Venture Capital (VC)

Historically, venture capital has been restricted to "Accredited Investors"—individuals with a net worth over $1 million (excluding their primary residence) or an annual income exceeding $200,000. This is due to the high risk and lack of liquidity associated with private startups. However, newer regulations like the JOBS Act have allowed for "Equity Crowdfunding," which enables retail investors to invest smaller amounts in startups through registered platforms, though these still carry significant risk.

Most venture capital firms operate on the "2 and 20" model. They charge an annual management fee of 2% of the total capital committed to the fund. This fee covers salaries, office space, and the costs of sourcing deals. The real profit comes from "Carried Interest," which is typically 20% of the profits generated by the fund after the original capital has been returned to the Limited Partners. This aligns the GPs' incentives with the performance of the companies they invest in.

A "Unicorn" is a privately held startup company with a current valuation of $1 billion or more. The term was coined in 2013 to represent the rarity of such companies. Today, while more common than they once were, they remain the primary target for VC investors because of their potential to return an entire fund. Companies valued at over $10 billion are sometimes called "Decacorns," and those over $100 billion are "Hectocorns."

Angel investors are typically high-net-worth individuals who invest their own personal money into very early-stage startups (Pre-seed or Seed). Venture Capitalists are professional money managers who invest "other people's money" (from Limited Partners like pension funds) through a structured firm. Because they are investing larger pools of capital, VCs typically invest later than angels (Series A and beyond) and write much larger checks.

A "Down Round" occurs when a company raises a new round of venture capital at a lower valuation than its previous round. This is generally a negative signal to the market and can be highly dilutive to existing shareholders and employees. It often happens when a company has failed to hit its milestones, is running out of cash, or when the broader economic environment for tech investments has cooled. Down rounds can trigger "anti-dilution" clauses that further dilute the founders.

VCs exit their investments when they can turn their private equity into cash. The most famous exit is an Initial Public Offering (IPO), where the company becomes listed on a stock exchange like the NASDAQ. However, the most common exit is a "Trade Sale" or M&A (Merger and Acquisition), where a larger company (like Google or Salesforce) buys the startup for cash or stock. In some cases, VCs may also sell their shares to other private investors in "Secondary Markets."