Venture capital (VC) firms are known for writing big checks to startups. But providing funding is only part of what they do. Venture capitalists are professional risk-takers who determine which ideas get a chance to scale and which founders get the fuel to chase them. Understanding how these firms work—how they choose companies, how they make money, and what it really means to take their investment—gives you a clearer view of the startup economy. Below, we’ll discuss what you should know about venture capital firms, including how to secure their funding.

What’s in this article?

• What are venture capital firms?
  
• How do venture capital firms work?
  
• What role do venture capital firms play in the startup environment?
  
• What do venture capital firms look for when investing in businesses?
  
• How do venture capital firms generate returns?
  
• What are the advantages and trade-offs of raising money from venture capital firms?
  
• How do businesses prepare to pitch venture capital firms?
  
• How Stripe Atlas can help
  

What are venture capital firms?

A venture capital firm is a company that pools money from outside investors and uses it to buy equity in startups. In Q1 2025, global VC investment reached $126.3 billion. The investors who supply that money (pension funds, endowments, and wealthy individuals) are called limited partners (LPs). The people who run the firm are called general partners (GPs), and they decide which startups to back and how to manage those bets.

VCs take partial ownership of companies they invest in. They buy a portion of the business in exchange for capital, with the expectation that if the startup grows and either goes public or gets acquired, that equity can be sold for a far greater sum. If the startup fails, the equity becomes worthless. That’s why VCs are careful about where they invest and why their model is built on spreading risk across a portfolio.

How do venture capital firms work?

A venture capital firm runs on a cycle: raise money, invest it, support the startups, and eventually cash out. Each step is designed to turn a pool of investor capital into outsize returns.

Here’s a closer look at each stage.

Raising a fund

VC firms start by raising a fund from LPs such as pension funds, endowments, family offices, and wealthy individuals. The firm acts as the GP, deciding where to place the money. A single fund can range from tens of millions to billions of dollars and often has a stated focus, such as early-stage software or late-stage healthcare.

Finding and vetting startups

Once capital is secured, VCs look for companies that fit their focus. They evaluate founders, markets, business models, and traction, and they conduct due diligence to test whether the startup is worth the risk.

Making the investment

If the fit is right, the VC firm commits money in exchange for equity. Terms clarify valuation, ownership percentage, and board representation.

Supporting growth

VCs often take board seats, make customer introductions, recruit executives, and advise on strategy. Their influence is designed to increase the odds that a company will scale quickly.

Exiting

The payoff comes when a startup gets acquired or goes public. That’s when the VC firm sells its stake, ideally for a multiple of what it invested. Profits return to the fund’s LPs, and the firm keeps a share, called carried interest, as a reward for managing the money.

What role do venture capital firms play in the startup environment?

VCs set the tempo for how fast new businesses and industries emerge, and they act as accelerators for founders who are willing to take outsize risks. Here’s how they shape the startup environment:

• Capital for risky new ideas: Many young companies can’t get bank loans. VCs step in to fund unproven but promising ideas, often fueling improvements that later define whole industries.

• Mentorship and guidance: Good VCs bring hard-won experience. They join boards, offer strategy input, and steer founders through challenges such as hiring, scaling, and refining product-market fit.

• Networks and credibility: A VC’s network can open doors to customers, future investors, or senior talent. Backing from a respected fund also signals legitimacy to the market.

• Paths to growth: With capital and connections, VCs enable startups to scale in years instead of decades.

• Economic ripple effects: By backing high-growth companies, VCs help create jobs, push incumbents to improve, and bring new technologies to market.

What do venture capital firms look for when investing in businesses?

Every VC firm has its own focus, but most use the same basic checklist when they decide whether to invest. They ask three things: can this company get big fast? Do we trust this team to make it happen? And will there be a clear path to return our investment?

Here’s what they’re evaluating:

• Scalability and growth potential: VCs want startups that can grow quickly and at scale. Software, marketplaces, and other models with low marginal costs are especially attractive because they can multiply revenue without multiplying expenses.

• The team: Many investors will say they back people, not ideas. A resilient founding team with the right mix of skills and chemistry is often the deciding factor.

