Venture capital is investments in startups and young companies with high growth potential. Such investments involve a higher level of risk, as most startups do not succeed. However, if the company triumphs, a venture capital investor can make a substantial profit, tens or even hundreds of times the initial money spent.

The basics of venture capital funding

Venture capital funding is a form of investment different from traditional lending or raising money on the stock market. The basic idea is that investors take part in promising companies that have the potential for significant growth but are not yet financially stable and do not have access to traditional sources of capital.

Key Characteristics of Venture Capital Investments

Venture capital is a special form of financing that differs from traditional investments in several important ways.

High risk. Technology startups typically operate in emerging, little-known, complex, and fast-growing sectors, making them vulnerable to market changes, regulatory restrictions, and other unexpected factors.

High potential returns. Despite the high risks, venture capital investments can yield huge returns. If a startup is successful, its valuation can increase by tens or even hundreds of times.

Long-term investment horizon. Ventures typically take 5–10 years before getting an exit opportunity. This distinguishes them from short-term equity investments.

Invest in innovative sectors. Most ventures are in fast-growing sectors such as artificial intelligence, financial technology (fintech), business solutions, education technology and many others.

Active role of the investor. Unlike passive investors, venture capitalists are often actively involved in the development of a company. They may sit on the board, provide strategic advice and help raise the next round of funding.

Who are venture capitalists?

Venture capitalists are individuals or companies that invest in young technology companies with high growth potential, aka startups. They play an important role in funding innovation and are of the following types.

Venture capital funds. These are organisations that manage capital from institutional and private investors and channel it to finance startups. VCs work according to clearly defined strategies and invest in companies that meet their criteria.

Angel or private investors put their own money into early-stage startups. They typically have an entrepreneurial background and can provide mentoring as well as financial support.

Corporate venture capital. Many large corporations set up venture capital funds to invest in promising technologies and startups that can complement their business or accelerate innovation.

Purposes of Venture Capital Funding

Venture capitalists invest for more than just profit. Here are the main reasons why venture capital funding is essential to businesses in general.

• Supporting innovation. Many ground-breaking technologies are only possible because of venture capital investment. Without it, many companies would not even exist;
• Developing new markets and business models that can fundamentally change current industries (e.g. electric cars, financial technology, cloud services, etc.);
• Generating high returns. The prospect of significant financial gain motivates investors to take risks and support promising startups that would otherwise not have the opportunity to raise money for development;
• Creating new jobs. Financing startups helps create new businesses, which in turn generates new jobs and stimulates economic growth;
• Supporting entrepreneurship. Venture capitalists help entrepreneurs turn their ideas into reality, fostering a culture of innovation and entrepreneurship in society.

How do venture capital investments work?

Venture capital investment drives the development of technology companies and startups. They provide both the financial and intellectual resources necessary for business growth.

Mechanisms of venture capital investment

There are several main mechanisms used to invest in startups. The choice of mechanism depends on the stage of development of the company, its needs and the strategy of the investor.

Direct investment

This is the most common mechanism whereby an investor receives a stake in a company in return for the funds invested.

Convertible Loans

This is a temporary form of financing where an investor provides a loan to a company that can be converted into shares if certain performance targets are met. If not, the loan must be repaid.

SAFE (Simple Agreement for Future Equity)

SAFE is a mechanism similar to a convertible loan but without the obligation to repay. An investor puts money into a company on the condition that they will receive shares in the next round of funding.

Where do investors get their money?

The main sources of capital for venture capitalists are.

Institutional investors. Large financial institutions such as pension funds, insurance companies and university endowments often invest heavily in venture capital funds. This is because they are looking for opportunities to diversify their portfolios and generate high returns over the long term.

Banks and financial institutions. Although traditional banks do not usually finance startups directly because of the high risk involved, they may provide money to funds or private investors that specialise in venture capital.

Government and international support programmes. Some nations create special initiatives to support innovative companies. For example, the EU and the US have government funds that invest in high-tech startups through venture capital funds or provide grants to support entrepreneurship.

Family offices and large private investors. Some wealthy families set up investment funds to manage their capital. Some of this wealth may be invested in venture capital projects.

