Venture Funding

A newly founded company needs money long before it earns any. It has to pay salaries, rent offices, and build a product that doesn’t even exist yet. A regular bank rarely grants a loan for this, because it gets little collateral and default is likely. Venture funding solves this differently: investors give money and receive not a loan repayment in return, but a share in the company. If the company later goes public or is sold, this share is worth a lot. If it fails, the money is gone — and that exact risk is embedded in the term risk capital.

Why AI companies wouldn’t exist without venture capital

AI development is extraordinarily expensive before the first cent comes in. Training a large language model costs computing time on specialized chips, often in the hundreds of millions. On top of that come salaries for researchers, who are fiercely competed for worldwide. No founder can raise these sums out of their own pocket.

That’s why funding rounds explain many of the headlines of recent years. Companies like OpenAI, Anthropic, or Mistral had barely any revenue when they were already valued at billions. This valuation is not a measurement of today’s worth. It is a bet on what the company might be worth in five or ten years.

This also explains why some observers speak of a bubble. When very large amounts of capital flow very quickly into an industry, valuations often rise faster than actual business results. If this expectation bursts, it’s not only investors who lose money. Companies that depend on the next funding round then run into trouble as well.

From the seed round to Series C

Venture funding proceeds in rounds that follow one another. At the beginning is the seed round: small amounts, often under two million euros, for a team with an idea. After that come rounds labeled Series A, Series B, Series C, and so on. With each letter, the amounts grow, and the company has to show more results.

At each round, a valuation is negotiated — that is, a price for the entire company. If a company is valued at 100 million and an investor puts in 20 million, they receive roughly one-sixth of the shares. The existing owners then hold a smaller percentage than before. This effect is called dilution and is the price of fresh money.

The money itself usually doesn’t come from the investors personally. Venture capital firms raise it from pension funds, universities, or very wealthy individuals and manage it in a fund. These funds firmly expect that most of their investments will fail. A single big hit is meant to offset the many losses — this calculation model shapes the entire behavior of the industry.

How to read funding rounds in the news

In tech news you constantly read sentences like: Start-up X raises 50 million dollars in a Series B. What matters here is what this number does not mean. It is neither revenue nor profit, but capital raised that still has to be spent. A large round mainly shows that investors believe in the company’s future.

A common misconception concerns valuation. If a company is valued at a billion and therefore called a unicorn, nobody has paid a billion. The value is extrapolated from the price of the few newly sold shares. If market sentiment drops, the same company can be worth significantly less in the next round. Such devaluations are called a down round.

Venture funding is also not the only source of money. Large corporations are increasingly investing directly in AI companies, often tied to computing power rather than cash. And once a company is mature enough, an IPO or acquisition by a corporation often follows. Only then do the early investors actually get their money back.