Unlike angel investors, who invest with their own money, venture capitalists work for venture capital firms that raise money from outside investors. VCs spend the money they raise in startups that have a strong growth potential or have previously proven significant growth. Venture capital funding is divided into stages that correspond to the stages of a business’s development. As a company grows, it will likely go through these stages and raise multiple rounds of venture capital funding.

A startup goes through several stages of development, and VC funding might happen at any point through this process. The earlier the investment takes place, the higher the risk. However, because the shares will be cheaper, the profit potential will be higher. The earliest stage is when there only is an entrepreneur with an idea. Pre-seed or seed investments are the terms for investments made during these stages. From that point onwards, the entrepreneur might have a well-thought-out business plan, market research, a prototype or maybe even their first customers.

By providing equity to the startup, the VC fund buys shares, making the fund a partial owner of the startup. The purpose of this activity is to increase the value of the startup so that someone else can eventually buy the shares at a higher price. When this happens, there is an exit. The venture capital fund is then no longer an owner of the company but made a profit in doing so.