In case you know how the basics of VC and equity work, you can skip this.

Companies have equity (also known as stock or shares). This was invented, so that people could buy a part of a company. The more valuable a company is, the more expensive 1% of it is. Companies that solve a lot of problems that people are willing to pay for, e.g. Airbnb, are worth a lot ($50B or so). Now, if you had just 1% of Airbnb, you would have equity worth $500M, and you would be very rich.

But Airbnb was not always worth $5B. It started off as a small company, worth a few dozen thousands, perhaps. Whoever invested early, is very well off. Early investors (like Sequoia or Y Combinator) invested a few million for 10-20% of Airbnb equity, leading to a 1000X return on that investment.

However, most companies are not successful as Airbnb. 90-99% of startups fail, depending on how you define failure. Early stage venture capital investment deal with this by investing into 100 companies, knowing that 90 will fail, 5 will be barely OK, but 1-5 will make back their money more than X100.

Early companies are worth less, because it’s not yet clear whether and how profitable they will be. This makes them more risky investments, but with much higher potential returns. Risk and high returns go hand in hand. After all, if there were risk-free high returns, then everyone would bid for those, thus increasing the price and lowering the return.

Anyway, the earlier, the riskier but the more % you get for your $. That’s how finance works. And VCs go for the high-risk, high-reward end of this.