• A unique edge: Improvement matters. That could be proprietary tech, a clever business model, or a differentiated approach to an old problem. VCs look for something that competitors can’t easily copy.

• Market size: Even the best product falls short if the opportunity is too small. Investors usually want to see a market big enough in size that capturing even a slice could generate hundreds of millions in value.

• Traction: Investors want proof that the idea works (e.g., user growth, early revenue, strong engagement). Evidence of demand reduces the risk that the startup’s goals are unrealistic.

• Exit potential: VCs invest with an endgame in mind. Is this a company that could credibly go public? Would acquirers line up if it succeeds?

• Fit with their fund: A life sciences VC firm won’t back an unrelated mobile app, no matter how strong the pitch is. Founders should research which firms invest in their space to avoid wasting their energy.

How do venture capital firms generate returns?

Venture capital works on a simple principle: invest early, wait for the company to grow, and cash out big. The payoff comes almost exclusively through exits—either the startup goes public or a larger company buys it. That’s when the VC firm sells its equity.

Because most startups fail, VCs build portfolios knowing only a few bets will carry the fund. The math is skewed: out of 20 investments, many might flop, a handful might return modest gains, and one breakout success could deliver 10 times the initial investment or more. That single win can repay the entire fund and then some.

Returns are shared with the VC’s investors. Capital is paid back to the LPs, then profits are split. Following the standard “2 and 20” model, the firm charges a 2% annual management fee and keeps about 20% of profits as carried interest. VCs think and plan for the long term since funds generally run on a 10-year timeline.

What are the advantages and trade-offs of raising money from venture capital firms?

Venture capital can supercharge growth, but it ties you to partners who expect rapid scale and eventual liquidity. That’s the right path for some companies, but for others, it might feel like running on someone else’s timeline. Here’s a closer look at what VC funding gets you and the expectations that come with it.

Advantages include the following:

• Capital for growth: VCs provide the kind of funding that banks or small investors rarely can—enough to hire aggressively, expand markets, or accelerate product development. Because it’s equity, there are no monthly repayments that drain cash flow.

• Expertise and networks: Good VCs bring guidance as well as financial investment. Many are ex-founders or industry veterans who can help address scaling challenges. Their networks can open doors to customers, senior hires, or future investors.

• Credibility: A respected VC firm on your cap table signals legitimacy and makes it easier to attract press, talent, and later rounds of capital.

Trade-offs include the following:

• Dilution and control: VC money buys equity. That means giving up ownership and often board seats, which shifts decision-making power.

• Pressure to grow fast: Venture funds have fixed lifespans so investors want companies to scale quickly and aim for big exits. Founders might feel pushed to chase growth at the expense of sustainability.

• Exit expectations: VCs invest to sell. That creates pressure to go public or get acquired, even if founders originally envisioned building a long-term, independent business.

• Vision alignment: Investors care about returns. If their priorities don’t align with yours, tension can arise. In extreme cases, founders lose influence in their own companies.

How do businesses prepare to pitch venture capital firms?

Startups that pitch VCs need to prove both the opportunity and their readiness. The better prepared you are, the more likely it is investors will see you as a smart bet.

Here’s what businesses should do before the pitch:

• Prepare the basics: Have more than an idea. A minimum viable product, some early traction, and clean documentation (e.g., incorporation, cap table, intellectual property secured) show you’re serious. Programs like Stripe Atlas help startups handle incorporation so they don’t stumble on paperwork.

• Target the right firms: Not every VC firm invests in every industry or stage. Research who’s active in your space and at your size. Customizing outreach avoids wasted effort and signals you’ve done research.

• Craft your pitch: A clear, focused deck and story matter more than flashy slides. Explain the problem, your solution, the market, traction, your team, and how you’ll use the capital. Practice your pitch until you can deliver it with clarity and conviction.

• Be ready for due diligence: Keep financials, projections, contracts, and metrics organized. Investors will want to examine these details.

• Use your network: Introductions carry more weight than cold emails. Build relationships, attend events, and lean on advisers for intros.

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.

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