Venture capital is a type of financing given to small businesses or startups with high growth potential, often in exchange for a percentage of equity in the business.

Companies that are on a high growth trajectory will typically need multiple stages of financing as the demand for their product exceeds their ability to service that demand with organic revenues until they grow to a certain size where economies of scale form and they can sustain growth profitably on their own. As such, venture capital covers a continuum of growth beyond the startup phase.

Depending on the stage of growth the company is at, the funding comes from one or more sources such as high-net-worth individuals (angel investors), venture capital firms, or corporations with strategic investment arms.

Venture capital investors make money from capital gains. That is, when they can exit the business through the sale of their shares after the shares have increased significantly in value. Exits often occur after a merger, acquisition, or an Initial Public Offering.

Another opportunity for exits comes in the form of secondary share sales where in a late-stage financing, new investors purchase the shares of earlier stage investors at an agreed upon valuation.

Many high growth technology start-ups lack the track record and revenue that would give them access to other forms of funding like bank loans, debt instruments, and Initial Public Offerings because of a lack of assets and significant revenue. In this case, venture capital can be the answer if the company fits the growth profile of a venture backable company.

It is a highly risky investment so investors need to see the potential for higher returns than would be found in other investment opportunities like real estate or stocks and bonds.

Beyond cash, venture capital investors can help entrepreneurs with technical expertise, networks, mentorship, managerial assistance, or access to the right talent pool.