Guide to venture capital.

Venture capital provides significant investments – upwards of £2,000,000 – to high-potential businesses capable of rapid growth. This investment is made in exchange for an ownership of company shares.

What is venture capital?

Venture capital provides long-term monetary investments in exchange for equity in a business. The money is invested by wealthy individuals or venture capital funds consisting of pooled resources from individuals and institutions. Unlike bank loans and other forms of financing, there is no interest paid on venture capital and the money does not need to be repaid (unless agreed upon in advance). Because of this it is a form of ‘risk capital,’ which means the creation of future profits is uncertain.

What can venture capital offer me?

Many high-risk businesses with the potential to dominate a sector require substantial funding in order to do so. Marketing and recruitment are just two areas where substantial money must be spent in order to succeed. Traditional forms of financing, such as bank loans, can’t provide enough capital to make a difference. Venture capital therefore provides high-risk firms to the level of cash they need. In addition, individual venture capitalists will often back up their investment with advice, business contacts and their own clout in order to help firms get off the ground.

Is venture capital right for my business?

Most start-ups and small businesses will be unsuitable for venture capital because they won’t fit the informal eligibility criteria of a high-risk investment that requires over a million dollars in investment. Investors also want to see evidence of established business acumen which can be difficult for first-time entrepreneurs. Take a look at our guide to start-up finance for other forms of investment that may be more suitable.

How hard is it to gain an investment?

Gaining investment from venture capitalists is difficult. Investors typically only invest in entrepreneurs that have a proven track record creating high-value businesses. Most start-ups also require much lower levels of funding, which aren’t offered by venture capitalists. Investors are also focused in particular sectors, particularly technology and online industries where high-risk companies have achieved considerable success in recent years.

Comparative cost of venture capital

Venture capital is an expensive form of finance. Because of the significant sums and huge risk involved, investors want to ensure a sizeable return. Gaining venture capital can often reduce a business owner’s majority stake to a minority stake; at the very least be prepared to give away 40% of your company. Investors make their money when they ‘exit’ the business, either by selling their stake at a profit or when the company is bought out by a larger competitor. Maximising the initial equity stake helps investors maximise the return on exit.

Where can I find venture capitalists?

Venture capitalists do not tend to advertise too openly; like book publishers they are already inundated with requests. Speak to high-profile universities as many research departments have links to venture capitalists, particularly those with a focus on technology. Finding individual venture capitalists is always harder than approaching a network; you might wish to contact the British Venture Capital Association (BVCA) or the European Private Equity and Venture Capital Association (EVCA) who can point you in the right direction. A Google search for ‘venture capital funds’ may also help you find what you’re looking for.