Venture Capital
Venture Capital is a game of extreme outliers. It relies on the power law: one investment must return the entire fund to compensate for the vast majority that go to zero.
The Power Law
Unlike Private Equity, which models tight distributions around a 15-20% IRR with low failure rates, VC expects 50-80% of investments to fail completely. The mathematical necessity is that the winners must achieve 10x, 50x, or 100x returns.
Stages of Capital
- Pre-Seed / Seed: Funding the idea and early product. Extreme risk, valuations driven by market sizing and team pedigree, not revenue.
- Series A/B: Finding product-market fit and scaling. Focus shifts to unit economics, CAC/LTV ratios, and revenue growth.
- Growth (Series C+): Pumping capital into a working machine to dominate a market before IPO. Lower relative risk, higher valuations.
Dilution & The Cap Table
Founders and early investors are diluted with every successive funding round. Owning 10% of a company at Seed stage might translate to 3% at IPO. Understanding anti-dilution provisions and pro-rata rights is essential for early investors.
Valuation Mechanics: Post-Money vs. Pre-Money
A funding round is defined by how much is raised and the valuation it implies.
Post-Money Valuation = Pre-Money Valuation + Investment Amount
Dilution Calculator
Calculate founder ownership post-raise, including an Option Pool expansion.
Liquidation Preferences
VCs hold Preferred Stock, not Common Stock. A 1x Non-Participating Liquidation Preference means that in an exit, the VC gets their initial investment back first, before common shareholders get anything, OR they convert to common if the exit is large enough.
In downside scenarios (selling for less than capital raised), founders often walk away with nothing while VCs recoup a fraction of their capital.
FAQ
What is a SAFE?
Simple Agreement for Future Equity. It is a warrant to buy stock in a future priced round. It delays valuation discussions but introduces complex dilution math for founders.
Why do VCs care about TAM (Total Addressable Market)?
Because of the power law. If a company can only realistically reach $50M in revenue, it cannot generate the $1B+ exit required to return a $200M fund.