What you’ll learn: We’ll break down the complexities of exactly what venture capital funding is, including the types and stages. You’ll also get helpful tips on how to proceed with getting started if it’s an option for your business.
What is venture capital funding? It has many aspects and benefits to understand. In simple terms, venture capital (VC) helps startups grow by providing funding in exchange for ownership. There are different funding stages, from early seed money to later-stage investments for expansion. While this type of funding can boost growth, it also comes with risks, such as less control over the business and pressure from investors. To harness the benefits of VC, founders need a solid plan and the right investors.
Global venture capital investments totaled over $368 billion across more than 35,000 deals in 2024. That’s over 35,000 times companies raised funds in the hopes of taking their businesses to new heights.
While many of these companies will stay around for decades and even go on to become unicorns and decacorns, some may not even raise another round. Yet, for all these companies—and many others like Google, Meta, and SpaceX—venture capital remains an important milestone in their business journey.
VC can indeed be a critical component of startup growth. Yet, it can also be a risky endeavor for investors and slippery ground for startups.
In this article, we’ll discuss venture capital in depth, including how it works, its various types and stages, and the challenges it brings. We’ll also share some tips on raising venture capital, so make sure you read till the end.
Venture Capital Definition and How It Works
What is venture capital funding and how does it work? Venture capital is a type of financing in which startups and small businesses receive funds and other benefits in return for some equity (ownership) stake.
VC is mostly meant for businesses with a promising growth potential. The funds are sourced from a range of investors, including pension funds, insurance companies, investment banks, and endowments. VC is often managed by dedicated investment companies called VC firms.
Venture capital is a form of private equity, meaning the equity or stock sold to a fund is not available to the general public. Selling equity also means a startup securing VC funding is transferring part of the ownership and authority to the investor.
Types of Venture Capital
If understanding the question “What is venture capital funding?” is our starting point, gaining insight on the types is the next step. Venture capital can be of different types depending on the purpose it serves for a business. While a startup in its early stages may require capital for research and product development, a growing startup may need greater funds to scale production or expand into new markets.
While there are no rigidly defined categories, here are four types of venture capital based on the stage of startups they serve:
1. Seed Capital
If a business idea is a seed, raising seed capital is like watering the seed for the first time. It’s meant for newly-launched businesses or even those that have yet to launch. Capital in this stage helps businesses perform market research, hire staff, develop a minimum viable product (MVP), and start operations so they can start generating revenue.
For obvious reasons, investing in a business this early carries a very high risk. This is why seed capital may come from angel investors and some select VC firms that specialize in seed-stage investing.
2. Early-Stage Capital
Once the wheels are moving, a startup will usually need more funds for various reasons. For instance, meeting increasing demand, upgrading products, and expanding its team. Venture capital raised at this stage thus helps scale operations.
While the risk remains high, it’s somewhat lower than that in seed funding. Multiple rounds of funding can happen during this stage—we’ll discuss funding rounds in a while—with multiple firms and other investors participating in each round.
3. Growth/Expansion Capital
Startups that have been operating and growing consistently for several years may want to expand their business further. Expansion at this point can mean several things. For example, it might mean entering a new market, targeting a new customer base or region, and even acquiring other companies. They need a good amount of capital to do so.
This stage of funding attracts not only VCs but also more risk-averse investors. This is because a startup reaching this stage has already proven its potential. The business, therefore, is less risky to invest in.
4. Late-Stage Capital
Late-stage capital is for companies that already have an established business with consistent revenue and still show good potential for further expansion and growth. There is no clear line between expansion-stage funding and late-stage funding, as the purpose is similar. However, late-stage funding can also include companies that are eyeing a liquidity event, such as an IPO, merger or acquisition.
Late-stage capital can attract venture capital firms and private equity firms alike, along with a range of other institutional investors.
Quick fact: A great recent example of late-stage funding is OpenAI’s record-breaking $40-billion fundraising deal from March 2025. This is the world’s largest private tech funding round ever. OpenAI said it plans to use the funds for conducting AI research, scaling computer infrastructure and improving ChatGPT.
