Simply put, venture capital funding involves a venture capital firm investing a large sum of money (typically starting at $2 million or more) in exchange for an equity stake in your company.
Venture Capital Funding Risks and Rewards
Unlike banks or more traditional investment sources, venture capital funding is all about big risks and big rewards.
Venture capital firms specifically look for companies that offer an exceptionally large growth opportunity, which you can think of as the type of company that could go from inception to IPO in less than 10 years.
With big rewards, however, come big risks. These opportunities usually exist within the technology and healthcare sectors which are fiercely competitive and often highly speculative. Venture capital may be responsible for big hits like Google, Apple, and Facebook, but there are also hundreds of failed investments for every one of those hits.
Trading Equity for Capital
If you go to your local bank and apply for a loan, you're going to be asked to pay the principal back with interest. You're not going to be giving part of your company to a bank and you're not going to ever be asked for anything more than the principal and interest.
However if you go the route of venture capital funding, you're going to be trading your equity (a stake in your company) for capital and you're going to be asked to return a massive amount of money back (hopefully much more than 3 times the invested amount) in less than 10 years.
Entrepreneurs are typically less concerned about the payback amount or the time period than they are the equity and control they often give up to take on the capital. One lesson that gets learned quickly after taking venture capital funding - you'd don't get that equity back - ever.