Venture capital firms invest in companies with the potential for a significant return – those whose products or services have a unique selling point or competitive advantage.
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.
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.
What is venture capital?
Venture capitalists (or VCs) invest in businesses with the potential for high returns. 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.
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.
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.
Raising £1 million to facilitate the next 16 months of operations.
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.
There are important things a business owner like you should think about when considering equity investment, including the cost of finance, impact on their share of the business and the time required to secure this kind of investment.
When taking on equity, businesses should make potential investors aware of four HMRC schemes – Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS), Venture Capital Trust (VCT) Scheme and Social Investment Tax Relief (SITR)
These encourage investment in unlisted growth companies, through a range of tax reliefs against investment in new shares.
Before seeking equity finance, you should consider these five questions:
How much is required?
What is it for?
How long will the funds be needed for?
What other skills does the business need?
What level of control do existing shareholders want to retain?
The answers can be incorporated in a comprehensive business plan, which should incorporate realistic financial projections, a detailed marketing plan and, crucially, what the investor can expect in return.
Networking and making use of any suitable contacts is critical to finding appropriate potential investors. Many corporate finance advisers will have networks of contacts in the business angel, VC and PE communities. Engaging an adviser can help the process.
Many private investors focus on specific industry sectors or geographical areas. The following associations may help you to track down investors, networks or networking opportunities:
Access to the right kind of finance at every stage in your growth journey enables businesses like yours to invest, grow and create jobs. That’s why the British Business Bank and ICAEW’s Corporate Finance Faculty, and partner organisations representing finance and business, have created the business finance guide.
The Business Finance Guide
Download our comprehensive guide in PDF format allowing you to print and read at your leisure.
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