Disclaimer: This article provides general information and is not legal or technical advice. For official guidelines on the safe and responsible use of AI, please refer to the Australian Government’s Guidance for AI Adoption →
Brief, factual overview referencing current Australian context.
How do venture capitalists make money?
Mainly via management fees (often ~2% p.a.) and carried interest (commonly ~20%) on profits after returning capital to LPs.
What are the stages of VC funding?
Pre‑seed, seed, Series A–C+. Each round funds new milestones with higher expectations for traction, governance, and scale.
How does dilution work in a VC round?
New shares are issued; investor ownership ≈ investment ÷ post‑money valuation. Existing holders dilute unless they invest pro‑rata.
Venture capital: how does it work? — For Australian founders and operators, this means understanding where VC money comes from, how funds decide, what a round does to your ownership, and how to run a clean process. This guide distils global norms and local context for 2026 so you can make an informed, values‑aligned choice.
A founder team preparing their pitch and data room before investor meetings.
Who is this guide for?
Founders & Teams
You’re considering a raise or deciding whether VC fits your goals.
Students & Switchers
You want a practical model of how VC funds and rounds actually work.
Community Builders
You support founders and want a clear, Australia‑aware explainer.
How VC funds are structured and how returns are made
Venture capital funds are typically limited partnerships. Limited partners (LPs) — such as super funds, family offices, and institutions — commit capital. General partners (GPs) manage the fund: they source deals, support portfolio companies, and aim to return more than was invested. Two revenue streams matter: an annual management fee (often ~2% of committed capital) and carried interest (commonly ~20% of the profits after returning LP capital). Funds often have ~10‑year lives with an investment period in the early years and harvest later. Australian VC funds generally follow the same global model.
Key insight
VC economics reward outsized outcomes. A few exceptional winners must pay for many experiments — that’s why investors focus on scalable markets and repeatable growth.
The funding journey: from pre‑seed to Series C
Rounds fund milestones. Expectations and governance rise with each stage; the goal is to reduce risk step by step.
Pre‑seed and seed
Pre‑seed: Team, early insight, prototype or initial research. Evidence of a real customer pain and a credible plan.
Seed: Early product in market, first users, clear problem/solution fit, learning loops, and early traction indicators.
Series A–C
Series A: Signals of product‑market fit, improving retention, repeatable go‑to‑market, early unit economics.
Series B–C: Scaling systems, multi‑quarter growth, leadership hires, governance, and expansion plans.
What venture investors evaluate
Team: Rate of learning, clarity, founder‑market fit, ability to recruit.
Market: Big, growing, and accessible with a credible wedge.
Product & defensibility: Differentiation, velocity, and any moats (data, distribution, community, IP).
Traction & unit economics: Evidence of demand, retention, CAC/LTV directionality (appropriate to stage).
Round structure: Valuation, proposed dilution, option pool, governance, and a plan for 18–24 months.
Common deal instruments in Australia (as at 2026)
You will encounter a few standard approaches. Seek local legal advice; terms and tax can vary.
Priced equity round: Shares are issued at an agreed pre‑money valuation. Clean, familiar, and sets a clear baseline for the next round.
SAFE: Simple agreement for future equity. Converts in a later round using a valuation cap and/or discount. No interest or maturity.
Convertible note: Debt that converts later, usually with interest, a discount, and a maturity date. Sometimes used where timing or pricing is uncertain.
Pro tip
Prefer standard, well‑understood documents. The time you save and the trust you build often matter more than clever edge‑case terms.
Dilution in practice: a quick worked example
Suppose a seed investor puts $1.0m into a company at a $4.0m pre‑money valuation ($5.0m post‑money). Investor ownership after the round is $1.0m ÷ $5.0m = 20%. Founders now hold 80% (before any option pool changes). If a later Series A raises $5.0m at a $20.0m pre ($25.0m post), new dilution is $5.0m ÷ $25.0m = 20%. Founders would move from 80% to 64% (0.8 × 0.8); the seed investor’s 20% becomes 16%, and the Series A investor holds 20%. Real rounds also adjust for employee option pools and any convertibles.
