Venture capital
VEN-cher KAP-ih-tul
A form of private equity financing where firms invest fund money in high-growth startups in exchange for equity.
Venture capital is institutional investment in startups. VC firms raise funds from limited partners (pension funds, endowments, wealthy individuals), then invest that money in startups they believe will generate outsized returns.
The VC model depends on power law returns. Most investments fail. A few break even. One or two generate 50-100x returns that pay for the entire fund. VCs optimize for finding those rare, massive winners. This is why they push for aggressive growth: a company growing 30% per year will not return the fund, but one growing 200% per year might.
The typical VC fund has a 10-year life. Investments happen in years 1-4. The fund returns money in years 5-10 through IPOs, acquisitions, or secondary sales. The VC firm earns a 2% annual management fee and 20% of profits (carried interest). The process starts with a pitch deck and ends with a term sheet.
Examples
A VC firm leads a Series A round.
The firm invests $10M from their $300M fund. They take a board seat. They expect the company to grow to $50M+ ARR and eventually IPO or be acquired for $1B+. If it works, the $10M investment returns $200M to the fund.
A founder evaluates different VC firms.
Firm A has deep experience in developer tools and can make customer introductions. Firm B has a bigger brand but less relevant expertise. Firm C offers a higher valuation but adds less strategic value. The founder chooses Firm A because the operational help matters more than a slightly higher valuation.
A VC portfolio follows the power law.
A fund invests in 30 companies. 15 fail completely (0x return). 10 return 1-3x (break even). 4 return 5-10x. 1 returns 50x. That single winner generates more money than the other 29 combined. This is why VCs bet on potential, not probability.
Frequently asked questions
When should a startup raise venture capital?
When you have found product-market fit (or have strong signals toward it), your market is large enough to support a venture-scale outcome ($1B+), and you need capital to grow faster than revenue can fund. Not every company should raise VC; it is a specific tool for a specific growth model.
What do VCs look for in a startup?
Large addressable market, strong founding team, evidence of product-market fit, defensible competitive advantage, and a path to a venture-scale outcome. At seed stage, team and market matter most. At Series A, traction and unit economics become critical.
Related terms
A high-net-worth individual who invests their personal money in early-stage startups in exchange for equity.
A non-binding document outlining the key terms of an investment, including valuation, board seats, and investor rights.
The first major institutional funding round, typically $5-20M, raised after a startup demonstrates product-market fit and initial traction.
Ownership in a company represented by shares of stock, which entitle the holder to a proportional share of the company's value.
Want the complete playbook?
Picks and Shovels is the definitive guide to developer marketing. Amazon #1 bestseller with practical strategies from 30 years of marketing to developers.