Venture Capital: What it Is and How it Works
Written by Law on Call Staff | Last Updated November 10, 2025
Venture capital funding can help startups rise to multi-billion dollar industry leaders. But the venture financing process is multifaceted, and a lot happens between funding and an IPO.
Below, we’ll help you understand whether pursuing VC makes sense for your business.
Main Takeaways
- Venture capital funding is usually reserved for startups with the potential for rapid growth.
- When you accept VC funding for your enterprise, it’s generally in exchange for equity.
- VC and private equity have some overlap, but they’re not the same.
What Is Venture Capital?
Venture capital (VC) is a form of financing in which investors provide money to startups with high growth potential in exchange for equity.
Elements of VC:
- Entities (venture capital firms)
- Individuals (venture capitalists)
- Investment money (venture capital funds)
Since venture capitalists focus their investments on startup companies, venture capital funding involves substantial risks. In fact, venture capitalists plan on the majority of their investments flopping—they’re fishing for the few successes that will provide major returns.
How do I get venture capital funding?
Getting VC funding requires ample research and networking. Since a venture capital firm typically invests in startups at certain stages of development/growth and within specific industries, it’s essential to seek out firms that fund companies like yours.
After establishing which firms to target, consider having a mutual acquaintance introduce you with the firm or attending events that are likely to make that connection possible. If all else fails, it might be time to send a clear and succinct pitch email to the firm.
Notably, starting an LLC may make it more difficult to acquire VC funds. You might need to form a corporation to look appealing to investors.
Does my company need venture capital funding?
While many startups seek venture capital funding, not all do. Some prefer to take out loans in order to generate funds while maintaining full control of the business.
How Does Venture Capital Work?
If you plan to seek VC funding for your startup, it’s important to know what to expect. Here’s how the venture capital process typically breaks down—from acquiring funds to arranging exits.
The VC Process Step-By-Step
- Fundraising
Just like startups seek funding, so too must venture capital firms. Investment money is kept in a venture capital fund. A firm will typically have one active fund at a time, with a 10-year lifecycle. At the end of that cycle, after investments are returned or exits are negotiated, a new fund may be created and a new fundraising campaign may begin. - Match Up
Before investing, venture capitalists meet with entrepreneurs. VC firms often fund companies within a sector the investors have experience working in. For example, a firm made up of restaurateurs might prioritize food-focused startups. If you’re looking for investments, it’s typically best to focus on firms that work with your industry. - Investment
After being introduced to startup founders, venture capital firms will weigh the potential risks and returns. From there, they’ll decide whether to invest and how much. The collection of companies that VCs invest in is called a “portfolio.” - Guidance
Since VC finances startups, the business-running experience of founding teams may be limited. So, many venture capitalists provide guidance and mentoring to the companies they fund. While this can be helpful, remember that your goals for the company may not align with venture capital goals. - Exit
Ultimately, venture capitalists try to drive their startup investments toward an initial public offering or sale (for a much higher price than their investment). Of course, not all exits are successful. Since many startups fail, many venture capital investments result in losses.
Are there downsides to accepting venture capital?
Accepting venture capital generally means giving away an ownership percentage of your business and relinquishing partial company control.
And if you decide to pursue venture capital, make sure your business is ready to absorb a windfall. Plenty of startups have faltered under the weight of too much money coupled with too little experience.
How much equity should I give to venture capitalists?
There is no easy formula to determine how much equity should be given to venture capital investors over time. Most founders hope to retain as much equity as possible while still getting the investments needed to grow the company.
- For venture capital-funded startups that reach an initial public offering, founders might have anywhere from a few percentage points of ownership at the low end, to around 40% at the high end. (There are outliers, of course.)
- Remember that retaining 40% equity doesn’t necessarily mean VCs have 60%; ownership might also be held in employee stock options or by non-VC investors.
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What Do Venture Capitalists Look For?
Venture capital investment criteria varies, but assessing startups comes with a few common evaluation tactics. VCs will often assess a startup’s management team, product and development timeline, market size, risk and return, and the startup’s valuation.
Who are the startup’s founders and managers?
Venture capitalists have to trust a startup’s management team. In fact, investors’ belief—or lack thereof—in a company’s management can take precedent over their belief in a product or market fit. So what do they want in startup management?
Venture capitalists often look for startup teams with prior management or company-building experience, ideally in the startup’s industry. Venture capitalists want to see driven, focused managers who have the wherewithal to go beyond a good idea.
What is the product and it’s development timeline?
VCs tend to look for products that fill a market need and solve a problem. They want to see products other companies aren’t making, or that other companies are selling for more.
Where the product is in development also has an impact. For example, if only a prototype of the product exists, investors may ask for a larger stake in the company since they’re taking on greater risk.
How big is the Market?
What’s the market size for the product? Is it growing or shrinking? The bigger the market, the larger the potential consumer base, the more money a company can feasibly make.
Is there significant risk and return?
Venture capitalists often look at investments as high-risk-high-reward. This means that accepting more risk—say, investing in an early-stage startup in an emerging market—could lead to a greater payout down the line. (Of course, it also means there’s a huge potential for no reward at all.)
What’s the startup’s valuation?
A startup’s valuation helps VCs negotiate how much equity they should get in exchange for a certain amount of investment.
Equity often corresponds to how the investment amount relates to the company’s worth. For example, if an investment is equal to 20% of a company’s value, VCs will likely want a minimum of 20% equity.
Venture Capital vs. Private Equity
Venture capital and private equity are often confused, as they both deal with large investments in private companies. But startups only need to worry about venture capital. Below we discuss why that is and explain some differences between VC and PE.
Main Differences
- Types of Companies
Venture capital focuses on startups with high growth potential. Private equity, on the other hand, focuses on established businesses that need a boost or overhaul. While both tend to invest in private companies, private equity may invest in a publicly traded company with the intention of turning it private. - Ownership Percentage
A venture capital investment typically funds 50% or less of a company. VCs generally have some say in company direction and decisions, but they do not have complete steering power. Private equity firms aim to buy 100% of a company so they can have complete control. - Number of Companies in Portfolio
Venture capital firms invest in numerous companies at a time. The risk is spread across entities. Private equity firms typically invest in one company at a time, with resources focused on generating a return from that single investment. - Amount Invested
A single venture capital investment generally tops out in the tens of millions. A single private equity investment might top $100 million. Since private equity gobbles up entire mature companies, there is willingness to invest more in an individual enterprise.