"Venture capital" is semantically equivalent to "dangerous money," which is part of its mystique.

Essentially, VC is a high-stakes extreme sport in which top players can accumulate startling amounts of wealth and power. And sometimes, a massive pile of investor cash burns so brightly, it gets picked up on satellites.

But where does all that money actually come from, and how do VCs actually make money? Prior to joining TechCrunch, reporter Haje Jan Kamps worked at VC fund Bolt, where he interacted directly with early-stage founders.

"Once you’re on the VC-fueled treadmill, you can’t easily step back off," he writes. "The corollary of that is that I suspect a lot of founders don’t really know how venture capital works."

In this comprehensive explainer, he deconstructs venture capital to help readers understand how investors think about risk and return, pro-rata rights, and why "VC investing is a hits-driven business."

It should go without saying, but it's a bad idea to pitch an investor if you don't have a solid grasp of how they operate.

"As a startup founder, you’d never dream of selling a product to a customer you don’t truly understand," writes Haje. "Not understanding why your VC partner might be interested to invest in you is dangerous."

Thanks very much for reading TC+ this week!

Walter Thompson
Editorial Manager, TechCrunch+
@yourprotagonist

Planning to use your startup equity as collateral? Good luck

Image Credits: Colin Anderson Productions pty ltd (opens in a new window) / Getty Images

Employee incentives are one of the oldest brain hacks. Offer the right person enough equity and delicious snacks and they will gladly work 60+ hours/week or take part in a weekend dev sprint.

But workers who are interested in accessing liquidity have just two options: wait for a tender offer from their employer, or find a private buyer in the secondary markets.

"You could claim the system is broken. I happen to agree," says Max Brenner, part of the founding team at Compound.