Venture Capital
Venture capital, or VC for short, is money that investors put into very young companies, even though these companies don't yet turn a profit. In return, the investors receive shares in the company and hope that a small number of these companies will become extremely valuable.
A newly founded company needs money at the start, before it even sells anything. A bank usually won’t grant a loan for this, because it wants to see regular repayments. This is exactly where venture capital comes in. Investors give the young company money and receive a stake in the company in return. They don’t get fixed interest, but only earn money if the company turns out to be worth a lot later on. If nothing comes of it, the money invested is lost.
Why most AI companies wouldn’t exist without venture capital
Training a language model costs hundreds of millions of dollars, often more. This sum is incurred before a single customer has even paid. There is hardly any other source of money that finances something like this. Companies like OpenAI, Anthropic, or Mistral have grown over many years almost exclusively on outside capital.
For the investors, this is a numbers game with extreme swings. A typical fund invests in about 30 companies. Most of them fail or just muddle along. But one or two hits bring back a hundred times the investment and thereby carry the entire fund. This pattern is called a power law: a few outliers determine almost the entire outcome.
This leads to a mindset that often seems strange from the outside. A VC doesn’t look for companies that are certain to make a little profit. They look for companies that have a small chance of achieving gigantic success. This is why so much money flows into areas that look risky and unfinished.
From the seed round to the exit
Funding takes place in stages called rounds. It starts with the seed round, involving comparatively small amounts. This is followed by Series A, Series B, Series C, and so on. With each round, more money is raised, and the estimated value of the company usually rises along with it.
This estimated value is called the valuation. It is not a measured figure, but the result of a negotiation. If investors pay 100 million for ten percent of the shares, the company is mathematically considered to be worth one billion. Such figures are constantly in the news, but they say nothing about revenue or profit.
At the end comes the exit. Either the company goes public, or a larger company buys it. Only then do the shares turn into real money. Until then, eight to twelve years often pass. Incidentally, the capital itself usually doesn’t come from the VC people personally, but from pension funds, university endowments, and very wealthy families.
Reading VC news correctly
You encounter venture capital in tech news almost daily, usually in a standard sentence: company X raises 200 million dollars at a valuation of two billion. Well-known names on the investor side are Sequoia, Andreessen Horowitz, or, in Europe, Index Ventures. Large corporations also run their own VC arms, investing in young companies in their industry this way.
A common mistake is to confuse the valuation with actual success. A high valuation initially only means that someone was willing to invest at that price. If market sentiment turns, valuations can drop significantly again. This is then called a down round, meaning a round on worse terms than before.
As a reader, it’s therefore worth looking beyond the headline. What’s interesting is what the money is intended for and how long it will last. For AI companies, a large portion flows directly into data centers and graphics chips. Anyone who needs a lot of capital just to operate at all is permanently dependent on new rounds.