Venture Capital vs. Other Startup Funding Options
Answering the question “What is venture capital funding?” can also be helpful in the context of other types of funding. While venture capital is one of the most common ways for startups to raise funds, it’s not the only way. If you are a startup founder, there are several other ways you can finance your business other than giving up equity in exchange for funds.
Here’s a brief roundup of three common startup funding options and how they compare with venture capital:
| Venture capital | Loans | Donation-based crowdfunding | Grants | |
| Takes away equity | ✔️ | ❌ | ❌ | ❌ |
| May demand collateral | ❌ | ✔️ | ❌ | ❌ |
| Needs to be repaid | ❌ | ✔️ | ❌ | ❌ |
| Takes away partial control | ✔️ | ❌ | ❌ | ❌ |
- Business loans and other credit-based funding options don’t demand any equity, but they often require collateral, a good credit history or some business performance. Keep in mind it may not be easy to secure loans and they need to be paid back.
- Donation-based crowdfunding involves raising small funds from a lot of people to amass a big amount. While it doesn’t come with collateral, equity, or repayment requirements, you cannot expect to generate huge amounts of capital like with venture capital.
- Grants are offered by government agencies, private organizations, and even individuals. They usually target specific types of businesses or founders. You don’t have to pay the money back, but you have to compete with many other startups to win a grant.
Other than these, angel investors are similar to venture capital firms, as they usually demand equity. However, since these are individuals, you can only expect relatively smaller amounts of funding. This is usually best for the seed stage.
Venture Capital Firms and Startup Investors
Any discussion on venture capital is incomplete without understanding the medium that connects this capital with capital-seeking companies: venture capital firms. Let’s look at how they work and make money.
Venture capital firms are financial organizations that accumulate funds from large investors for the specific purpose of investing in new companies. These investors are called the limited partners (LPs) of the firm and usually include:
- Pension funds
- Insurance companies
- Investment banks
- Endowments
- High-net-worth individuals
The capital from these LPs makes up a VC fund. However, the fund itself is run and managed by a group of senior professionals. These individuals typically have exhaustive experience in investment and entrepreneurship. They are called general partners (GPs) and are responsible for all capital raising, investing and other daily operations. The group of GPs practically represents the fund.
While a VC firm is one organization, it can manage multiple funds. Each fund might be focused on a specific theme, sector or geography.
Some of the most prominent VC firms are Sequoia Capital, SV Angel, Accel, Andreessen Horowitz, 500 Global, and Tiger Global.
How Do VC Firms Make Money?
VC firms usually run a fund for several years, usually around 10 years or so. During this period, the firm invests in multiple companies across multiple funding stages (see the next section). These companies become part of the fund’s investment portfolio and are hence called portfolio companies.
The last step in a fund’s investment cycle is an exit event (also called a liquidity event), which is when the fund cashes out by selling its equity in a portfolio company. This usually happens via an initial public offering (IPO), merger or acquisition of the company. However, sometimes it can also happen via liquidation, i.e., the company shutting down.
Since VC funds focus on early-stage companies, the risk of loss is always quite high (as many as 90% of startups fail). This is why most VC-backed companies don’t generate returns on exit.
However, since a venture capital fund invests in a lot of different companies, even a small minority of high-performing startups often manage to overcompensate for the nonperforming majority, making the entire fund profitable as a whole.
Stages of Venture Capital Funding Explained
We’ve already talked about the different types of venture capital. Now let’s zoom in and get into the funding stages in which venture capital investments happen.
Seed Funding
This is the first official funding round for an early-stage startup. As we discussed earlier, the purpose of funds at this stage is establishing business fundamentals, including market research, product-market fit assessment, and product development.
Angel investors often play a major role during seed rounds. However, some VC firms that specialize in early-stage investing may also participate.
