Venture capital is high-risk but also high-return investing in support of businesses just starting, also called: start-up companies. In pursuit of high returns, a venture capital firm raises a fund of very big sums of money to establish the company and later see very nice profits from their investment.

The legal structure of a VC fund is a limited partnership, limited liability company or limited liability partnership. Those who invest money into the fund are known as limited partners. Those who invest the fund's money in developing companies, the venture capitalists, are known as general partners. Generally, the LPs contribute 97%-99% of the committed capital of the fund while the GPs contribute 3%-1% of it. As returns are made on the fund's investments, committed capital is distributed back to the partners in the same percentage.

VC firms receive compensation for their investment. The fund's primary source of net income is capital gains from the sale or distribution of stock of the companies in which it invests.

A venture capital fund passes through five stages of development that lasts a few years.

The first stage is deciding what the investment target market will be.

The second stage is fundraising.

The third stage is comprised of sourcing, and investment. When a VC firm sources a company, it means that the company has been brought to the attention of the firm. Sourcing occurs through reading trade press, attending trade conferences, receiving a request for investment that states the outcome of the company and speaking to those with industry familiarity. Companies in which VC firms invest become "portfolio companies."

The fourth stage is helping portfolio companies grow. The portfolio company and the VC firm unite to form a team. This team's goal is to increase the value of the portfolio company. The VC firm becomes an equity participant in the portfolio company. The structure typically comprised of a combination of stock, options, and convertible securities. In return, the VC firm provides financing and a representative who sits on the portfolio company's board to offer strategic advice to the management team and assure that his/her firm's interests are considered.

The fifth and final stage is its closing. By the expiration date of the fund, the VC firm should have liquidated its position in all of its portfolio companies. Liquidation usually occurs in one of three ways: Bad case: Chapter 11.

Good cases: 1. An Initial Public Offering in one of the stock markets of the world, 2. The sale of the company to a third party.