Venture Capitalist

A venture capitalist is someone who puts money into very young companies. Such companies often don’t yet have a finished product or customers. A bank would therefore not give them a loan, because it cannot foresee repayment. The venture capitalist also doesn’t demand repayment. Instead, they receive a share in the company and only earn money if the company later becomes highly valuable. The English term for this is Venture Capital, abbreviated VC.

Why hardly any AI company could exist without this money

New technologies are very expensive at the start and bring in nothing for a long time. Anyone wanting to develop an AI model needs expensive specialized computers and well-paid experts. These expenses occur years before the first revenue. Without investors who bridge this gap, such companies simply wouldn’t exist.

Venture capitalists calculate differently than ordinary investors. They assume that most of their investments will end up worthless. Out of ten companies, seven may fail. But if one of them multiplies its value a hundredfold, the entire package was still a good deal. This pattern is called portfolio thinking.

That’s why these investors specifically look for ideas that can become very big. A solid business with stable but small profit hardly interests them. This shapes which companies get founded in the first place. Founders often align their plans with what investors consider big enough.

From the fund to the exit

Venture capitalists usually don’t invest their own money. They collect it from pension funds, insurance companies, and very wealthy individuals. This pooled money is called a fund and typically runs for ten years. At the end of this period, the investors must get their capital back, ideally with a substantial profit.

Investment happens in stages called funding rounds. Right at the beginning is the seed round with comparatively small amounts. After that come rounds named Series A, Series B, and so on. At each round, the company is assigned a value, known as the valuation. This valuation is not a measurement but the result of a negotiation.

For the investor, what ultimately counts is the exit, in industry jargon. They sell their shares either to a larger company or through an initial public offering. Only then does the paper value turn into real money. As long as no exit takes place, the investor only has a number on a list. A common mistake, therefore, is to confuse a high valuation with actual wealth.

When billion-dollar rounds make the headlines

Venture capitalists appear in business news almost daily. Reports like “Start-up raises 200 million dollars at a valuation of two billion” describe exactly such funding rounds. Well-known names from California’s Silicon Valley are Andreessen Horowitz and Sequoia Capital. In Europe and Germany, the market is smaller but has been growing for years.

In the AI sector, the amounts have recently become extraordinarily large. Companies like OpenAI or Anthropic have raised billions, often also from major technology corporations. Such corporate investors additionally pursue their own interests, such as selling their data centers to the funded start-up. This distinguishes them from classic funds, which focus solely on profit.

As a reader, healthy skepticism toward these figures is worthwhile. A high valuation says what investors expect for the future. It says nothing about whether the company generates revenue or profit today. Many highly valued companies post losses for years. Whether the expectation was correct only becomes clear at the exit.