Venture Capital: what it is, how it works and how to get investment for your startup

Venture capital (VC) is a form of professional investment that provides capital, knowledge and network of contacts to startups with high growth potential, in exchange for a stake in their capital. Its objective is to accelerate the scale of the business and obtain high returns in the medium term, assuming a higher risk than other investments.

In Spain, the VC is today one of the most relevant levers for a startup to go from a validated idea to being a scalable company. But understanding how to achieve it is just as important as knowing what it is and how it works.

How does a Venture Capital fund work?

A venture capital fund operates with a highly structured internal process, designed to manage risk, identify growth opportunities, and accompany startups for several years. Knowing this process is key if you are looking for financing and want to optimize your options:

1. Origin of capital

Venture capital funds manage capital from professional investors, known as limited partners (LPs). Among them are pension funds, insurance companies, corporations, family offices and large estates.

This capital is committed to a fund with a limited life, usually between 8 and 10 years. During this period, the management team must invest, accompany the investees and generate returns. This time constraint explains many of the decisions funds make, from the pace of investment to the pressure to scale.

2. Investment Thesis

Before analysing projects, each fund defines a clear and public investment thesis, which acts as a decision-making framework. It is usually specified in four axes:

• Stage: pre-seed, early stage, growth.
• Priority sectors: artificial intelligence, fintech, climate, health, cybersecurity, among others.
• Ticket size: Initial investment and traceability.
• Geography: local, regional or international.

If your startup doesn’t fit into a fund’s thesis, the rejection isn’t personal or a negative assessment of the project. It’s simply not the right fund for your startup.

3. Deal flow and filtering

A venture capital fund receives hundreds—and in some cases thousands—of projects every year. In this context, the first phase of the process is an exercise in rapid discarding. The goal is to decide if a startup deserves to spend more time on it.

That’s why the first filters are deliberately simple. Investment teams look for early signs of potential. In this phase, three elements weigh in particular:

First of all, the problem. The funds are looking for startups that address a relevant problem, clearly identified and shared by a significant number of customers. In addition to the solution being innovative, the problem must be significant enough to impact a broad market, thus enabling sustainable growth.

Second, the founding team. In early stages, the team is often more decisive than the product. Investors are looking for founders with complementary capabilities, aligned vision, and above all, the ability to learn. The question is whether the team will be able to find the right answers as the project evolves.

Finally, traction. Even in very early stages, funds expect some form of validation: first customers, pilots, MPV , recurring use of the product or clear signals of market interest and clear customer acquisition channels. What they are looking for is evidence that the startup is moving in the right direction.

Overall, this phase aims to identify those startups that, with the right support, could become high-impact companies.

Many “noes” have a simple explanation: the project does not fit into the thesis of the substance. Stage, sector, size of the round or geographical focus mark clear limits in decision-making. This kind of rejection says more about the bottom line than it does about the startup. In a process designed to rule out quickly, understanding how the decision is made is already a competitive advantage.

4. Due diligence: when the fund decides if it wants to walk the path with you

Due diligence is the phase in which the process changes its nature. The objective is no longer to filter and becomes to understand in depth. For the fund, it is about reducing uncertainty; for the startup, to demonstrate consistency and ability to execute.

At this point, the analysis becomes more transversal. Metrics take on a central weight. Growth, margins, unit economics and capital use are analyzed as a set that allows us to evaluate whether the model makes sense today and whether it can be sustained as it scales. More than perfect figures, the funds seek coherence between the data and the story of the project.

Product and technology are examined with the same logic. The degree of differentiation, possible barriers to entry and the ability of the product to evolve with the market are analyzed. The underlying question is whether there is a defensible advantage over time or whether the project could be easily replicated as it grows.

Legal and financial aspects also come into play. Corporate structure, intellectual property, shareholder agreements, and regulatory risks are reviewed to identify potential future frictions.

The team is once again a key focus of the analysis. The funds contrast references, review trajectories, and observe how founders respond to pressure and difficult questions. Due diligence allows you to assess what the team has done so far and, in addition, how it makes decisions when uncertainty increases.

This phase goes beyond a technical audit. It is a process of building mutual trust. The fund evaluates whether it wants to accompany the team for several years, and the startup has the opportunity to check if that investor is the right partner for its growth. In this balance, a good part of the future success of the relationship is decided.

5. Investment and support: the beginning of a long-term relationship

The investment marks a turning point in the relationship between the startup and the fund. From that moment on, venture capital becomes an active part of the project and its evolution. The focus is no longer on the transaction and shifts to accompaniment in key decision-making.

This accompaniment usually materializes, first of all, through participation in the board. From there, the fund provides strategic perspective, experience accumulated in other projects and a view oriented towards sustainable growth. It’s about helping the founding team anticipate scenarios and prioritize the next steps well.

Another relevant area is team building. The funds usually support the identification and recruitment of key talent, especially in times of expansion or professionalization of the organization. Bringing in the right people at the right time is one of the decisions that has the most impact on a startup’s trajectory.

The investor’s network of contacts also comes into play. Access to potential clients, strategic alliances or new investors is part of the value that a fund can bring over time, as long as there is mutual alignment and trust.

Finally, the accompaniment includes the preparation of the following rounds of financing. From the definition of metrics to the positioning of the project in front of new investors, the fund acts as a partner in the construction of the narrative and the growth strategy.

Types of Venture Capital Investors and the Right Time for Each

Within the venture capital ecosystem, very different investor profiles coexist, with different objectives, horizons and ways of getting involved. Understanding these differences is key for a startup to approach the type of capital that best fits its moment and needs.

