Venture capital (VC) has shaped the trajectories of some of the most influential companies of the past few decades. But it’s also a misunderstood corner of finance. The huge amounts of money associated with VC often become headline news, but the mechanics of VC funding—where the money comes from, what investors expect in return, and how they select the businesses they fund—don’t receive as much attention. If you’re building something new and exploring your financing options, it’s important to know what VC is and whether it’s an option for you. Below, we’ll explain how venture capital works, whom it’s for, and its pros and cons for businesses.

What’s in this article?

• What is venture capital?
  
• How does venture capital work?
  
• Who provides venture capital?
  
• Which businesses are a good fit for venture capital?
  
• What stages of business growth does venture capital fund?
  
• What are the pros and cons of venture capital for businesses?
  
• How Stripe Atlas can help
  

What is venture capital?

Venture capital is money invested in young companies that have the potential to scale into bigger enterprises. Instead of lending cash with a repayment schedule, venture capitalists take an ownership stake (equity) in the businesses they fund. Most startups fail, but the rare success story can return hundreds of times the initial investment and cover losses across the rest of an investor’s portfolio.

In Q2 2025, global VC investment totaled $101.05 billion, with the US market accounting for the majority of funding. VC has fueled much of the modern tech economy, including companies like Stripe, Uber, and Airbnb. That capital gave founders the means to build infrastructure and grow faster. When VCs invest, they hope that the ambitious ideas they back can turn into industry-defining businesses.

How does venture capital work?

In the venture capital system, investors raise money, structure it into a fund, and place bets on startups that could grow into industry leaders. Here’s a closer look at each stage.

Raising the fund

VCs don’t invest their own savings alone. They pool money from limited partners such as pension funds, endowments, wealthy individuals, and corporations. That money goes into a dedicated fund. A typical fund can contain hundreds of millions of dollars, earmarked for startup investments over a set time frame.

Pitches and due diligence

Startups pitch their ideas to VCs. If the VCs are interested, their teams research market size, team background, financials, competitive environment, and technology. This due diligence helps investors decide whether the risk matches the potential.

Term sheets and equity

If a deal moves forward, both sides agree on terms: how much money the VC firm invests, what percentage of the company it owns, and what rights it holds (e.g., board seats, voting influence). These investments are equity: returns come only if the company grows in value.

Funding rounds

Startups typically raise money in stages: a seed round to build a product or prove an idea, Series A to scale once there’s traction, and Series B, C, D, and so on as the company scales nationally or globally. At each stage, the company’s valuation rises if it continues growing.

Company involvement

Most VCs aren’t hands-off. Many take board seats, introduce key hires, connect founders with customers, and guide strategy.

The exit

Returns come when the startup either goes public (i.e., initial public offering) or is acquired. This “exit” is how VCs turn equity into cash. Many startups never get there, but the model works because a handful of breakout wins can generate extraordinary returns.

Who provides venture capital?

Venture capital comes from specialized investors who pool money with the specific goal of backing high-growth startups. The biggest players are VC firms: teams of partners and analysts who raise large funds from limited partners. These firms manage the capital and decide which startups to back.

But VC firms aren’t the only source of this funding. Corporate venture arms invest for both returns and business advantage. For example, tech giants might fund emerging startups in adjacent markets. Micro-VCs and seed funds operate at a smaller scale. Accelerators combine modest investments with structured programs and mentorship, often in exchange for early equity. Angel investors, affluent individuals who invest their own money, can cover the gap between larger venture rounds and funding from friends and family. And they’ll sometimes coinvest with VC firms.

Together, these players form the VC sector. Some investors focus on specific industries or stages, while others cast a wider net. What unites them is a willingness to take big risks for the chance of outsize returns.

Which businesses are a good fit for venture capital?

Venture capital is built for businesses that can scale fast, dominate large markets, and return at least 10 times the initial investment. That excludes many companies, even successful ones. So what makes a startup a good VC candidate?

Huge market potential

VCs look for markets that can support billion-dollar businesses. If the ceiling is low, as with a niche service or a regional retailer, the business won’t match the venture model.

Growth that compounds

The ideal fit is a product that can scale quickly once it’s built (e.g., software, networks, platforms, biotech breakthroughs). VCs expect aggressive growth curves, not steady single-digit expansion.

Some traction or proof

While seed investors might back a team and idea, later VC rounds depend on evidence such as a prototype, early users, revenue, and data that proves adoption is possible.

Capital intensity

Certain sectors (e.g., drug development, hardware, global fintech infrastructure) demand so much up-front investment that organic growth or bank loans won’t be enough. VC fills that gap.

Founder alignment

Not every founder wants venture money. VC brings partners into the boardroom and a timeline that pushes toward exits. Founders who want full independence or are happy running stable but modestly sized companies often choose to bootstrap their companies instead.

What stages of business growth does venture capital fund?

Venture capital typically arrives in waves: funding “rounds” that match a startup’s progress. Each stage has different expectations for what founders have proven and what comes next.

Seed

This is the earliest stage of official equity fundraising. Companies usually raise between $500,000 and a few million from angels or seed funds. The goal is to validate an idea, build a prototype, or run small pilots.

