VC (Venture Capital)

VC firms invest in rounds, typically seed, Series A, Series B and beyond, each priced at a higher valuation as the company de-risks. In exchange for the check, investors receive preferred stock, board rights, and pro-rata rights to invest in future rounds. Formula: Post-money Valuation = Pre-money Valuation + Investment Amount Example: A firm invests $5 million at a $20 million pre-money valuation. Post-money valuation is $25 million, so the firm owns 20% of the company ($5M / $25M). Why founders raise VC: speed. VC lets you hire ahead of revenue, spend on growth before it's profitable, and compete for a market before someone else claims it. The tradeoff is dilution and pressure to grow fast enough to justify the next round at a higher valuation. The power law: VC returns are driven by a small number of outsized winners. Sequoia Capital's early investment in WhatsApp, roughly $60 million across several rounds, returned billions when Facebook acquired the company for $19 billion in 2014. A fund can lose money on 90% of its bets and still return well if one investment is that large. Not every business should raise VC. VC firms need companies that can plausibly return the whole fund, which means large addressable markets and fast growth. A profitable, steady business serving a niche market is often better off bootstrapped or funded with revenue-based financing, since VC dilution and growth pressure work against a lifestyle-scale business.

A founder raises a $1.5M seed round from a VC fund at a $6M pre-money valuation ($7.5M post-money), giving up 20% of the company. Eighteen months later they raise a Series A at a $30M valuation, diluting further but validating that the seed metrics justified the next check.