What is a startup?
Financial products all the way down.
What is a startup? A loss-making business? A high-growth business? Perhaps. Definitions vary. But fundamentally most startups are financial products. Their success (and continued existence) is more likely to hinge upon their performance as a financial product than their performance as a business.
Financial products all the way down.
Founders offer a financial product to a VC - in this case, a very very high-risk, very high reward bet. Basically if you give me $1m, I will return you $100m, but there is a very low chance that I will do so, and most likely I will return you nothing.
Some investors like to buy these highly risky financial products when the odds are very long. They invest relatively small amounts early in startups where they believe in the ability of the founders to build a big business. These investors often will have a specific thesis about founders - they’ll invest in founders that remind them of themselves, come from a certain background or are pursuing a specific industry. This sort of investment enables the entire sector to exist, but a portion of this space is “for the love” - not the usual motivation for buying a financial product!
VCs package up risky financial products (startups) into a “fund” - essentially a bundle of really risky bets that taken together are able to spread the risk enough to offer relatively (compared to investing in an individual startup) reliable returns. These funds are themselves a financial product - though investors in these financial products will invest based on the historical returns of previous products offered by the VC firm and ahead of the fund’s investment in a specific startup.
VCs in turn sell their financial products to limited partners - these could be high-net-worth individuals, family offices and pension funds (super funds in Australia).
So - startups are financial products, packaged into other financial products, which are in turn packaged into other financial products, and ultimately sold to rich people and, perhaps, you.