What investors look for in this stage:
- A great business idea
- A promising business plan
- A strong founding team
Median seed round deal size (2024): $3.1 million
Series A
Once a startup has launched the MVP, commenced operations and begun showing increasing and consistent growth over several months, it can likely graduate to the Series A funding stage. Funds raised in this stage help scale operations to meet the rising demand.
While Series A is also part of early-stage funding, this round marks a big jump from the seed stage. It’s harder to get to, attracts more VC firms and raises significantly more capital than a seed-stage funding round does.
What investors look for in this stage:
- An established product-market fit
- Strong long-term planning and vision
- Clear signs of revenue and customer growth
Median Series A deal size (2024): $12.4 million
Series B
A company that reaches the Series B stage has already established a presence in the market and is entering its growth or expansion stage. This can mean launching more products, expanding to new regions, targeting new customer segments, and so on.
Series B rounds usually attract a range of old and new investors—mainly VC firms and private equity firms—who believe in the long-term growth potential of the business.
What investors look for in this stage:
- A well-matured product
- High customer retention and positive feedback
- Signs of innovation as well as stability
Median Series B deal size (2024): $28 million
Series C, D, and beyond
The later stages of funding can differ for different companies. Many companies raising Series C or subsequent rounds may just be looking to expand into more markets, further diversify the product line, and attract more customers. Others may want to acquire other companies and even list on the stock market.
Either way, a company in this stage has already proven its potential and expects continued growth. This is why these rounds see a wider range of large investment groups, such as hedge funds and investment banks, besides private equity and VCs.
What investors look for in these stages:
- Established companies
- A strong market presence
- Existing or nearing profitability
Median Series C deal size (2024): $45 million
Quick fact: Each funding stage may run across multiple rounds (for example, two seed rounds, three Series B rounds and so on). However, a startup may not necessarily start from the seed stage or go through every single stage.
How to Get Venture Capital Funding
Startup investors look at a range of factors to decide on whether to invest in a company. If you’re an entrepreneur, your job is not only to find the right investors who will likely invest in your company, but also to make your company feel right to investors.
Here are some tips you can go by to increase your chances of raising venture capital:
1. Know Your If, Why and How Much
First things first, you must have enough clarity about your idea of a fundraiser. So ask yourself these three questions:
- Is your business ready for venture capital funding? VCs will look for clear signs of a promising business potential before deciding to invest. So make sure your business is commercially ready with a minimal viable product—or at least some proof of concept—when you turn to investors.
- Why do you need funds? If you answered “yes” to the first question, you must have clarity on what you need funds for. Investors will demand your plan of action, your expected goals, and projections, so make sure you do the homework.
- How much capital do you need? Knowing your numbers is important. Not just for clarity but also because more funds demand more equity, and you want to give up as little equity as possible. So do your math right and ask for only as much as you really need.
2. Find the Right VCs
While preparing your outbound strategy for finding VCs, make sure you are targeting the right investors. Many VC firms usually have a preferred set of industries and funding stages. For example:
- Some VCs may invest almost solely in tech companies, while others’ portfolios are more balanced.
- Some participate only in Series A rounds and onwards, while others are open to seed funding as well.
- Some VCs mostly offer financial help, while others are actively involved in strategic guidance too.
Targeting firms that don’t usually invest in companies in your sector, industry, or funding stage might not help. So research your target investors—try sites like AngelList, Crunchbase, and OpenVC—and shortlist those who are the most likely to truly understand your vision and can help your business the way you want them to.
Quick tip: Warm pitches can improve your chances of getting noticed. So try to introduce yourself to VCs via any mutual connections you might have.
3. Prepare a Tempting Pitch Deck
Once you have some investor meetings lined up, you’ll want to get the most out of them. The pitch deck can play one of the most important parts in this. Here are some important pointers:
- Include in-depth market research, competitor analyses, and financial projection insights in the presentation.
- Try to mention essential details, such as target market size, company figures, and team strengths, within the first few slides.
- Avoid cluttering slides with too many details.
Most of all, practice your pitch as many times as you need to. Prepare answers for any questions your investors might come up with. The more comfortable and confident you appear, the more quickly you can build trust with your potential investors.
