The funding stages
Startups typically raise capital in sequential rounds. Pre-seed/seed is the earliest stage — often a few hundred thousand to £2m to prove a concept, build a prototype, or find product-market fit. Series A (typically £2–15m) comes when there is evidence of product-market fit and a team. Series B is for scaling — hiring, marketing, geographic expansion. Series C and beyond is growth capital for companies already generating significant revenue. Each round dilutes existing shareholders: if the company issues new shares to investors, existing shareholders’ percentage falls.
How VC funds make money
VC funds charge a management fee (typically 2% of assets per year) and carried interest (20% of profits — "carry"). The fund manager (General Partner, or GP) keeps 20% of all returns above the invested capital, with the remaining 80% going to the Limited Partners (LPs) who provided the capital. The fund life is typically 10 years. The model requires at least some investments to achieve 10–100x returns, because most startups fail — the top 1–2 investments in a portfolio often generate more than the sum of all others combined. A VC fund that doesn’t have a breakout winner in its portfolio rarely returns capital to LPs, let alone profit.
Valuations and dilution
At each funding round, investors and founders agree on a valuation. A "pre-money" valuation of £10m means the company is worth £10m before the new investment. If the investor puts in £2m, the post-money valuation is £12m and the investor owns 2/12 = 16.7%. Early investors typically protect themselves with anti-dilution provisions and liquidation preferences — the right to be repaid first in an exit, before common shareholders (founders and employees) see any return. In a down round (raising at a lower valuation than the previous round), founders and common shareholders can be severely diluted.
“Venture capital is the pursuit of outliers. If your fund can’t generate a 3x return on every investment, it needs one investment that generates 100x.”
What this means for you
For retail investors, direct access to VC-stage investments is extremely limited and high-risk. Listed private equity trusts and specialist VC trusts (eligible for SEIS/EIS tax relief in the UK) provide some access, but the underlying risk — most startups fail — remains. The VC model works as a portfolio strategy across dozens of bets; individual startup investing without that diversification is closer to speculation than investment. The most actionable insight: if you join a startup, understand how much of the cap table is held by VCs, what liquidation preferences exist, and at what valuation exit you personally see a return.