Private equity funds, which typically specialise in buying large stakes in companies, sometimes also invest in venture capital projects or set up their own VC funds.

How do startups attract venture capital investment?

For startups, attracting venture capital funding is a critical stage of development, as they often do not have sufficient equity to scale their business. Successfully attracting investment depends on many factors, including the startup's market, team and business model.

The key stages in attracting investment.

• Preparing a startup

Before approaching investors, a startup should form a business plan with clear objectives, a development strategy and create a minimum viable product (MVP) to demonstrate its potential. Also, the founders should outline financial indicators and growth projections, as well as build a strong team with experience in the relevant field.

• Finding venture capital investors

Startups can find investors through participation in startup accelerators and incubators, networking and specialised events (pitches, conferences), investment attraction platforms (AngelList, Crunchbase) and by approaching VCs directly.

• Pitching and negotiating

To convince investors, a startup must prepare a high-quality presentation of the company and product (pitch deck). It includes the potential market and competition, a vision for the company's development, and a business model, monetisation and scaling strategy.

• Evaluating the business and closing the deal

If investors are interested, they will conduct a thorough analysis of the startup (due diligence). An agreement is then signed that defines the amount of the capital provided, the investor's share, and the rights and obligations of the parties.

• Receiving investment and further development

Once the deal is done, the startup receives funding and begins active work on scaling up. Investors can help the startup not only with money but also with expertise, connections, and resources.

Benefits and risks of venture capital investment

What are the benefits of VCs for startups?

Access to capital without the need for loans. One of the biggest benefits of venture capital funding for startups is the ability to access significant sums of money without having to take out loans, which require collateral and regular repayments.

Rapid growth and scaling. Venture capital enables young companies to scale quickly by increasing production, hiring more staff and expanding their market presence.

Access to expertise and contacts. Investors often have significant industry experience and can help a startup with more than just funding. They can provide mentoring and advice, access to business contacts and help to expand into new markets.

Increased business credibility. Receiving funding from a well-known venture capital fund or investor automatically enhances a startup's reputation. This can help attract new customers, partners, and even the next round of investment.

What are the benefits of VCs for investors?

High profit potential. Venture capital investments are risky, but if successful, they can yield huge returns. For example, those who have invested in early-stage companies such as Google, Amazon, or Airbnb have seen extraordinary returns.

However, it's important to remember that only a relatively small percentage of startups succeed. In general, venture capital investments tend to work according to the Pareto principle: 20% of successful companies offset the losses of the 80% that fail and generate profits.

Opportunity to influence the company's development. Unlike traditional passive investors, venture capitalists can directly impact the business by making key strategic decisions and helping the company grow.

Access to innovation. Investors gain exclusive access to cutting-edge technologies and business models that can change the market.

What are the main risks of venture capital funding for startups?

Loss of control over the business. Because venture capitalists take a stake in the company, founders can lose complete control over management, especially if they raise many rounds of funding.

High pressure to grow fast. Investors expect rapid business growth and high profitability. If a company doesn't meet these expectations, it can get into trouble.

Difficulty attracting follow-on investment. If a startup does not grow as expected, it may have difficulty raising the next round of funding.

High competition. The startup market is extremely competitive, and even a good idea may not survive due to the emergence of stronger players.

Rapid exit requirements. Investors are interested in an exit (sale, etc.), which may not always coincide with the founders' strategic vision.

What are the main risks of venture capital funding for investors?

High probability of startup failure. Statistically, around 90% of them fall short, which means a significant risk of capital loss.

Long payback period. Investors may need 5–10 years before they see a profit.

Lack of liquidity. Unlike publicly traded stocks, venture capital investments cannot be sold quickly.

Legal and regulatory risks. Startups may be subject to changes in the law or have regulatory issues that affect their operations.

Potential conflicts with founders. Disagreements between investors and the company can be detrimental to the development of the business.

Structure of venture capital funds and roles of participants

A venture capital fund is a temporary structure for investing in young technology companies, raising money from institutional and other investors and individuals. These funds are usually set up for 10 years.

