In one sentenceInvestment in fast-growing startups in exchange for a stake in their ownership, in which the investor accepts high risk in the hope of a large return when they succeed or are sold.
Simply put
It is also called “risk capital”. The investor does not lend to you; they become a partner and share the loss with you if the business fails, so they ask for a relatively large stake and a role in important decisions.
The price of the stake is set by the “pre-money valuation”, then the investment amount is added to give the “post-money valuation”.
Worked example
A delivery app startup agreed with an investment fund on 2,000,000 SAR in exchange for 20% of its ownership after the investment.
Investment amount2,000,000 SAR
Post-money valuation2,000,000 ÷ 20% = 10,000,000 SAR
Pre-money valuation = 10,000,000 − 2,000,0008,000,000 SAR
Formula: Post-money valuation = investment amount ÷ stake percentage
Don't confuse it with
Debt financingThe financier recovers its money in installments whatever the outcome and holds no stake, while the venture investor shares in profit and loss.