How Smart Investors Use Venture Capital to Build Wealth

Big companies like Google, Amazon, Facebook and Apple all started out as bold ideas backed by venture capital. 

Decades later, the same firms are household names, as familiar to most people as electricity, the internet, or the telephone.

But hindsight is a fickle friend. The truth is, it wasn’t always so obvious they’d succeed.

These success stories highlight just how powerful early-stage investment can be, both for the companies and the investors who had the vision to believe in them and the courage to back them.

Today, that same opportunity for outsized growth continues, particularly in cutting-edge sectors like AI, health tech, fintech and cybersecurity.

Venture capital has become one of the fastest-growing alternative asset classes, attracting investors who are looking beyond public markets for higher returns.

Unlike traditional investments, venture capital involves long-term equity financing in private companies with high growth potential.

It’s typically illiquid and carries risk, but it also offers the chance to get in early on the ‘next big thing’.

For many investors, the appeal lies in its ability to outperform conventional markets, especially in times of economic uncertainty.

But be under no illusions – venture capital isn’t a playground for amateurs. This is a high-risk, high-reward game that requires sharp analysis, calculated risk and a clear strategy.

To help you navigate these potentially treacherous waters, the Nomad Capitalist team has put together this in-depth guide to walk you through:

• How venture capital works
• How to evaluate opportunities
• What to consider before entering the venture capital world.

Whether you’re looking to diversify, drive growth, or be part of the next wave of innovation, understanding venture capital is a powerful step forward.

What is Venture Capital?

Venture capital (VC) is a form of private equity investment. 

It primarily targets startups or small companies, where there is an opportunity for high growth and potentially high returns for investors. 

Venture capital funds are companies that manage a shared investment fund. They gather capital from their investors, known as limited partners (LPs), to make VC investments. 

Their focus is on providing equity capital to private small businesses, often innovative technology startups or companies developing new technologies that have high growth potential but would likely struggle to secure finance from traditional banking institutions.

As a fundamental asset class, venture capital is unique.

For starters, investments are made in companies whose shares are typically illiquid and difficult to value accurately until the business matures. 

Because of this, most VC funds offer investment opportunities in new enterprises and emerging sectors or subsectors that are not readily accessible through public markets.

Aside from the VC and fund side, businesses seeking venture capital are usually in an early stage and often lack any funding. 

As a result, these companies can only offer a percentage of ownership in exchange for an equity investment.

If you’ve ever watched Dragon’s Den, then it’s like that without the camera and gimmicks. 

Because of this, venture capital is thought of as a long-term investment that gives the business time to expand after receiving its initial funding infusion. 

This investment allows companies to improve their operations by, for example, introducing new products, expanding their distribution channels or developing new software features. 

The aim is for these improvements to drive sales and profit, thereby increasing the company’s scale and overall value.

When a venture capital fund invests in a company through a venture funding round, an implied valuation of that company is established. However, the investment itself remains illiquid until the company achieves an ‘exit’ event, such as an initial public offering (IPO) or a strategic sale to another company. 

At this point, the company obtains a market valuation and the venture capital fund can realise a return on its investment.

Pros and Cons of Venture Capital for Investors

Venture capital offers opportunities for high returns, but also involves risk for investors. 

The pros include: 

• Potential for high returns in high-growth companies that outperform other asset classes 
• Access to cutting-edge companies and technologies and disruptive industries 
• Diversification in non-traditional asset classes
• VC funds provide expertise and guidance to companies they invest in. 

Cons of Venture Capital:

• A high-risk asset class where many investments fail, leading to capital losses 
• Investments are typically illiquid and long-term and cannot readily be converted to cash
• Mainly accessible to institutional investors and high-net-worth individuals, as significant capital is required.

How Does Venture Capital Work?

Venture capital operates differently from other types of investment, such as leveraged buyouts, which involve acquiring mature companies predominantly using debt. 

Venture capital is an equity-only investment strategy. It also differs from growth capital, where investors purchase minority or non-controlling stakes in more established companies. 

Venture capitalists generally concentrate on new companies.

The time horizon for startups varies, but there is an evolution of growth by stage or round of capital. 

Each VC fund will focus its investing activity on a specific stage or round of capital. 

The pre-seed stage involves concept development, product or service prototype development and beta testing. Here, the investor profile includes friends and family, angel investors, bootstrapping founders, incubators, grants and other non-dilutive investments. 

At the seed and seed plus stages, business development involves proof of concept, user testing, product or service validation and business planning. The investor profile includes angels, family offices, seed funds, accelerators and corporate VC.

At the series A and B stages, company development includes revenue generation, customer acquisition and company infrastructure development, and the investor profile includes angel investors, family offices and early-stage VC funds. 

At the series C and beyond stage, with company development, we see growth, scaling and profitability. The investor profile includes family offices, later-stage VC funds and venture debt capital lenders.

Typically, VC funds do not invest until the series A round.

VC funds are often referred to as institutional capital and a series A is often referred to as a startup’s first institutional round. 

Another recent development has been the formation of seed funds, which are like institutional VC funds targeting seed-stage investments. 

Some VC funds will structure their primary series A fund and carve out a smaller opportunistic or seed extension fund, but these are not the norm.

