends to fund established companies seeking an equity infusion. VC is an essential source for raising money, especially if start-ups lack access to capital markets, bank loans, or other debt instruments.

Harvard Business School professor Georges Doriot is generally considered the "Father of Venture Capital." He started the American Research and Development Corporation in 1946 and raised a $3.58 million fund to invest in companies that commercialized technologies developed during WWII. The corporation's first investment was in a company that had ambitions to use X-ray technology for cancer treatment. The $200,000 that Doriot invested turned into $1.8 million when the company went public in 1955.

VC became synonymous with the growth of technology companies in Silicon Valley on the West Coast. By 1992, 48% of all investment dollars went into West Coast companies; Northeast Coast industries accounted for just 20%. During 2022, West Coast companies accounted for more than 37% of all deals while the Mid-Atlantic region saw just around 24% of all deals.

Types of Venture Capital

  • Pre-Seed: This is the earliest stage of business development when the founders try to turn an idea into a concrete business plan. They may enroll in a business accelerator to secure early funding and mentorship.
  • Seed Funding: This is the point where a new business seeks to launch its first product. Since there are no revenue streams yet, the company will need VCs to fund all of its operations.
  • Early-Stage Funding: Once a business has developed a product, it will need additional capital to ramp up production and sales before it can become self-funding. The business will then need one or more funding rounds, typically denoted incrementally as Series A, Series B, etc.

How to Secure VC Funding

  • Submit a Business Plan: Any business looking for venture capital must submit a business plan to a venture capital firm or an angel investor. The firm or the investor will perform due diligence, which includes a thorough investigation of the company's business model, products, management, and operating history.
  • Investment Pledge: Once due diligence has been completed, the firm or the investor will pledge an investment of capital in exchange for equity in the company. These funds may be provided all at once, but more typically the capital is provided in rounds. The firm or investor then takes an active role in the funded company, advising and monitoring its progress before releasing additional funds.
  • Exit: The investor exits the company after some time, typically four to six years after the initial investment, by initiating a merger, acquisition, or initial public offering (IPO).

Many venture capitalists have had prior investment experience, often as equity research analysts. VC professionals tend to concentrate on a particular industry. A venture capitalist who specializes in healthcare, for example, may have had prior experience as a healthcare industry analyst.

Advantages and Disadvantages of Venture Capital

Venture capital provides funding to new businesses that do not have enough cash flow to take on debts. This arrangement can be mutually beneficial because businesses get the capital they need to bootstrap their operations, and investors gain equity in promising companies. VCs often provide mentoring and networking services to help them find talent and advisors. A strong VC backing can be leveraged into further investments.

However, a business that accepts venture capital support can lose creative control over its future direction. VC investors are likely to demand a large share of company equity, and they may make demands of the company's management. Many VCs are only seeking to make a fast, high-return payoff and may pressure the company for a quick exit.


  • Provides early-stage companies with capital to bootstrap operations

  • Companies don't need cash flow or assets to secure VC funding

  • VC-backed mentoring and networking services help new companies secure talent and growth


  • Demand a large share of company equity

  • Companies may find themselves losing creative control as investors demand immediate returns

  • VCs may pressure companies to exit investments rather than pursue long-term growth

Angel Investors

Venture capital can be provided by high net-worth individuals (HNWIs), also often known as angel investors, or venture capital firms. The National Venture Capital Association is an organization composed of venture capital firms that fund innovative enterprises.

Angel investors are typically a diverse group of individuals who have amassed their wealth through a variety of sources. However, they tend to be entrepreneurs themselves, or recently retired executives from business empires. The majority look to invest in well-managed companies, that have a fully-developed business plan and are poised for substantial growth.

These investors are also likely to offer to fund ventures that are involved in the same or similar industries or business sectors with which they are familiar. Another common occurrence among angel investors is co-investing, in which one angel investor funds a venture alongside a trusted friend or associate, often another angel investor.

Venture Capital Success

Due to the industry's proximity to Silicon Valley, the overwhelming majority of deals financed by venture capitalists occurred in the technology industry—the internet, healthcare, computer hardware and services, and mobile and telecommunications. In 2023, San Francisco still ranked highest among VC investments. Other industries have benefited from VC funding, including Staples and Starbucks (SBUX).

Google and Intel have venture funds to invest in emerging technology. In 2019, Starbucks also announced a $100 million venture fund to invest in food startups. VC has matured over time and the industry comprises an assortment of players and investor types who invest in different stages of a startup's evolution.

Why Is Venture Capital Important?

New businesses are often highly risky and cost-intensive ventures. As a result, external capital is often sought to spread the risk of failure. In return for taking on this risk through investment, investors in new companies can obtain equity and voting rights for cents on the potential dollar. Venture capital, therefore, allows startups to get off the ground and founders to fulfill their vision.

What Is Late Stage Investing?

Late-stage financing has become more popular because institutional investors prefer to invest in less-risky ventures, as opposed to early-stage companies where the risk of failure is higher.

How Have Regulatory Changes Boosted VC?

