Venture capital is a form of investment where individuals or firms provide funding to startups and small businesses in exchange for equity or ownership stakes, helping them grow and develop.
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Last Updated: January 26, 2026
Many new businesses need financing to get up and running. Thankfully, there are lots of ways to get funds to start a new operation, and venture capital is one financing option. This guide walks through what venture capital financing is, its benefits, its drawbacks, and more.
Venture capital, by definition, is start-up money that a business owner receives from an investor in exchange for giving that investor a piece of the business.
One big advantage of venture capital is that the business owner doesn’t have to worry about making principal and interest payments to their investors, as they’d do with a traditional small business loan. This is a big help, since many businesses take some time to generate a profit. Additionally, many venture capitalists are seasoned business professionals themselves, so they can often give tips, tricks, and other guidance to the business owners they invest in. That can be a win-win situation.
Some entrepreneurs wonder whether finding someone who will invest in their company without expecting to be repaid is too good to be true. And that’s understandable. There are definitely some catches that business owners need to be aware of when using venture capital for funding.
If an entrepreneur chooses funding through a venture capitalist, they’ll likely have to:
A lot of work can go into using a venture capitalist to fund an enterprise.
Writing a good, detailed business plan is often key to securing the funding needed for a successful business. Investors don’t easily part with their money. In the company business plan, potential investors need to see that the entrepreneur has done their research, that they understand their company’s logistical and financial needs, and that they have a smart plan for building their business and spending their money.
Writing a good business plan can be tricky. Thankfully, ZenBusiness offers a Business Plan Template that can simplify the drafting process.
A venture capitalist will likely require a business owner to give them a significant amount of equity and control over the business in exchange for their money. This arrangement will likely last for the life of the company.
Before an entrepreneur decides to use venture capital financing, it’s prudent for them to consider whether they’re willing to share their profits and control for the foreseeable future. It’s also wise for entrepreneurs to check that the investor is a right fit for them and their company; it’s a crucial business relationship, after all.
When choosing an investor, a business owner wants to find someone who is reliable, ethical, knowledgeable, and respectful. Remember, this person will probably be very involved in the business’s routine operations. Often, it can take a lot of research to find a good investor. This can involve attending industry events, reading business journals, and checking business registries.
Potential investors want to see the inner workings of a business before fronting any money. An entrepreneur can provide that information in a due diligence review. In a due diligence review, investors examine how the business operates, its products and services, its finances, its management team, and its governing documents.
For a limited liability company, one of the most important governing documents is the operating agreement. ZenBusiness helps entrepreneurs draft a good one with their Operating Agreement Template.
After an entrepreneur finds a good investor, they’ll usually need to ensure that the investment contract has fair terms that respect their rights and needs as a business owner. There’s a good chance the investor will have an attorney for the negotiation, and it’s a good idea for an entrepreneur to consult a business attorney as well.
A lot of preparation goes into finding a good venture capitalist to fund a business. The entrepreneur will want to make sure their business is in order and that the right person is investing before they dive in.
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Hopefully, this guide has helped clear up what venture capital is and the role it can have in a successful company. If a small business owner is ready to start a new company, ZenBusiness offers a variety of business formation services to help anyone start and grow their business for years to come.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.
Written by ZenBusiness Editorial Team
The ZenBusiness Editorial Team has more than 20 years of combined small business publishing experience and has helped over 850,000 entrepreneurs launch and grow their companies. The team’s writers and business formation experts are dedicated to providing accurate, practical, and trustworthy guidance so business owners can make confident decisions.
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