Venture Capital

What is Venture Capital?

Venture Capital (VC), also known as risk capital, refers to investments in young companies that have high growth potential but are not yet profitable.

In return for their investment, venture capital firms typically receive:

• Company shares, with the exact ownership depending on the company’s valuation and the funding round.
• Seats on the board or comparable governing bodies.
• Voting rights on strategic decisions.
• Liquidation preferences (priority payouts if the company is sold).

How it works

Funding stages

Seed round:

• Stage: Very beginning.
• Investment: 100,000 to 2 million US dollars.
• Purpose: Develop the product and acquire the first users.

Series A:

• Stage: The product works and first users have been acquired.
• Investment: 2 to 15 million US dollars.
• Purpose: Accelerate growth and build the team.

Series B/C/D:

• Stage: Strong growth is already underway.
• Investment: 15 to more than 100 million US dollars.
• Purpose: Achieve market leadership and scale the business.

Exit strategies

VC investors typically invest with the intention of selling their shares after five to ten years.

Acquisition: A larger company acquires the startup.
Initial Public Offering (IPO): The company goes public and venture capital investors sell their shares.
Secondary Sale: Venture capital investors sell their shares to other investors.

Examples

Docker

Investment: More than 400 million US dollars (Series A through E, 2013-2019)
Investors: Benchmark Capital, Greylock Partners, Insight Partners, Sequoia Capital
Development: Docker Desktop was free for everyone until 2021. Since 2021 it has required a paid subscription for companies with more than 250 employees. Many users began looking for alternatives such as Podman.

Anthropic (Claude)

Investment: 7.3 billion US dollars (as of 2024, Series A through E)
Investors: Amazon (4 billion), Google (2 billion), Menlo Ventures, Spark Capital
Special characteristic: Amazon and Google are among Anthropic’s largest investors while also providing its cloud infrastructure.

WhatsApp

Founded: 2009
Investment: 60 million US dollars (Sequoia Capital)
Acquired by: Facebook (Meta) for 19 billion US dollars (2014)
Development: The original promise was “No ads! No games! No gimmicks!” After the acquisition, privacy and data usage became the subject of extensive public debate and regulatory proceedings. Founder Jan Koum left Facebook in 2018.

Instagram

Founded: 2010
Investment: 57 million US dollars
Acquired by: Facebook for 1 billion US dollars (2012)
Development: Instagram evolved from an independent photo-sharing application into part of Facebook’s advertising business. Its feed increasingly became an algorithmically curated advertising and recommendation system.

Well-known venture capital firms

Sequoia Capital: WhatsApp, Instagram, Zoom, Dropbox, Reddit (Silicon Valley)
Andreessen Horowitz (a16z): Facebook, Twitter, GitHub, Coinbase (Silicon Valley, very active in cryptocurrency)
Y Combinator: Airbnb, Dropbox, Reddit, Stripe (startup accelerator)
Tiger Global: Spotify, Peloton (New York, also active in China and Asia)
Insight Partners: Docker, Twitter, Wix (focus on software and SaaS)

Control mechanisms

Board seats: Venture capital firms receive seats on the board or comparable governing bodies and participate in important decisions. The larger the investment, the greater their influence.
Veto rights: Venture capital firms may have veto rights over strategic decisions such as a sale of the company or major changes to the business model.
Liquidation preferences: If the company is sold, venture capital investors receive their agreed payout before founders and employees. A standard 1× liquidation preference is common in traditional VC agreements, while higher multiples exist but are not typical.
Anti-dilution clauses: If the startup later raises capital at a lower valuation, the ownership of venture capital investors is protected while founders and employees experience greater dilution.

How to recognize venture capital funding

• Free use at the beginning to attract users quickly.
• Rapid growth accompanied by high marketing expenditure.
• News about funding rounds in technology media.
• Focus on user growth rather than profitability.
• Sudden pricing changes or new paid plans after several years.
• Acquisition by a larger company after five to ten years.

Alternative funding models

Bootstrapping

Meaning: A company grows from its own revenue without external investors.
Examples: 37signals (Basecamp, Hey.com), Mailchimp (until its sale in 2021)
Characteristics: Founders retain complete control, there is no exit expectation, and growth is usually slower.

Donation-based funding

Examples: OpenBSD (approximately 150,000 US dollars per year), Wikimedia Foundation, Mozilla Foundation (partially)
Characteristics: No investor demands, community-driven, often chronically underfunded.

Cooperatives

Examples: Fairphone (partially), Green Bay Packers (NFL team)
Characteristics: Members make decisions democratically, there is no pressure to achieve an exit, and decision-making is generally slower.

Revenue-Based Financing

Meaning: Repayment is based on revenue rather than company ownership.
Characteristics: No ownership dilution, no board influence, suitable primarily for profitable companies.

For developers

When choosing development tools, it can be useful to ask:

• Who finances the project?
• Are venture capital investors involved?
• What exit strategy is being pursued?
• Is there a foundation or community-based governance model?

Example: Docker remained free for many years. After receiving more than 400 million US dollars in venture capital, Docker Desktop became a paid product for business customers in 2021. Teams that had built their workflows around it often migrated to alternatives such as Podman. This is one possible development following venture capital funding, not an inevitable consequence of every venture capital investment.