Venture Capital: What Is Venture Capital?

Venture capital is when investment banks or high net-worth individuals fund budding, high-growth startup companies or small businesses in return for a portion of its equity (the company’s valuation or worth). When a startup receives an investment, it releases a portion of its equity and influence to investors and becomes a part of a venture capitalist’s portfolio companies. For that reason, it’s important to establish a trusted partnership, ensuring that both the startup and its investors have similar values and ethics.

Venture capitalists (VCs) take a high risk—with a potential of a very high reward—when they provide cash flow, liquidity, and other types of funding to startup companies. For VCs, the biggest return on investment is when a company goes public (initial public offering or IPO) for the first time, which means that their equity becomes extremely valuable. In addition to financing, venture capitalists also provide mentorship, education, and best practices to support emerging entrepreneurs navigating an often cutthroat industry.

Here’s a brief history of venture capital:

• Beginnings: Venture capital firms emerged during the early-mid 1900s. Georges Doriot, a Harvard business school professor, established one of the first firms in 1946. Doriot founded the American Research & Development Corporation (ARDC), which heavily invested in the technology realm due to its ability to generate new jobs for the American public. ARDC was revolutionary in its approach to pooling money from various sources. Until then, raising capital was often relegated to wealthy families like the Vanderbilts or Rockefellers.
• Government intervention: With the burgeoning landscape of venture capital, the government initiated the Small Business Investment Act (SBIC) of 1958. By putting money into the hands of these investment firms and providing licenses by the Small Business Association (SBA), the government hoped that they could stimulate the economy, specifically through supporting small businesses. This act also provided a tax break to investors. These regulatory innovations allowed venture capital to witness tremendous growth during the following decades, specifically during the dot com boom.
• New innovations: Technological innovation has always sat at the heart of venture capital: One of the first startups to receive venture funding was the Fairchild Semiconductor (FCS), a premier semiconductor company in the San Francisco Bay Area. Investors continued with this tradition, which is why many venture-backed companies have roots in Silicon Valley.
• NVCA launches: The National Venture Capital Association (NVCA), founded in the early 1970s, launches. The organization serves as a resource for venture capital firms and startups. Through providing data, networking, and education, the NVCA helps companies navigate the ever-changing ecosystem and landscape of entrepreneurship.

While companies can receive funding at various stages of their evolution, venture capital firms typically seek partnerships with early-stage companies that need help fundraising. It’s at this point that companies are most ripe for investment, have lots of equity to offer, and investors can still shape or influence them. The standard evolution of funding consists of multiple rounds: a seed round and then series A, B, and C funding rounds, each of which brings more capital to the startup. Here’s a closer look into how VC funding works:

1. 1. Identify a VC fund: An important first step is to do your own research on venture capital funds. You can do so through platforms that aggregate venture firms and delineate their priorities. Once you’ve made a list of which firms you want to pursue, use a business tool to find connections. Networking is a huge part of the venture capital world.
2. 2. Pitch deck: If you land an introduction, a venture capitalist might ask you to send them a small presentation (also called a pitch deck), allowing you the opportunity to showcase your idea and potentially land their investment. Your pitch deck should highlight your company’s value and worth and how it differs from other existing startups.
3. 3. Meet and greet: If your proposal snags the interest of a managing partner, it’s possible that a meet and greet will be the next step. This in-person meeting is a chance for them to get to know you on a personal level. Keep in mind that it’s also your opportunity to get to know them. Remember to seek out investors who not only align with your business values but also your personal values. If the meeting goes well, the partner might ask you to return so you can connect with other members of their team.
4. 4. Partners meeting: This is a meet and greet but on a larger level. At this point, you’ll meet with the entire VC management team or general partner and present your idea yet again. If you present your case successfully, you will receive a term sheet, which is a nonbinding agreement that summarizes the terms of a prospective investment.
5. 5. Due diligence: One of the more critical parts of the VC process—which involves screening, business, and legal stages—that can take anywhere from one to three months. During this process, venture capitalists take a holistic look at the potential investment. This means they examine the founding team, market, business plan, products, and financials involved to ensure the investment is worth their while.
6. 6. Closing: As the final step of the process, the firm will send you paperwork and documents that outline the terms of your agreement. After you and your investors sign, the firm will deposit funds into your account shortly after that.

MasterClass at Work is the learning platform to help unlock the full potential of your employees and inspire a learning lifestyle in everyone. From negotiation to mindfulness to baking—these are just a few things your teams can explore.