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On October 16th, King Hall’s Center for Innovation, Law and Society will host Samsung Associate General Counsel Cindy Dole (Class of ’09). Her talk will revolve around venture capital’s role in innovation and the role of lawyers in the venture capital investment process. This post aims to provide a basic overview of how venture capital (“VC”) funding works.

Companies need money—capital—to operate. They have many avenues for raising that capital, and various financing options suit companies’ needs at different stages in their development. For example, a company that isn’t yet profitable will raise capital differently than a company that has had steady profits for the last decade.

Venture capital is simply one of many ways a company can raise capital. VC investments focus on emerging companies that are looking for their first large cash infusion.^[1] The investors are usually high net worth individuals, sometimes called angel investors, or venture capital firms.^[2]The prototypical recipient of a venture capital investment is a company in its first two years of operation.^[3]

Investing in a young company is risky. Statistically, a startup is more likely than not to fail, and it may go bankrupt before it has any assets to sell to pay off its debts.^[4] However, with high risk comes high reward. VCs invest with the hope of achieving above-average returns on their investment, and as such, seek out companies with large growth potential.^[5] They are trying to invest in the ground floor of companies that will go on to be major players in the economy. As such, VCs typically do extensive background research on the firms in which they invest, and typically become involved with the firm in an advisory capacity in order to oversee their investment.^[6] Venture capitalists exit the company once it is out of its growth stage, typically by a merger, acquisition, or IPO.^[7]

Venture capital is heavily associated with technology and innovation.^[8]If you are interested in learning more about why, we encourage you to attend Cindy Dole’s talk on October 16th, 2023.

[1] See Paul Gompers, The Rise and Fall of Venture Capital, 23 Bus. And Econ. Hist. 1, 3 (1994).

[2] See Adam Hayes, Venture Capital: What Is VC and How Does It Work?, Investopedia (last updated July 15, 2023), https://www.investopedia.com/terms/v/venturecapital.asp.

[3] See id.

[4] See Tom Eisenmann, Why Start-ups Fail, Harv. Bus. Rev., May-June 2021, https://hbr.org/2021/05/why-start-ups-fail; Gompers, supra note 1, at 3.

[5] See Josh Lerner and Ramana Nanda, Venture Capital’s Role in Financing Innovation: What We Know and How Much We Still Need to Learn, 34 J. of Econ. Persp. 237, 240 (2020).

[6] See Hayes, supra note 2.

[7] See id.

[8] See Lerner, supra note 5, at 237.

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An Introduction to Venture Capital