Venture capital is professional money invested in startups that could grow very large — accepting that many bets will fail in exchange for rare outsized winners.

How it works

The chain has three layers:

1. Limited partners (LPs): endowments, pensions, family offices, funds-of-funds — commit capital to VC funds
2. General partners (GPs): partners at VC firms who source deals, sit on boards, and manage the fund
3. Portfolio companies: startups that receive equity checks, often in priced rounds (Seed, Series A, B, etc.)

GPs call capital from LPs over time, invest, then return proceeds on exits. Economics typically include management fees (~2% of committed capital) and carried interest (~20% of profits above a hurdle). Funds are illiquid — LPs wait years for distributions.

Venture capital fits companies with scalable products, large markets, and paths to dominant share. It is a poor match for capital-efficient lifestyle businesses or slow-growth franchises — those rarely return fund-scale outcomes.

Round sizes and ownership targets vary by stage. Seed checks might buy 10–20% of a company; later rounds often aim for similar ownership slices while absolute dollars grow with valuation.

Why it matters

• Founders: VC buys speed and risk tolerance banks will not offer. It also brings governance — board seats, reporting, and pressure to raise again or exit on fund timelines.
• Investors / LPs: Venture is a small allocation for most institutions — high risk, low correlation with public markets, driven by power-law returns. Vintage year and manager selection dominate outcomes.

Common mistake

Raising venture capital because it is available, not because the business model needs it. Dilution and growth expectations compound; wrong-fit funding creates misaligned incentives.

Related ideas

See also venture debt, venture partner, capital call, and dry powder.