What Is Venture Capital?

Venture capital firms raise money from limited partners (pension funds, endowments, wealthy individuals) and invest it into startups they believe can grow fast enough to return the fund many times over — since most VC-backed startups fail, the model depends on a small number of huge winners. In exchange for capital, VCs take preferred equity (often with liquidation preferences and pro-rata rights), a board seat or observer rights, and negotiated protective provisions in the term sheet.

VC is not the only path to growth capital, and it isn't the right fit for every company. It suits businesses that can plausibly reach outsized scale and are willing to trade ownership and control for speed. Bootstrapped or revenue-funded companies grow more slowly but keep full ownership and decision-making power — a trade-off founders should weigh deliberately, not default into.

Raising venture capital reshapes a company's cap table, governance, and expectations for years — a bad term sheet or a mismatched investor can cost founders control of their own company. A startup attorney should review every term sheet before signing, and a fractional CFO can model dilution across future rounds so founders know exactly what a raise costs them in ownership before they take the money.