How Does Venture Capital Work?
Short answer: a venture capital fund raises money from institutions and individuals, then invests it in private companies that could grow very large, taking equity instead of repayment. A fund may back a company across several rounds, sit close to the decisions that matter, and see a return only when the company sells or goes public. Pitango has been investing in Israeli technology companies since 1993, across more than 300 portfolio companies and roughly 100 exits, including CyberArk, Riskified, Taboola, and Via.
Most founders meet venture capital as a black box. Money goes in, a term sheet comes out, and somewhere in between a group of partners decides yes or no. The mechanics are less mysterious than they look, and founders who understand how fundraising for startups works tend to raise more effectively, because they understand what investors are looking for and why.
What is a venture capital fund, and what does it get in return?
A venture capital fund is a pool of capital raised from limited partners: pension funds, insurance companies, endowments, family offices, and wealthy individuals. The fund’s partners invest that pool in private companies over a defined life, usually around 10 to 15 years, then return the proceeds to those limited partners.
For the money, the fund takes equity, a share of ownership in the company, usually preferred shares carrying certain rights. If the company succeeds, most of the time the stake turns into a return when a buyer acquires the company or it lists on a public market.
The structure explains a lot of investor behavior. A fund needs a small number of very large outcomes to carry an entire portfolio, so it looks for companies that have the potential to lead a category, not businesses that will earn a comfortable few million a year. A steady local business can be an excellent company and a poor venture investment at the same time.
At which stages do funds invest, and how does the money move?
Funds invest across the life of a company, and each stage asks a different question of the founder.
| Stage | What the company usually has | What the money buys |
|---|---|---|
| Pre-seed and seed | Founding team, prototype, first users or pilots | Building the product and the first real hires |
| Series A | Product in market, early traction and initial validation | Building toward repeatable growth |
| Series B and C | A working model and growing revenue | Scale, new markets, deeper teams |
| Growth | A credible path to category leadership | International expansion, acquisitions, and scaling toward category leadership |
How long does the process take, from first meeting to wire?
Founders should generally plan for a fundraising process to take several months. Processes can move faster, but relying on that leaves very little room for delays and can significantly reduce a founder’s negotiating leverage as runway gets shorter.
A typical path runs like this:
- First meeting, where a partner gets to know the founder, the idea, and the market.
- Follow-up sessions with more partners, deeper on product, competition, and numbers.
- An internal discussion inside the fund, sometimes several, before a partnership decision.
- A term sheet covering valuation, ownership, board rights, and protections.
- Due diligence, where the fund inspects finances, legal structure, customer contracts, and the technical foundations.
- Signing and closing, then the wire.
Take a seed-stage company that opens conversations in January with nine months of runway. It signs a term sheet in March, spends six weeks in diligence, and closes in May with four months of cash left. The same company opening those conversations in June, with four months of runway, may find itself fundraising under significant time pressure. If there’s one lesson in how fundraising for startups works, it’s to open the conversation earlier than feels necessary.
Does the fund help run the company, and what else does it bring?
A fund doesn’t run your company. It usually takes a board seat, which means a voice on the decisions that shape the company’s direction: senior hires, the next round, an acquisition offer, a major shift in strategy. Daily operations stay with you.
Beyond capital, an experienced fund can bring access to customers and partners, support with executive hiring, follow-on capital, and relationships with other investors. An experienced partner who has seen companies navigate similar challenges can often recognize problems before they become expensive ones.
Pitango has been partnering with founders for more than three decades, combining investment experience, data, and technology to support portfolio companies as they build and scale. The relationship compounds over years rather than quarters, and that part of the investor-founder relationship never appears on a term sheet.
Building something bold? Reach out directly at pitango@pitango.com.