Limited Partner (LP) vs. General Partner (GP)

There are two key roles in a venture capital fund: LP and GP. The former provides the capital, while the latter manages it.

LP (Limited Partner)

These are often pension funds, universities, insurance companies, family offices or wealthy individuals who limit their involvement to signing cheques and providing funding.

LPs are not involved in the operational activities of the fund (finding startups, documenting and supporting teams, etc.). At the same time, they have full access to all its affairs.

GP (General Partner)

This is the main person and direct manager of the fund. His role is similar to that of a CEO in other companies. The GP and the fund's staff select startups, conduct due diligence, negotiate, mentor the companies, and ultimately decide when and how to sell the stakes to return money to investors at a profit.

The GP typically invests 1-2% of the fund's capital to demonstrate the LP's commitment to the cause.

The '2 and 20' model: management fee and carried interest

The venture capital world has a long-established standard model by which VC funds operate. It is known as the '2 and 20' model.

• 2% per annum of the fund size is the management fee.
• 20% of profits is carried interest, or simply carry.

The management fee is the annual budget set aside for operations. Office rent, staff salaries, software, travel for negotiations, etc., are all covered by the management fee.

For example, if a foundation has raised $100 mln, it will receive $2 mln each year for operating expenses. This fee is paid whether the fund has earned anything or not.

Carried interest is the reward for successfully running the fund, i.e. a cash bonus for profitable exits. It is the real financial motivation for the GP.

There are several nuances to receiving such a reward. Firstly, the fund is calculated with LPs first, and only then is the carry taken into account for the rest. In some variants, there is also a minimum return threshold (e.g. 8% per annum) after which the carry kicks in.

Due diligence process

A venture capital fund does not operate blindly. Before an investor (GP) signs a cheque, a serious due diligence process is carried out on the startup.

Legal, Financial and Technical Due Diligence

There are three key milestones in the due diligence process: legal, financial and technical. Each is critical in its own way, because even one major flaw can ruin a deal.

Legal due diligence includes

• Corporate structure.
• Capitalisation table (cap table): who owns shares and whether there are any options.
• Contracts (with customers, suppliers, partners, employees).
• Intellectual property (registration of rights, patents).
• Licences and regulations (relevant for products in sensitive areas such as fintech or medicine).
• Previous rounds of funding (no toxic arrangements or rights of previous investors that could block a new round).

A financial review includes

• Balance sheet, profit and loss account, cash flow (what are revenues, expenses, assets, and liabilities).
• Burn rate (how much money the company is 'burning' each month).
• Financial forecasts (realistic growth plans).
• Contracts with customers (whether reported revenues are confirmed).
• Existence of debts and liabilities (credits, loans).

Technical due diligence includes

• Availability of a qualified team capable of implementing the product.
• Infrastructure (how the system is built, whether it can scale).
• Security (whether there are defences against cyber-attacks, whether GDPR/ISO standards are met).
• Documentation (whether new developers will be able to understand the project).
• IP and licensing (open source or proprietary).

What documents and reports should a startup prepare?

• An up-to-date Captable showing the ownership structure of the business.

• Financial statements and projections: profit and loss, cash flow, list of major expenses, cash balance and plan. If the business doesn't have any revenue yet, it's important to show how the money is being spent and how long it can operate without new investment (runway).

• Constituent documents: registration, articles of association, shareholder agreements, documents relating to previous funding rounds (SAFE, convertible notes).

• Legal contracts with clients, partners, and employees.

• Technical documentation: access to demo or staging environment, list of technologies, libraries, and tools used, description of development processes (CI/CD, testing).

• Team details: CVs or LinkedIn of key people, confirmation of their roles and contributions to the business, and collaboration agreements or contracts.

• Confirmation of metrics and deliverables. If the company is claiming revenue, you will need to provide invoices or statements from payment systems. If it's about user growth, it's worth showing analytics (e.g. Google Analytics, Amplitude or Mixpanel).

• Strategy: financial model, product development plan, hiring plan, roadmap.

Startup valuation methods

Valuing a startup is an art with elements of mathematics, especially in the early stages when the company has no recurring revenues or profits.

