Intro to Venture Capital

Two people wearing business suits shake hands outdoors, symbolizing an agreement or partnership. The focus is on their hands and forearms, with a blurred background.

When you’re building a startup, chances are you’ve already heard a lot about venture capital (VC). But what exactly is it, and why does it come up so often?

Venture capital is one type of investment, also called “asset class”, where investors fund private companies (such as startups) in exchange for equity (ownership) in the business. Their goal? To generate strong returns when the company grows significantly or has a successful “exit”, primarily through an acquisition or an initial public offering (IPO) on a stock exchange.

Compared to other asset classes, like real estate, the stock market, or bonds, venture capital is high risk, but also has the potential for high reward. That’s why it typically makes up only a small slice of an investor’s overall portfolio.

Who Are the Investors?

As a founder, you’ll typically encounter two broad types of investors:

Angel Investors: Individuals that invest their own money
Venture Capitalists (VCs): Professionals investing other people’s money (from institutions, endowments, pension funds etc)

Angels: More Than just a Check

Angel investors often have a personal motivation: Many are former founders themselves who want to give back, stay close to innovation, or support a field they are passionate about. Some may be mission-driven, others might be excited by the thrill of startup life. As such, there are no formulaic methods to landing an Angel check, which typically ranges from $50k – $500k (but can be more or less). Some founders start with the infamous “FFF” round (“Friends, Family and Fools”). If you do so, be sure to set expectations early and document everything thoroughly. Relationships matter more than ever in this phase.

Venture Capitalists: Entering a Long-Term Marriage

Venture Capitalists (VCs) operate differently. They raise money from outside sources (called Limited Partners (LPs)) such as universities, foundations, pension funds and wealthy families. They then invest that pooled capital into startups, according to an investment thesis.

“ Spend time getting to know an angel’s investment motivations and how hands-on they want to be. Some will want to act as sounding boards, mentors, or connectors. Others may take a more hands-off approach. Either way, clear communication about expectations and roles goes a long way

VCs are expected to generate significant returns, usually over a 10-year period, using a structure called a closed-end fund. Here’s how it works:

They invest the money over 1 – 3 years by choosing companies they believe will generate large returns (we define large in a bit)
They manage the investment in those companies for another 7 – 9 years
Their goal is to return the original capital plus profits to their LPs

VCs earn money two ways (also called “2/20”):

2% management fees (to cover salaries, operations, travel etc)
20% of the profits (called “carry), so they are highly incentivized to bet on big winners

Many VC firms also require their leaders/General Partners (GPs) to invest some of their own money into the fund (1-5%) to align incentives even further.

How is VC Different from Investing in Stocks?

If you buy public stocks on the stock market, you can sell them anytime. That makes them liquid. But VC funds are illiquid – once the money is in a fund, it stays there for 10 years.

To justify that lack of flexibility, VCs aim to deliver higher returns than the stock market: For example:

The S&P 500 averages 8-10% per year
Top VCs target 20%+ annual returns (which results in ~3x the money in 10 years)

This is very hard to achieve and only a small percentage of funds consistently hit those targets. These ambitious return expectations are the main driver behind the “pickiness” of VCs, the dynamics with them and the support you receive as a portfolio company.

The Power Law: Why VCs Swing for the Fences

Startups, especially in biotech, are incredibly risky. Most fail. In fact, fewer than 10% of early-stage biotech companies return even 1x the capital invested (which means they were not a very good ”investment”). But those few outliers? They can return 50x, 100x or more. VCs factor these odds into investing, and need to believe every investment has the potential to be a “fund maker”, a single company capable of returning the entire fund.

For example:
If a VC raises a $50M fund and then writes a $2M check into your company, they will be expecting that you can produce a >$500M exit. Why? Because by the time of exit, the fund may only own 5-10% of your company.

Rule of Thumb:

VCs look for startups that can return at least 10x the size of their fund. If your startup doesn’t have that level of potential, it might not be a VC fit, and that’s totally ok. There are many other paths to building a great company.

VC isn’t the only path, there’s many more options to explore. If you decide to go down that route, it’s worth understanding the VC model, the expectations and the kind of relationship you want with your investor. For a deeper dive into VC, we recommend you to head to the Resources section, where you will find books such as “Venture Deals”, a classic in the VC world. If you’re thinking about raising VC money, approach it like any other relationship: With clarity, communication and shared goals. It makes sense to reflect on questions such as these:r

What kind of company do I(we) want to build? What is my’(our) vision for this?
Am I ready for the expectations that come with raising outside capital?
What kinds of investors align with my(our) values and vision?

If you have clarity on these questions, it’s much easier to find investors that are aligned with your long-term plans and vision for your company. We’ll dive deeper into the VC world in Section 4, preparing you for VC fundraising.

Why Biotech is a Unique (and Demanding) Case for Venture Capital

Compared to startups in other industries, biotech companies face a very different reality: They burn through capital faster (because of high infrastructure and consumable costs, etc), have much longer development timelines, and carry higher technical and regulatory risk. In some cases, they also operate within complex socio-political realities that influence perception and adoption of their innovations.

And yet, VC remains one of the most essential pillars of the biotech ecosystem. Why? Because VC bridges a critical funding gap:

Academic labs and research institutions drive early scientific breakthroughs using experiments that model the human condition, funded by grants, fellowships or government programs.
Pharmaceutical companies tend to only get involved later, only once product is “derisked” in those experimental models, has some clinical validation, or is ready to go-to-market – leveraging their experience and revenue-backed resourcing to undertake late-stage product development, commercialization, marketing, and sales efforts

That leaves a crucial middle phase, often called the “valley of death” where promising ideas need funding to move from idea to concept to clinic.

The Value VCs Bring to Biotech (Beyond Capital)

The best biotech VCs offer more than just funding, they bring deep industry expertise. Many have scientific or medical backgrounds themselves and can help you navigate:

R&D strategy and milestones
Clinical trial planning and regulatory pathways
Go-to-market models, pricing and reimbursement
Strategic partnerships and business development

Working with the right VC can mean gaining a thought partner who truly understands the complexity of what you’re building, and who can help you with both your science and your strategy.

Want a simple breakdown of how VC fits into biotech? Check out these short videos from No Patient Left Behind:

How VCs Evaluate Biotech Startups

Biotech VCs tend to be highly thesis-driven. That means that they first assess whether a company fits their investment focus and strategy:

Therapeutic area
Stage of development (e.g. preclinical vs clinical)
Modality (e.g. cell and gene therapy, RNA-based, small molecules, digital healthtech)
Broader perception and risk appetite (e.g., reluctance to fund genetically modified plant development despite scientific merit)

If your startup is “in scope”, they’ll dig into several key risk areas:

Scientific & technical risk: Is the underlying science sound and reproducible?
Regulatory risk: What does the path to approval look like?
Market potential: Is there a clear and compelling unmet need, and willingness to pay?
Team capability: Do you have the right people in place?
Financing strategy: What’s your capital plan to get from here to a major inflection point or exit?

Understanding how VCs think, and what they need to see can help you shape your narrative, pitch and fundraising strategy. It also helps you decide which VCs are worth engaging in the first place. It also helps you decide which VCs are worth engaging in the first place. We’ll dive deeper into this in Sections 3 and 4, and also in our resources section.

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