Venture capital firms invest in businesses with the potential for high returns, such as those with innovative new technologies. They look for companies with a proven track record and the size of the investment will relate to the business stage.
What is venture capital?
Venture capitalists (VCs) invest in companies with the potential for a significant return – those whose products or services have a unique selling point or competitive advantage.
VC firms invest in a portfolio where some of the businesses may fail, so those that succeed have to compensate for those losses, with the potential for a high return.
If your business is looking for VC investment, you will need to demonstrate this clearly in a business plan. This will need to show a gap in the market or, as is often the case, how you plan to introduce a highly innovative new technology.
Venture capital tends to be offered in stages, with “stage A” investment in a start-up or pre-profit, starting at as little as £50k.
Subsequent stages of venture capital investment “B”, “C”, “D” etc. increase in value – potentially up to tens of millions of pounds.
Most VCs also want proven track records, and therefore rarely invest at the start-up stage. The exception are micro-VCs, the fastest growing sub-segment of the VC market, who specifically target businesses at seed stage.
Venture capitalists typically invest more than money – they will expect representation on the board, and in return will offer strategic advice to support plans for growth.
The difference between venture capital and angel investment
Both angel investors and venture capital firms invest directly in private companies.
Angel investors will be individuals, often successful business people, investing personal funds into a potentially rewarding business opportunity.
In contrast, venture capital is invested by firms or companies. They raise investment money by offering individuals a chance to invest in a fund that is then used to buy shares in a private company.
The fact that business angels use their own money and venture capitalists are using other people’s money affects their capacity for risk.
Typically a venture capital firm is in a position to invest much larger amounts of money than a business angel.
Many businesses use angel investment as a start up and look to secure venture capital at a later stage as they grow.
Preparing for venture capital investment
It can be a complex, costly and time-consuming process securing VC investment.
A detailed business plan is a must, and legal fees will be incurred through the deal negotiation, regardless of whether investment is ultimately secured.
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