DCF, Comparable Approach and VC Method

Discounted cash flow

DCF is a financial model that determines the value of a company by the present worth of its future cash flows.

An investor forecasts how much a company will earn over the next 5–10 years. These cash flows are then 'discounted' back to today's risk-adjusted value. The result is a valuation of the business today.

What is needed for a DCF? A financial model with projections over several years, a discount rate (e.g. 30-50% for a startup) and a calculation of the terminal value of the business.

When does it work? In later stages (Series B and beyond), when there is stable revenue, and in SaaS models with predictable cash flows.

Why is it difficult? Startups often don't have reliable forecasts; small changes in assumptions make a big difference to the outcome; risks are difficult to formalise.

Comparative approach

An investor analyses deals with other startups in the same industry, region, or stage. In the end, it's like valuing a flat by comparing it to its neighbours. It is not always accurate, but it is a good benchmark.

The venture capital approach

The essence of this approach is to think in terms of exits. How does it work?

• The investor estimates how much he can sell the business for in 5–7 years.
• He then decides how much he wants to earn (e.g. 10 times).
• The next step is to calculate how much the investor needs to buy now to reach that target.
• The final step is to take into account the dilution of the investor's stake. Therefore, a certain margin is added to the final figure so that the target profit is still there after the next rounds.

Pre-revenue heuristics: the Berkus and Scorecard methods

Berkus method

This method was invented by the American investor Dave Berkus. He noticed that many founders overestimate their ideas in the early stages. To avoid over-optimism, Berkus suggested evaluating a startup based on five key criteria. For example:

• Idea — $300,000.
• Team effectiveness — $300,000.
• Prototype or MVP — $500,000.
• Strategic relationships — $200,000.
• Product launch — $100,000.

The total is the approximate pre-money valuation of the startup.

Scorecard Valuation Method

The idea is to first find out the average valuation of similar startups in your region (e.g. $2.5M pre-seed in Poland in the fintech industry) and then compare your company to this average according to a set of conditional criteria (team, market size, competition, etc.).

Each criterion is given a weight (e.g. team — 30%, market — 25%). The startup is then rated as a percentage of the benchmark. For example, if the team is stronger than the average startup, it will get 120%, but if the product is underdeveloped, it will only get 80%.

Next, you need to multiply the weight of the benchmark by the score for each factor. This gives you the total score.

To get the pre-money score, the last step is to multiply the total score by the average market valuation.

A clear example:

• In your niche, the average seed valuation is €3 million.
• We take three criteria and weight them: team 50%, market 30% and product 20%.
• We score ourselves: team strong = 1.2; market average = 1.0; product underdeveloped = 0.8.
• Furthermore, we calculate the total score: (0.5 × 1.2) + (0.3 × 1.0) + (0.0 × 0.8) = 1.06.
• The formula for calculating the pre-money would be: €3 million × 1.06 = €3.18 million.

Key deal parameters and term sheet

The term sheet is a preliminary agreement between the startup and the investor. While not legally binding, it paves the way for a future full-fledged deal. Think of it as a roadmap.

Liquidation preferences, vesting, and protection against dilution

Liquidation preferences

These preferences determine who gets the money first on exit or liquidation of the company.

Vesting

This is the schedule by which the founders earn their share of the company over time. Such a rule is necessary so that the founder does not leave the company too soon with a notional 30% of the company in his pocket. The longer you work, the bigger the share you get.

A typical scenario is as follows:

• The vesting period is 4 years. This means that you can only get full shares after working for four years.
• Cliff at one year — the first shares can only be received after 12 months of service.
• Shares are then awarded on a monthly or quarterly basis.

Anti-dilution

Anti-dilution is a mechanism that protects the size of an investor's holding from being reduced if the next round of funding is at a lower valuation than the previous one.

There are two main types of anti-dilution protection:

• Full ratchet — the toughest. If the new shares sell for less, the previous investor recalculates its stake at the same lower valuation. This shifts the problem of a falling valuation to the founders of the startup.
• The weighted average is the softer approach. It takes into account exactly how many new shares have been issued. This means less dilution, but the investor is still partially compensated for the fall in valuation.

Veto rights and governance

What is governance in a venture capital deal?