In the earliest stages, business angels usually appear. They are investors who, in addition to capital, provide direct experience as entrepreneurs or managers. They are usually closely involved and help to validate the first hypotheses of the project, both at the product and market level. At this point, personal trust and affinity with the founding team have a relevant weight.

As the project progresses, seed and early stage funds come into play. Their focus is on checking that the product is starting to fit into the market and that the first growth metrics point in the right direction. In this phase, the analysis focuses on the team’s ability to execute, learn quickly, and lay the foundation for a scalable model.

When the startup has demonstrated traction, well-defined customer acquisition channels and seeks to accelerate its growth, growth capital funds appear. Its objective is to promote expansion, whether through internationalization, product expansion or market consolidation. At this stage, the demand on metrics, processes and corporate governance increases significantly.

A particular case is that of corporate venture capital (CVC) funds. These investors, linked to large corporations, combine financial interest with strategic objectives. They are looking for startups that can generate synergies with their core business, explore new technologies or open lines of innovation. The relationship usually goes beyond capital and involves industrial or commercial collaboration.

Each of these profiles responds to different logics. Therefore, the fit between startup and investor does not depend only on the size of the round, but also on the timing of the project and what each party hopes to build in the medium and long term. Choosing well with whom to walk this path is a decision that directly conditions the future evolution of the company.

Differences between Venture Capital and Private Equity

Confusion between venture capital and private equity is common, especially among entrepreneurs who are approaching the world of investment for the first time. Both share financial logic and professionalization in management, but they operate at very different times in the life cycle of a company and pursue different objectives.

The following table summarizes the main differences:

Beyond this comparison, the key difference is in the nature of the business challenge. Venture capital invests in companies that are still building their model, exploring the market and defining their value proposition. The risk is high, but so is the potential for growth. The investor accompanies the team in a process of creation and expansion.

Private equity, on the other hand, enters companies that have already demonstrated their viability. Their work focuses on improving processes, optimising structures, gaining operational efficiency and, in many cases, promoting consolidation processes. The focus is less on discovering the model and more on making it work better.

For founders, understanding this difference is key. It is not a question of deciding which type of capital is “best”, but of identifying what type of partner fits the moment and the real needs of the project. Choosing the wrong type of investor usually generates strategic frictions that are difficult to correct later.

How to prepare your startup to raise Venture Capital

This is probably the most decisive part of the process and also one of the least explained. Raising venture capital is not about convincing, but about generating trust. And that trust is built long before you sit down in front of an investor.

A first key element is the coherence of the story. Funds are looking for teams that can clearly explain what problem they are addressing, why that problem is relevant today, and why they are uniquely placed to solve it. Here it is about demonstrating a deep understanding of the context, the customer and the dynamics of the market. When the story is solid, difficult questions cease to be a threat and become an opportunity to go deeper.

Traction, even in its most incipient forms, is another central factor. Revenues, pilots, active users or preliminary agreements work as signs of progress. Beyond the specific figure, what the funds value is the direction: whether the project is progressing, whether it learns from the market and whether it is able to turn hypotheses into observable facts.

Metrics play a fundamental role here. A founding team that knows and understands its key indicators transmits control and management capacity. Concepts such as CAC (customer acquisition cost), LTV (value that a customer generates throughout their relationship with the company) or burn rate (rate at which the startup consumes cash) allow the investor to assess whether growth is sustainable and whether resources are being used judiciously.

The important thing is to show that the team knows what it measures, why it measures it and how it uses that information to make decisions in an environment of uncertainty.

Finally, the funds analyse each project with a view that goes beyond the current round. Venture capital invests thinking about the entire journey, including future rounds. Therefore, it is evaluated if the model has the potential for scale, if the market allows it and if the team is prepared to grow in complexity and size.

Preparing a startup to raise venture capital is, at its core, an exercise in maturity. It involves understanding one’s own project honestly, knowing how to explain it clearly and placing it within a credible growth trajectory. That preparation, more than any presentation, is what makes the difference in the investment process.

Investment trends in Spain in 2025

Beyond the headlines and one-off figures, the end of 2025 offers a good reference to understand what venture capital funds in Spain are currently prioritizing and how they are reading the technological cycle.

The year 2025 has confirmed a structural change in the venture capital market in Spain. After several years of adjustment and greater investment prudence, capital has been concentrated in technologies with real adoption and strategic relevance, leaving behind more speculative dynamics.

Consolidated data from the Startup Observatory show that investment in artificial intelligence and cybersecurity closes 2025 above the levels reached in 2024, both in total volume and in number of operations. This growth has not been due to a one-off upturn, but to a sustained trend throughout the year, driven by business demand and competitive pressure.

In artificial intelligence, 2025 has marked the definitive step from experimentation to integration into business processes. The funds prioritised startups with specific applications in sectors such as industry, healthcare, energy or financial services, especially valuing those capable of demonstrating operational impact, scalability and efficient use of capital. The conversation has shifted away from the technology itself to its ability to generate competitive advantage.

Cybersecurity cemented its position as one of the strongest verticals in the ecosystem. The increase in attacks, accelerated digitalization and a more demanding regulatory environment reinforced the interest in specialized solutions, with a focus on critical infrastructure protection, digital identity and security in cloud environments. In this area, 2025 was a year of consolidation rather than experimentation.

This market performance is consistent with the analyses published by other reference sources, such as SpainCap, the association that brings together the main private equity and venture capital managers in Spain, which point to a more selective ecosystem, with fewer opportunistic operations and greater demands on technological fundamentals, traction and corporate governance.

The end of 2025 leaves a clear reading: venture capital in Spain is still active, but it has raised its bar. Capital is directed towards projects that combine deep innovation, solid business models and long-term execution capacity. More than a year of volume, 2025 has been a year of investment quality.