These numbers are illustrative only; your valuation, pool size, and instrument terms will change the math.
Process and timing: what to expect in a raise
Efficient raises are structured, time‑boxed, and data‑driven. In balanced markets, 8–16 weeks from first meetings to funds‑in is common; tougher markets can take longer. Keep communications clear and your data room organised.
Step‑by‑step actions
1Prepare essentials: 12–18‑month plan, focused deck, clean data room
2Build a target list: stage/sector fit, cheque size, portfolio conflicts
3Run outreach: warm intros where possible; track pipeline clearly
4First and partner meetings: align on thesis, milestones, and use of funds
5Negotiate term sheet, complete diligence, sign, and close
Resources
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Download checklists, worksheets, and example documents tailored to this guide.
Alternatives: Angels, grants, revenue/bootstrapping, and (later) venture debt. Choose the path that matches your ambition, risk tolerance, and runway needs.
Australia‑specific notes (as at 2026)
Most local funds mirror global norms on structure, fees, and deal mechanics.
SAFE and convertible notes are widely understood; priced equity remains standard for larger rounds.
Connect with the Australian ecosystem early — community groups, mentors, and founder peers can shorten your learning loop.
Pro tip
Map your milestones to a realistic runway. Raise what you need to reach the next proof‑point — not an arbitrary round label.
📝
Free MLAI Template Resource
Download our comprehensive template and checklist to structure your approach systematically. Created by the MLAI community for Australian startups and teams.
Decide whether VC aligns with your goals. If yes, set a tight milestone plan, prepare your materials, and run a crisp, respectful process. If not, pursue the capital path that best serves your customers and team — there are many ways to build an impactful company.
Stripe • Fund mechanics, evaluation criteria, and guidance for startups approaching VCs.
Analysis
Disclaimer: This article provides general information and is not legal or technical advice. For official guidelines on the safe and responsible use of AI, please refer to the Australian Government’s Guidance for AI Adoption →
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About the Author
Dr Sam Donegan
Medical Doctor, AI Startup Founder & Lead Editor
Sam leads the MLAI editorial team, combining deep research in machine learning with practical guidance for Australian teams adopting AI responsibly.
AI-assisted drafting, human-edited and reviewed.
Frequently Asked Questions
How do venture capitalists make money?
VCs typically earn a management fee on committed capital (often around 2% per year) and a performance fee called carried interest (commonly ~20%) on profits once investors’ principal has been returned. The exact numbers vary by fund and vintage.
What ownership percentage do VCs usually take?
It depends on stage and valuation. Seed rounds may land anywhere from ~10–25% new ownership for investors; later rounds often target dilution bands of ~15–25%. Your cap table, valuation, and any employee option pool adjustments affect the final percentage.
Do I need revenue to raise VC?
Not always at pre‑seed or seed, where the bet is often on team, market, and early signals of demand. By Series A, many funds expect evidence of product‑market fit (repeatable usage and growth, sometimes revenue momentum) plus a clear plan to scale.
How long does due diligence take?
Light diligence can be 2–3 weeks; deeper processes may run 4–8+ weeks, depending on round size, complexity, and how organised your data room is. Market conditions can extend timelines.
SAFE vs convertible note—what’s the difference?
A SAFE is an agreement that converts to equity in the future, typically at a discount and/or valuation cap, without accruing interest or a maturity date. A convertible note is debt that accrues interest and has a maturity date; it also converts to equity under agreed terms. Local legal advice is recommended in Australia.
Is venture capital right for my startup?
VC suits ventures targeting large, fast‑growing markets where scale requires significant upfront investment and a long runway. If you prefer control, steady growth, or capital‑efficiency over blitz‑scaling, alternatives like angel funding, grants, or bootstrapping may be a better fit.