Governance is the whole system of running the company after the investment. It includes the board of directors, the general meeting of shareholders, decision-making policies and veto rights and restrictions on the parties.

Veto rights: when an investor can say no

After an investment, a fund usually has the right to block certain decisions, even if it does not have a controlling interest. Typical examples of veto rights include the following situations:

• Changes to the share capital structure.
• Appointment/termination of the CEO or other key positions.
• Selling or merging with another company.
• Raising a new round of investment.
• Taking on a major expense or loan.
• Payment of dividends.

The investor doesn't run the business on a day-to-day basis, but can step in at a critical moment.

Exit strategies

Exit is the final stage of the venture cycle, when investors and founders convert their stake in a company into real money.

Secondary Market and Vintage Deals

The secondary market is one of the most popular forms of exit.

In short, investors sell their shares in the company to each other at a discount or vice versa at a premium. This means that the existing investment does not increase, but simply changes hands.

If you have doubts about the deal and want to recoup at least some of your investment, then sell your share at a discount to those who want it. If all is well with the company, but you don't want to wait, you can sell your share with interest and make a profit.

It also allows new investors to come into the company without having to organise a new round.

In addition to the secondary market, there is also the phenomenon of vintage deals. These are investments in startups or funds that were established several years ago and are now entering the exit phase.

In such cases:

• Investors (usually funds of funds or large family offices) buy stakes in portfolios of older venture capital funds that are nearing the end of their life cycle.
• These stakes are often offered at a discount.
• The risks are lower than in early-stage investments, but the profit potential is limited.

This approach allows experienced investors to jump on the last wagon of promising deals when the risks have been partially passed and the exit is imminent.

IPO vs M&A

An IPO is when a company goes public and sells its shares to a wide range of investors on the stock market for the first time.

Some main benefits of an IPO are

• Access to large amounts of capital without losing control of the company.
• The ability to use shares as currency for acquisitions or employee bonuses.
• Publicity and enhanced reputation on a global scale.

Disadvantages include:

• High preparation costs.
• Risk of volatility.
• Constant scrutiny by analysts and regulators.
• Restrictions on the sale of shares (lock-up period).

The IPO is the pinnacle of a startup's development.

M&A (Mergers and Acquisitions) is a transaction in which a startup is wholly or partially acquired by another company. It can be either an outright acquisition or a merger with an equal partner.

Advantages of M&A:

• Quick exit.
• Opportunity to join a large company with resources.

Disadvantages:

• Loss of control over the business.
• Restrictions on founders after sale (e.g. need to stay on for several years).
• Part of the deal may be deferred (earn-out) depending on future performance.

Venture portfolio performance indicators

Evaluating the success of a venture capital fund is more difficult than it may seem at first glance due to the significant length and duration of investments and exits over time.

IRR, MOIC and DPI

IRR — Internal rate of return

IRR shows the average annualised return of a fund over time. If an investor gets a 3x return over 3 years, that is different from a 3x return over 10 years. It is the IRR that allows you to take this difference into account.

The sooner a fund returns capital, the higher the IRR, even if the result is the same. For example:

• Fund A made 3x in 3 years — IRR will be around 44%.
• Fund B made 3x in 10 years — IRR is only 11.6%.

IRR is a critical metric for LPs.

MOIC — Multiplier on Invested Capital

MOIC answers the question of how many times the investor has returned the invested capital. If a fund has invested $10 million and returned $30 million, the MOIC is 3.0. This metric does not take time into account, but it is very useful for comparing specific deals in a portfolio.

For example:

• An investment in startup A that returned 5x is a good result.
• An investment in startup B returned only 0.8x means a loss.

MOIC is used to analyse both the fund as a whole and individual companies.

DPI — Real Money Return

The DPI shows how much money has been returned to investors. If LPs contributed $50 million and have already received $75 million, the DPI is 1.5.

This is a particularly important metric in the second half of a fund's life, when LPs expect to monetise performance. Even if the MOIC is high and the DPI is low, this means that most of the gains are still on paper, so risks remain.

Monitoring and managing risk in venture capital

High risk is the norm in venture capital. Investors deliberately put money into early-stage companies, knowing that most of them will either not survive or will not show the expected returns.

