A venture capitalist generally invests in companies and startups which are still in a stage where their business model needs to be proved viable, or they need resources to scale up.

Thus, those companies present high risks, but the potential for exponential growth. Therefore, venture capitalists look for startups that can bring a high ROI and high valuation multiples.

That’s because of the set of investments venture capitalists make; only a few will succeed. Therefore, they have to place more bets to make the system work in their favor.

In the end, the venture capitalist makes money (the so-called exit) by either reselling the stake in the company at a much larger valuation or with the IPO of the company they invested in.

When that happens, venture capitalists make substantial returns for their partners. Indeed, the venture capital firm is usually comprised by a group of partners which raised capital from another group of limited partners to invest for them.

The limited partners (or LPs) can be either large institutions or wealthy individuals looking for high returns.

Usually, venture capital firms invest in growth potential. Therefore, when a startup receives venture capital money, the venture capital firm – usually – expects aggressive growth.

Before we get to the advantage and disadvantages of taking venture capital money, let’s first understand the explicit and hidden incentives that drive venture capital firms. Indeed, at the end, taking venture capital money is mostly about interests alignment.

And if those interests do not converge, that is when probably it might be not a good idea to take that money.

For more: fourweekmba.com/venture-capital-advantages-and-disadvantages/