What Is Venture Capital?

Venture capital is money pooled from outside investors into a fund, which a firm invests in young companies with high growth potential in exchange for equity.

Category: Funding and investors · Reviewed 11 November 2026 · 2 min read

How it works

A venture capital firm raises a fund from limited partners, such as pension funds, endowments and wealthy individuals. The firm's partners then invest that money in startups, usually in return for preferred shares. The firm earns management fees and a share of profits, so it needs a few investments to return many times what was invested.

That math explains much of how venture capitalists behave. Because most startups do not succeed, they look for companies that could become very large. A business that grows steadily to a good, modest size may be a fine company but a poor fit for venture funding.

Example

For example, a fund of $100 million might back 25 companies. If most return little and one or two grow into large companies, the fund can still do well. This is why a venture investor may push a founder to take bigger risks than the founder would take alone, and why a fund will often pass on a profitable small business.

Why founders care

Venture money can fund fast growth and bring a network, recruiting help and credibility. It also brings preferred stock terms, a board seat, pressure toward a large exit and shared control of the company. Founders should read the term sheet carefully and compare it with options such as bootstrapping or angel funding.

Common mistakes

Pitching firms whose stage, sector or check size does not match your company.
Treating a fundraise as a full-time distraction with no plan for running the business.
Ignoring that the investor's goals may differ from yours.
Assuming venture capital is the only legitimate way to build a company.

Frequently asked questions