eli5: What’s a venture capitalist?


eli5: What’s a venture capitalist?

In: 4

People who have money to invest in a startup company with startup capital. You pitch them your company or product, and if they think there’s a chance of success, they fund your company for a promise of a substantial percentage of the profits.

Basically people or groups with lots of free money who are hoping to be part of the next big thing. Assume that you are the founder of a new company that creates a new and unique type of widget. You need money to get the company going so the VC people buy stock a (ie. They give you a lot of money for a partial stake) in the company. When the company does well, they make money in the way of stock value. If the company doesn’t do well, then they lose their money.

TLDR; it’s all an educated gamble.

Typically someone who cashed out of a startup, has a lot of cash, wants to get back in the game but not actually start a new company from scratch.

It’s all in the name, actually.

Venture capitalists provide really early investment in startups. It’s really risky (you’ll probably loose your entire investment) but when it succeeds the payoffs are enormous.

Let’s say you were a founder or really early employee of a company a few decades ago. You hit the jackpot and your company went public.
So you sell all your options and now your bank account has a few commas before the decimal point (or the other way around if you’re European).

You spend some time partying and playing video games. Then you get bored. What do you do next?

It’s kind of weird to go back to being a programmer at some other company. Maybe they can offer you a few hundred thousand in salary and more stock options but that’s peanuts to you now and you can only work at one company at a time.

Instead you can start playing the VC circuit. You already have a deep expertise in the industry. You’ve gone through all the work. You know the pitfalls. To a brand new startup 50k or a few hundred k is a huge deal. In exchange you get a large number of shares and a seat on the board.

Now you do that with a few startups at a time. If you did your homework well one of them will take off and you get an other huge paycheck. If you’re really lucky that happens a few more times.

A venture capitalist is a fancy type of gambler who instead of playing casino games plays with companies that make products or services. Many of these investments fail, but if one of them succeeds it pays for the failures plus a dividend. These people are unfortunately the gatekeepers to what products and services might exist in the world to a large extent as they will seldom back things that will grow slowly, opting more for explosive growth at all costs.