The Small Business Investment Act (SBIC) in 1958 boosted the VC industry by providing tax breaks to investors. In 1978, the Revenue Act was amended to reduce the capital gains tax from 49% to 28%. In 1979, a change in the Employee Retirement Income Security Act (ERISA) allowed pension funds to invest up to 10% of their assets in small or new businesses. The capital gains tax was reduced to 20% in 1981. These developments catalyzed growth in VC and the 1980s turned into a boom period for venture capital, with funding levels reaching $4.9 billion in 1987.

The Bottom Line

Venture capital represents a central part of the lifecycle of a new business. Before a company can start earning revenue, it needs start-up capital to hire employees, rent facilities, and begin designing a product. This funding is provided by VCs in exchange for a share of the new company's equity.

What Is Venture Capital? (2024)


What is venture capital in simple words? ›

What is venture capital in simple words? Venture capital is money invested in a business, usually a start-up, that is seen as having strong growth potential. It is typically provided by investors who expect to receive a high return on their investment.

What is an example of venture capital? ›

Examples of venture capital

VC funds like Tiger Global, KKR, Accel Partners, Temasek, Lightrock India invest in Indian start-ups. Every year, many start-ups get funding from venture capital funds. A unicorn is a start-up with a $1 Billion or more valuation.

Do venture capitalists make money? ›

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.

Is Shark Tank venture capital? ›

The sharks are venture capitalists, meaning they are "self-made" millionaires and billionaires seeking lucrative business investment opportunities. While they are paid cast members of the show, they do rely on their own wealth in order to invest in the entrepreneurs' products and services.

What are the disadvantages of venture capital? ›

  • Approaching a venture capitalist can be tedious.
  • Venture capitalists usually take a long time to make a decision.
  • Finding investors can distract a business owner from their business.
  • The founder's ownership stake is reduced.
  • Extensive due diligence is required.
  • The company is expected to grow rapidly.
May 5, 2022

What do venture capitalists do? ›

VC firms raise money from limited partners to invest in promising startups or even larger venture funds. Another example is investing in larger venture funds. The larger venture funds can have a clear target in mind for the kind of companies they want to invest in, like an EV (electric vehicle) company.

Who benefits from venture capital? ›

Venture capital provides funding to new businesses that do not have enough cash flow to take on debts. This arrangement can be mutually beneficial because businesses get the capital they need to bootstrap their operations, and investors gain equity in promising companies.

What are the pros and cons of venture capital? ›

Venture Capital AdvantagesVenture Capital Disadvantages
Offers access to larger amounts of capitalReduces ownership stake for founders
Lacks monthly paymentsDiverts attention from running the business
Comes without the need to pledge personal assetsIs relatively scarce and difficult to obtain
6 more rows
Sep 8, 2023

How do venture capitalists get funding? ›

Venture capital funding tends to come from wealthy investors, investment banks and other financial institutions. VC firms have considerably more to invest (typically more than $250,000) compared to other investors because they typically pool funds from other investment companies, large corporations and pensions.

How much do VP in venture capital make? ›


How much money do you need to be a venture capitalist? ›

Many venture capitalists will stick with investing in companies that operate in industries with which they are familiar. Their decisions will be based on deep-dive research. In order to activate this process and really make an impact, you will need between $1 million and $5 million.

Who turned down $30 million on Shark Tank? ›

Hanalei Swan, an 11-year-old prodigy, is one such remarkable individual who made headlines by turning down a staggering $30,000,000 investment offer on the hit TV show, Shark Tank. Hanalei's journey and her audacious decision to walk away from such a lucrative deal serve as an enduring source of inspiration.

Does JP Morgan have venture capital? ›

With decades of global experience, a robust professional and venture capital network, and scalable money-management solutions, we're the only bank you'll ever need.

Is Vanguard a venture capital? ›

Vanguard Venture Partners, L.P. operates as a venture capital firm. The Company targets technology and life sciences companies.

What is venture capital explained for kids? ›

Venture capital is a type of private equity capital.. Typically it is provided by outside investors to new businesses that promise to grow fast. Venture capital investments are usually high risk, but offer the potential for above-average returns.

Is venture capital a debt or equity? ›

Venture capital is an equity-based form of financing, whereby investors invest profits into a company and receive a stake in return.

What is venture capital meaning for kids? ›

Venture capital (or VC) is a type of investing where money is provided to private companies or ventures in exchange for equity. These investors, called Venture capitalists, invest in companies that have grown beyond the startup phase, and want to go to the next level.


Top Articles
Latest Posts
Article information

Author: Moshe Kshlerin

Last Updated:

Views: 5379

Rating: 4.7 / 5 (77 voted)

Reviews: 92% of readers found this page helpful

Author information

Name: Moshe Kshlerin

Birthday: 1994-01-25

Address: Suite 609 315 Lupita Unions, Ronnieburgh, MI 62697

Phone: +2424755286529

Job: District Education Designer

Hobby: Yoga, Gunsmithing, Singing, 3D printing, Nordic skating, Soapmaking, Juggling

Introduction: My name is Moshe Kshlerin, I am a gleaming, attractive, outstanding, pleasant, delightful, outstanding, famous person who loves writing and wants to share my knowledge and understanding with you.