Series A

This is the first institutional venture round. Companies often raise several million. By now, there’s usually a working product and early signs of adoption: users, revenue, or strong engagement metrics. The aim is to refine the model and set the foundation for scale.

Series B

This is fuel for expansion. Companies here have traction and need resources to grow aggressively: more staff, new markets, and bigger marketing spend. Investors want proof that the core model works and can be scaled.

Series C and beyond

Later rounds can raise tens or hundreds of millions of dollars. At this stage, a company is more mature and often preparing for an initial public offering or acquisition. Capital is used to expand globally, build new product lines, or strengthen operations.

Not every startup follows this series. Some stop after seed and reach profitability, while others raise multiple late-stage rounds. VCs fund momentum stage by stage until the business is either sustainable on its own or ready for an exit.

What are the pros and cons of venture capital for businesses?

Venture capital can transform a startup, but it reshapes the company in ways founders should weigh carefully. Here’s the trade-off.

Advantages

• Capital at scale: VC provides funding in amounts that most other sources can’t compete with. For example, a biotech firm might need tens of millions for trials, or a fintech startup might need infrastructure that’s strong enough to handle internet-scale payments. Without VC, that speed and scope would be impossible.

• Guidance and expertise: Many VCs are former founders or industry operators. They join boards, coach leadership teams, and help startups avoid common issues. It’s mentorship with a stake in your success.

• Networks: VCs can provide access to customers, talent, and future investors. Warm introductions from respected backers often change the trajectories of early companies.

• Credibility: A well-known firm’s backing acts as validation. It reassures hires, press, and enterprise clients that the business has been vetted and is built to last.

• No repayment burden: Unlike loans, VC doesn’t require monthly payments. If the business fails, investors eat the loss. Sharing the risk makes it possible to fund unproven ideas.

Disadvantages

• Dilution and control: Raising multiple rounds can leave founders with a much smaller ownership stake. Board seats and voting rights also mean founders are no longer the sole decision-maker.

• Pressure for hypergrowth: VCs need big wins to offset losses elsewhere. That can push companies to scale aggressively, sometimes at the expense of sustainable operations or the founder’s original vision.

• Tough fundraising odds: The VC funding process is competitive and time-consuming for founders. The odds of being funded by the VC firm Andreessen Horowitz, for example, are about 0.7%. The process demands months of pitching, diligence, and rejection, which is time not spent on building the business.

• Potential misalignment: Investors generally want an exit within 5–10 years. If your goal is a decades-long independent business, those timelines might clash.

VC is a tool. It accelerates businesses with the right mix of ambition and scalability, but it comes at the cost of ownership and autonomy. Founders should understand these trade-offs when they pursue VC.

How Stripe Atlas can help

Stripe Atlas sets up your company’s legal foundations so you can fundraise, open a bank account, and accept payments within two business days from anywhere in the world.

Join 75K+ companies incorporated using Atlas, including startups backed by top investors like Y Combinator, a16z, and General Catalyst.

Applying to Atlas

Applying to form a company with Atlas takes less than 10 minutes. You’ll choose your company structure, instantly confirm whether your company name is available, and add up to four cofounders. You’ll also decide how to split equity, reserve a pool of equity for future investors and employees, appoint officers, and then e-sign all your documents. Any cofounders will receive emails inviting them to e-sign their documents, too.

Accepting payments and banking before your EIN arrives

After forming your company, Atlas files for your Employer Identification Number (EIN). Founders with a US Social Security number, address, and cell phone number are eligible for IRS expedited processing, while others will receive standard processing, which can take a little longer. Additionally, Atlas enables pre-EIN payments and banking, so you can start accepting payments and making transactions before your EIN arrives.

Cashless founder stock purchase

Founders can purchase initial shares using their intellectual property (e.g., copyrights or patents) instead of cash, with proof of purchase stored in your Atlas Dashboard. Your IP must be valued at $100 or less to use this feature; if you own IP above that value, consult a lawyer before proceeding.

Automatic 83(b) tax election filing

Founders can file an 83(b) tax election to reduce personal income taxes. Atlas will file it for you—whether you are a US or non-US founder—with USPS Certified Mail and tracking. You’ll receive a signed 83(b) election and proof of filing directly in your Stripe Dashboard.

World-class company legal documents

Atlas provides all the legal documents you need to start running your company. Atlas C corp documents are built in collaboration with Cooley, one of the world’s leading venture capital law firms. These documents are designed to help you fundraise immediately and ensure your company is legally protected, covering aspects like ownership structure, equity distribution, and tax compliance.

A free year of Stripe Payments, plus $50K in partner credits and discounts

Atlas collaborates with top-tier partners to give founders exclusive discounts and credits. These include discounts on essential tools for engineering, tax, finance, compliance, and operations from industry leaders like AWS, Carta, and Perplexity. We also provide you with your required Delaware registered agent for free in your first year. Plus, as an Atlas user, you’ll access additional Stripe benefits, including up to a year of free payment processing for up to $100K in payment volume.

Learn more about how Atlas can help you set up your new business quickly and easily, or get started today.