After investing in a startup, the fund team must

• Receive regular financial statements from the companies (P&L, balance sheet, cash flow).
• Sit on boards of directors or supervisory boards.
• Track expenses, runway, and revenue dynamics.
• Monitor progress against KPIs and milestones.

Early identification of variances allows you to either help the founders or, if the situation is critical, reduce support and minimise losses.

Syndicates and co-investments

How and why do funds work jointly in rounds?

Venture capital investing is a risky business. When several funds tie together, each invests only a portion of the total amount, reducing individual losses if the startup fails. It also opens up access to larger rounds and better companies, as not every fund can afford to write big cheques.

In addition, each fund has its expertise: some understand a particular technology, while others handle marketing or regulation. By joining forces, the funds also help each other at the level of advice.

An important element of co-investment is the lead investor, who manages the round and invests the largest sum along with the largest number of shares. They set the terms of the round and take over the due diligence to ensure things run smoothly.

The role of angels and accelerators as co-investors

Angels are individuals who invest their own money in startups in the early pre-seed and seed stages. They are often experienced entrepreneurs or former top managers of technology companies.

Why are angels vital to the ecosystem?

• They are the first to give money to a startup when it doesn't have a profit or even a product.
• The involvement of angels sends a strong signal to other investors.
• Angels frequently help with first customers, partners, team building and other processes.

An accelerator is a support programme for young startups, usually lasting 2–3 months. It includes investment ($50-250k), theoretical and practical knowledge, mentoring, networking and preparation for fundraising.

Accelerators participate as co-investors in early rounds, taking a share of around 5-7%. All training programmes typically culminate in a demo day, where the startups present themselves to potential investors.

Some of the most successful and influential accelerators include Y Combinator, Startup Wise Guys, Techstars and 500 Global.

Why are accelerators important for co-investment?

• A quality mark for the market. Successfully qualifying for a strong accelerator says a lot about a startup's potential.
• Accelerators help attract other investors and funds.
• Some accelerators have enough money to support startups in the next rounds.

Sector and geographical specificities

Differences in the venture capital ecosystems of the US, Europe, and Asia

When it comes to venture capital investing, market context is key. Approaches to round formation, roles of investors, speed of decision-making and expectations for growth all differ radically between the US, Europe, and Asia.

The US

It is a mature and very fast ecosystem. With numerous experienced players and strong competition between funds, investing here is like battling for the best startups. Companies themselves often have several options to choose from.

The situation in the US ecosystem favours syndicates, where a round is led by a fund or experienced angel, and other investors simply join on agreed terms.

Importantly, the US also has a culture of using SAFEs (this type of investment agreement originated here at the Y Combinator accelerator), which allows for quick investment without complex legal procedures. This lowers the barriers to early-stage investment, while also allowing the deal to close literally in a matter of days.

Europe

This is a construct of dozens of jurisdictions and models. Co-investment is not just an option but a necessity. A fragmented market, different tax regimes and regulations regularly complicate the work not only of startups, but also of funds, angels, and accelerators.

In Europe, the investment process tends to be longer and more formal than in the US: investors spend more time on due diligence and approvals, which can drag out the deal for months. Convertible loans dominate the early stages.

Many European countries offer tax incentives to private investors to encourage the development of early-stage startups.

Asia

In Asia, investment regulations vary from country to country. For example, China has strict regulations on the technology sector, which can slow investment in certain industries. Restrictions may include data controls or censorship. According to the study, in the Chinese ecosystem, funds are short-term (five to seven years) and focus on quick exits.

In Japan, investment is slower due to formalities and conservatism, but there are some shifts. On the other hand, India has greatly simplified startup registration, introducing digital services and certain tax exemptions to attract investors.

In Southeast Asia (Indonesia, Vietnam, Thailand), the ecosystem is still developing, so startups often need to find co-investors from Singapore, the US, or Europe. Here, syndicates act as a bridge between local founders and global players.

Local clusters and their specialisations

Venture activity is typically concentrated in local clusters: cities or regions that specialise in certain industries and form strong ecosystems around them. These clusters create specialised communities with specific expertise.