Venture Capital Fund Structure

A VC fund is a collective group of limited partners and general partners (GP) who invest their own capital through a VC fund.

The invested capital is used to seek out, invest, develop and ultimately sell their portfolio companies to generate a return on the initial invested capital. 

The VC fund is structured as a limited partnership, like a private equity fund. General partners manage the fund and serve as advisors and sometimes board members to the fund’s portfolio companies.

A critical document for managing and understanding equity ownership in a startup is the capitalisation table, commonly known as a cap table. This spreadsheet contains the current list of all shareholders, including founders, key employees, existing investors and employee stock ownership plans.

It details their respective ownership of shares or securities, including common stock, preferred stock, options or warrants and the value assigned to their ownership. 

It must be updated each time a new round of capital is raised or any other dilutive event occurs. 

Potential new investors who are considering investing in the company will want to understand its equity ownership profile.

The cap table will tell them the percentage ownership each investor has in the company and the conversion terms of any convertible preference shares. It also includes the implied valuation of the overall company. 

Finally, all the shareholders in the business will want to understand what their ownership might be worth at exit. 

The cap table details:

• Each shareholder’s ownership percentage in the business 
• How each new funding round has impacted this percentage ownership
• How much each shareholder’s percentage ownership could be worth at the time of an exit, assuming no further dilution of their equity stake.

Dilution describes the reduction in each existing shareholder’s percentage ownership that occurs when a company issues new shares. For instance, founders initially own 100% of the company. 

However, when new shares are issued to attract investment or to incentivise employees or advisors, each new share recipient gains a portion of the company’s equity. Consequently, the founders’ and existing shareholders’ ownership percentages decrease or are diluted with each new issuance.

Generally, the earlier an individual invests or joins the company, the more their stake will be diluted by subsequent funding rounds or equity events. 

Typically, when a dilutive event occurs, all existing shareholders on the cap table are diluted proportionately. However, exceptions exist, such as when specific securities have anti-dilution rights or in the event of a down round.

A down round is when investors can buy common stock in a company for less than those in the previous round. It typically happens when a company fails to meet investors’ earnings targets.  

Private Equity vs Venture Capital

Although the terms private equity and venture capital are often used interchangeably, they represent distinct investment strategies.

Private equity encompasses two main approaches, namely, buyout and growth equity. 

A buyout occurs when a private equity fund acquires an established business with the aim of improving its operations and financial performance to eventually sell it for a profit. 

Buyouts, particularly of large companies, can be structured as leveraged buyouts, where a significant portion of the acquisition price is financed with debt. The private equity fund often borrows from other investors or private lenders to finance this debt component.

Growth capital, conversely, involves an investment to fund the expansion of an existing, more mature company, typically in exchange for a minority ownership stake. 

In both private equity scenarios, the firm realises a profit if it successfully increases the value of the business and exits through a public offering or a sale to another private equity firm or a strategic buyer.

Venture capital, on the other hand, invests in startups. 

It is usually invested in new companies with no customers, track record, profits or even a proven product.  

These companies haven’t grown yet and don’t have a finished product.

They might have a concept or an idea, but if they do have a product, it’s not profitable yet, so these are much riskier investments.

Therefore, you can’t just invest in one startup with any expectation of a return. If you do that, the most likely outcome is that it’s going to fail. 

How to Invest in Venture Capital

The rule of thumb when investing in venture capital is to make at least ten bets on different startups or companies.

Even if most of them fail, you could be in line for a sizeable profit as an early-stage investor in a successful startup that goes the distance. 

With that in mind, there are a few ways you can start to invest in venture capital. 

As discussed, one of the best ways to invest in venture capital is in a venture capital fund, where the fund makes various investments.

Another is Venture Capital Trusts (VCTs), publicly listed investment vehicles that invest in early-stage companies.

They offer individual investors the opportunity to gain exposure to a diversified portfolio of high-growth companies, with the potential for income and capital gains tax benefits.

VCTs are traded on the stock market, so investors can buy and sell them, providing some liquidity. However, VCTs should be regarded as long-term investments, typically requiring a minimum holding period of five years to qualify for tax relief. 

Interested in exploring the world of startups and top VC funds? 

Looking at factors like the innovation ecosystem, government support, tax environment and residence options, we’ve compiled a list of the best opportunities in Ireland, the UAE, Brazil, Colombia and Malta. 

Venture Capital: FAQs

Hands-on Support for Investors and Entrepreneurs 

There’s never a bad time to explore venture capital’s possibilities. Right now, investors are backing innovative companies and emerging technologies – and reaping the rewards.

But knowing where to start can be a challenge. 

At Nomad Capitalist, we provide hands-on support to investors and entrepreneurs entering offshore markets, optimising their taxes, protecting their assets and ultimately helping them go where they’re treated best.

Whether you’re looking to diversify your portfolio, secure a second citizenship or ‘plant a flag’ in a high-growth emerging market, the possibilities are endless.

Our global network of lawyers, estate agents, accountants and tax and company formation specialists ensures you get the practical guidance and strategic insight you need.

When it comes to building your bespoke action plan, we combine deep expertise with real-world experience to help you take control of your global financial future. Ready to get get started? Discover how we work.