What is Venture Capital?

Venture capital is a form of private equity focused specifically on early stage companies, startups and young businesses that are too new or unproven to raise money through traditional means. Venture capital firms invest in these companies in exchange for an ownership stake, with the expectation that a small number of them will grow into very valuable businesses.

How does venture capital work?

A venture capital firm raises a fund from institutional investors and wealthy individuals. It then deploys that capital into a portfolio of startups, knowing that most of them will fail or return little, but that one or two exceptional successes can more than make up for the losses. This model depends on backing many companies and accepting a high failure rate as part of the strategy.

What do venture capitalists provide beyond money?

The best venture capital firms offer more than capital. They provide strategic advice, introductions to potential customers and partners, help recruiting senior talent, and guidance on how to grow. This network and expertise can be as valuable as the funding itself for an early stage founder.

What kinds of companies receive venture capital?

Typically technology driven companies with the potential to scale rapidly, software, biotechnology, financial technology, consumer apps. The defining characteristic is high growth potential combined with high uncertainty. Venture capital is not suited to stable, predictable businesses.

Why does this matter for a stock market investor?

Because many of the companies you invest in today were once venture backed startups. Google, Amazon, Facebook, and thousands of others were funded by venture capital before they were ever publicly listed. Understanding how companies are built and financed before they reach the stock market gives you useful context for evaluating the businesses you eventually own.