In the US, the most prominent example is San Francisco (Bay Area). This is where the lion's share of technology trends are formed. Co-investment in this region is commonly based on personal contacts: if a lead investor has high credibility, other investors will join in without additional calls. Bay Area startups have easier access to capital. However, competition for money is very high.

Other clusters include New York (fintech, media), Austin (gaming, robotics) and Boston (biotech, healthtech).

In Europe, clusters are more dispersed. London is a financial centre with fintech funds and corporate banking partners. Berlin has cleantech and consumer services. Paris is strong in DeepTech due to its STEM education, while Tallinn has talent in cyber and defence.

Asia is dominated by 'mega-hubs', where local governments and companies provide systemic support to startups. This is often a combination of government policy and export orientation. There is even greater concentration by industry. For example, Beijing's Zhongguancun Technology Park has become a centre for artificial intelligence. Asian startups regularly attract both government support and corporate investment, which is also specific to the region.

Seoul has a high concentration of AI, big data, biotech, and robotics.

Israeli startups, meanwhile, are known for their strength in cybersecurity, artificial intelligence and defence technology, as many local founders have military backgrounds.

Legal and tax nuances

Organisational and legal forms of funds and startups

Most international investment deals are not done in the startup's home country, but in neutral and convenient jurisdictions. These include the USA (Delaware), the UK, Estonia and others. The reasons are simple: a reliable legal system, a lack of currency control and ease of working with capital.

USA (Delaware)

A startup is registered as a corporation (Delaware C-Corp), providing limited liability for shareholders and making raising venture capital easier.

As for funds, a limited partnership (LP) is often a transparent structure where income is distributed and taxed only at the partner level.

In general, the registration of funds and startups in Delaware is a standard not only for the US but also for other countries. This is due to favourable taxes, standardisation and access to US investors.

The UK

The UK is considered the leading financial and legal jurisdiction in Europe with an Anglo-Saxon legal system. Its corporate rules are the 'least uncomfortable choice' for global transactions: flexible, neutral and predictable. London is one of the traditional centres for fund management. There are few tax incentives for them, but they have a track record of working with European investors.

Luxembourg

A stable European jurisdiction with a very friendly business environment. The country's undoubted strength is its relatively low registration bureaucracy and attractive tax regime. You also get access to the European market and a developed financial infrastructure. Luxembourg is often used for VC/PE and alternative funds due to its international recognition.

France

France is one of the leaders in the European startup market. The popular Société par Actions Simplifiée (SAS) structure is a flexible form that investors value for its ability to provide a quick round of funding.

Estonia

e-Residency allows you to open a private company (OÜ) remotely. The legislation is simplified for IT, which makes Estonia attractive for international founders of digital startups.

Israel

Startup nation with a common law-based legal system, strong protection of intellectual property, tax incentives (especially for R&D) and regulators to support technology companies. Funds are typically structured as LPs or corporations for VC/PE. As a result, Israel actively supports angels and funds at the regulatory level.

Key tax incentives and risks

The tax environment is one of the least visible but most important factors in venture capital investment. Preferential regimes can significantly enhance deal returns, while unexpected tax liabilities can wipe them out. For syndicates, which often bring together investors from different countries, proper tax structuring is a must.

Examples of tax incentives:

• Exemption or reduction of capital gains tax incentivises long-term investment and increases expected exit returns.
• Tax deferral on reinvestment encourages greater domestic circulation of venture capital.
• Preferential taxation of venture capital fund income eliminates double taxation and facilitates deal structuring.
• Tax incentives for startups, such as reduced tax rates or simplified reporting, allow them to focus on growth rather than fighting tax pressures.
• Special legal regimes for innovative companies, combining tax, labour and regulatory incentives, create a more attractive environment for startups to build and scale.

At the same time, some risks may complicate the process of venture financing and the development of the startup industry:

• Instability or frequent changes in tax legislation discourage long-term planning and limit the size of investments.
• Restricting tax incentives to residents only makes the national market less competitive in the global venture capital environment.
• High tax burdens on startups create additional barriers to growth and investment.
• Ambiguous interpretation of financial instruments increases legal risks and uncertainty for investors.
• Failure to adapt the tax system to the specificities of risk reduces the efficiency of investment structures and complicates basic operations.
• Where governments do not have clear rules for cross-border investment, investors face high transaction and compliance costs. This reduces the amount of finance available.

