Illustration by Avery Adamson

Venture Capitalists are investors who pump millions of dollars into fast growing startups, hoping they’ll grow quickly and become huge successes.

The Rocket Farm

Most investors are like farmers: patiently hoping for steady growth of their money over years or decades of watering, fertilizing and pruning.

But not VCs (venture capitalists). They work with fast moving startups and ambitious entrepreneurs, hoping to find ones that will quickly catch fire and become huge successes in a short time.

A venture capitalist’s ‘portfolio’ is like a farm where entrepreneurs bring moon-shot rockets they hope to launch. The VCs pick the rockets they think are the best, then pump rocket fuel (cash) into them. They also provide advice to the young entrepreneurs on guiding their rockets, and on recruiting talented rocket scientists (engineers).

For every ten rockets the VCs turbocharge with fuel (and talent), most will basically explode on takeoff and become worthless wreckage.

But one or two may make it into orbit and become hugely valuable. These so-called ‘unicorns’ enable VCs to reap hundreds or thousands of times their initial investments. Which is how the luckiest VC firms turn millions into billions – for themselves and for those who invested in their fund (often university endowments and pension funds).

In return for their work, VCs typically charge their investors (called ‘limited partners’) both an annual fee (around two percent) plus a share of the investment gains (usually around twenty percent).

Venture capital rocket fuel has worked magic for decades in Silicon Valley, with huge successes like Amazon, Google, Facebook, Twitter, Tesla, AirBNB, Microsoft, and many other giants.

But for every mega-success, there are the thousands of companies that just blew up on the launchpad. That’s the venture capital model.

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