Venture capital (VC) is in a nutshell "risk money". This is because VC investments in companies are often not supported by any collateral and venture capitalists are dependent on the founders/management to make a success of the company. Thus, whilst venture capitalists put in sizeable investments into companies, they have little control over the management of the company and face the risk of losing their entire investment in the event the company fails. However, the high risk is offset by high returns when an investee company succeeds – in fact, because of the spectacular successes of some investee companies within the entire portfolio, venture capitalists expect to produce an ROI (return on investment) of at least 20% to 25% per annum on the VC funds they manage. This level of ROI is exceptional compared to many investment benchmarks such as the S&P Index and US Treasury Bills.

VC investments are typically equity based, meaning that the venture capitalist takes a percentage of the equity in the company that receives VC funding. Unlike debt financing through bank loans for instance, VC funding requires no collateral and no repayment period. The venture capitalist receives its repayment in the form of – hopefully huge – capital gains when the investee company undergoes a liquidity event, for example, an IPO or trade sale.

Due to the high risk nature of the investments, venture capitalists will carry out extensive screening, or due diligence in VC parlance, on potential investee companies from various aspects such as management, technology, and business model. A venture capitalist typically looks at a mid-to-long term partnership (3-5 years) with any company that receives its funding. The keyword "partnership" is important here – venture capitalists are not mere providers of capital, but business partners providing guidance, management assistance and networking to companies in their portfolio.