Quick tip: You can find real pitch decks of successful funding rounds of popular startups online to get some idea on creating yours.
4. Focus on What Investors Look For
Being in line with current market dynamics comes in handy for any entrepreneur. This can get especially true during fundraising, as investors will naturally favor companies that are more future-ready.
For example, AI and ESG are two rapidly rising global trends. Investments in AI-first companies hit an all-time high of $110 billion in 2024, while over 70% of investors think that companies should incorporate ESG directly into their strategy.
Startups that are visibly focused on sustainability and AI-enhanced capabilities are therefore likely more preferred over those that aren’t. Similarly, you should stay updated on the rising investing trends in your industry and sector. That way, you have more to show on what makes your startup better than others.
Venture Capital vs. Private Equity
We mentioned earlier how venture capital is a form of private equity because of the nature of the equity involved. In fact, private equity (PE) firms also have the same structure as VC firms—with GPs and LPs looking over different aspects.
Despite these similarities, though, private equity firms and venture capital firms are not interchangeable, due to some notable distinctions that make the two very different.
Here’s a quick comparison between venture capital firms and private equity firms:
| Venture capital firms | Private equity firms | |
| Commonly invest in | Early-stage and growing startups | Late-stage startups and mature companies |
| Risk level | Very high | Moderate to low |
| Source of funds | Pension funds, endowments, investment banks, insurance companies, etc. | Pension funds, endowments, investment banks, insurance companies, etc. |
| Usual stake size | Minority stake | Majority stake |
| End goal | Sell stake during an exit event (usually IPO, merger or acquisition) | Sell stake during an exit event or to another company |
Unlike VC firms, PE firms don’t usually invest in early or seed-stage startups. They only invest in mid- to late-stage startups and even mature companies that need a boost. In fact, private equity firms sometimes also buy a public company and delist it from the stock market.
Since their portfolio companies are more established, PE firms enjoy a lower level of risk than venture capital firms. The investment plan usually involves buying or acquiring a company and making it more efficient and profitable so it can be later sold at a profit.
Benefits and Challenges of Venture Capital
Now that we’ve discussed venture capital in good detail, we’re well-equipped for weighing its pros and cons. Here’s a quick summary of the advantages and challenges of venture capital so you can decide how and whether to approach VC funding.
Advantages of Venture Capital
VC can have multiple benefits if it’s the right fit. These include:
- No collateral or credit history: Unlike loans or other credit-based investing instruments, venture capital doesn’t demand any collateral or credit history.
- No repayment requirement: Since investors are part owners in your business, you don’t have to pay them back, even if your business fails.
- Strategic guidance: Besides money, you also get the expertise and guidance of your investors, who can help in strategy and decision-making.
- Reputational wealth: The more credible the firm funding your company, the more credible your business becomes, attracting more customers and investors.
- Network: Venture capitalists also come with a wide network of important people who can benefit your business—such as customers, partners or investors.
Challenges of Venture Capital
There are, however, some risks to be aware of. These include:
- Loss of autonomy: By giving up equity, you give up some autonomy to your investors. This can reduce your ability to experiment and take risks.
- Not easy to secure: VCs target only startups with a very high growth potential. Only a small number of startups reach the high bar.
- Preference for returns over growth: Sometimes, VC investors may pressure a company to focus on high-return short-term endeavors instead of sustained growth. This can be harmful for the business in the long run.
Navigating the VC World With Care
With the right approach and a strong business foundation, venture capital can be a boon to startups looking to accelerate growth and profitability. Yet, it’s not the only option. Nor is it always the most startup-friendly funding choice.
If you’re a founder planning to seek VC funding for your startup, make sure to go with a clear and well-defined plan of action. The goal is to strike a balance between securing sufficient capital and avoiding excessive equity dilution.
Ready to do more? Further your business goals with our Goal-Setting E-Book. Or, get insights on how to make your money work harder for you with our Make Your Money Dance Investing E-Book.
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