Trends and outlook for venture capital

ESG investing, climate tech, AI and web3

ESG: responsibility as an investment strategy

ESG (Environmental, Social, Governance) is no longer a trend, but a requirement of the times. Large LPs (pension funds, universities, public institutions) are increasingly asking GPs to consider the environmental and social impact of startups.

Venture funds are integrating ESG into the due diligence process, assessing a company's carbon footprint, social inclusion and management transparency, for example.

Startups that operate in the impact space or have an ESG policy gain a competitive advantage, especially in the European market.

Climate Tech: Innovation for survival

Climate challenges are driving a new wave of investment. The Climate Tech sector includes the development of new energy sources, water-saving technologies, energy-efficient solutions in construction, the food industry and transport.

Particularly popular areas today are carbon capture, use and storage technologies, hydrogen energy, waste recycling and precision farming technologies.

Climate tech attracts long-term capital, often with government co-financing or subsidies.

Artificial intelligence

Artificial intelligence is booming thanks to technological breakthroughs. In particular, the emergence of generative and large language models (LLMs).

The huge influx of capital says a lot about the industry. In 2024, AI startups secured 46.4% of the $209 billion in venture capital investment.

Web3

Due to improved market conditions and clearer regulations, there has been a resurgence of interest in Web3. The global market capitalisation of cryptocurrencies has increased to 2021 levels as a result of guidance from US regulators (e.g. the decision to launch the Bitcoin ETF). This move has been a catalyst for other market participants to follow suit.

How does investor risk appetite change?

Investor risk appetite is cyclical and closely linked to both macroeconomic and market-specific conditions. When the business environment deteriorates, investors become more cautious and look for safer niches and more sustainable business models.

Early stage (pre-seed/seed) is attractive because there is a higher probability of a 10x-100x multiple, but the risks are the highest. At the same time, large funds are increasingly opting for later rounds (Series B and beyond), where the risk is lower, but there is access to mature companies with a proven business model.

In regions with high political or currency volatility (e.g. Latin America, Southeast Asia, Africa), venture capital remains cautious. At the same time, the high growth potential means that even large funds are seeking local partners or co-investing through accelerators.

Meanwhile, the US remains the largest venture capital market, where even in times of economic instability, venture capital activity does not disappear, but changes its profile.

Despite all the caution and analysis, investors are still susceptible to FOMO and hype. Fearful of losing an opportunity, they are willing to invest in promotional brochures in the hope of maximising returns.

Practical tips for startups

How to prepare a pitch deck?

A pitch deck is a presentation of a startup to investors and is one of the most important tools for raising venture capital.

While every startup is unique, there are a few key elements that every pitch deck must have.

• The Problem
• The solution
• The Market
• Competition
• Business Model
• Team
• Required investment

The visual style of the presentation should be professional without being overloaded with text. Use infographics and other types of images to communicate important data.

The text should be concise, clear and focus on the key points.

How do you build relationships with investors after the investment?

After funding, it is important to properly build a long-term relationship with your investors.

Investors want to be kept informed about the progress of their investment project. It is important to maintain regular contact and be open to communication.

Report to investors on a quarterly or six-monthly basis on the current state of the business, your achievements and challenges.

Investors often have a great deal of experience and can make valuable suggestions on how to develop the business. As well as money, they may be able to help you find the contacts, partners or customers you need.

If a company is in trouble, it is important not to hide from investors, but to report problems immediately. Transparency in solving problems maintains trust and allows us to find solutions together.

Conclusion

The venture ecosystem is a complex, dynamic structure where the interests of entrepreneurs, investors, funds, regulators and innovation communities around the world intersect.

Startups should work on real problems, validate ideas in the market, build transparent communication with investors and don't forget to scale.

The right jurisdiction, a quality pitch deck and a clear financial model will determine whether your project gets the attention of an investor.