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Venture capital

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What is venture capital?

Venture capital (VC) is a form of private equity financing provided by investors-including venture capital firms, investment banks, and wealthy individuals-to startup companies and small businesses with high growth potential. In exchange for funding, venture capitalists receive equity (ownership shares) in the company and often play an active role in guiding its growth and strategy.

Key takeaways

1
High-growth focus
Venture capital targets early-stage or emerging companies that traditional lenders consider too risky. These startups often operate in innovative sectors like technology, healthcare, and clean energy.
2
Equity investment, not debt
VC funding is provided in exchange for equity, not as a loan. There is no set repayment schedule; instead, VCs aim to profit when the company is acquired or goes public (an “exit”).
3
Beyond capital
Venture capitalists bring not just money, but also industry expertise, mentorship, and access to valuable networks of partners, customers, and talent.

4
Risk and reward

VC is high-risk: most investments may fail, but the few that succeed can deliver outsized returns-sometimes over 10 times the original investment.

Why venture capital matters?

Venture capital funds drive innovation by enabling startups to develop new products, technologies, and business models, which helps stimulate economic growth. These investments often lead to significant job creation, as many venture-backed companies grow rapidly and can become industry leaders or unicorns. Additionally, receiving VC funding boosts a startup’s credibility and visibility, making it easier to attract further investment, customers, and talented employees.

How venture capital works

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1
Raising capital

VC firms raise funds from limited partners (LPs) such as pension funds, endowments, and high-net-worth individuals.

2
Sourcing and evaluating startups

VCs identify promising startups through networks, events, and direct outreach, then conduct due diligence on their business models, markets, and teams.

3
Investment and negotiation

Terms are negotiated, including the amount invested, company valuation, equity stake, and governance rights.

4
Active support

VCs often join the board, provide strategic guidance, help recruit talent, and connect startups with partners and customers.

5
Exit

VCs realize returns through IPOs, acquisitions, or secondary sales of shares, providing liquidity for themselves and founders.

Impact on startups and economy

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Provides capital and mentorship for rapid scaling.

Funds disruptive technologies and new business models.

Drives employment in high-growth sectors.

Fosters vibrant startup communities and attracts further investment.

Impact on financial statements

Real-world examples

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Case study: Ola Cabs

In 2011, Ola received early-stage funding from angel investors. As the company grew, it attracted major VC investment (e.g., SoftBank), enabling rapid expansion. Early investors saw returns of over 40 times their initial investment when Ola’s valuation soared.

Frequently asked questions about venture capital?

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Angel investors are typically individuals investing their own money at very early stages, while VCs are institutional investors managing pooled funds and often investing larger amounts at later stages.
Yes. These are called semi-variable or mixed costs (e.g., a utility bill with a fixed base charge plus usage-based fees).
They help determine how many units must be sold to cover all costs and start making a profit.