Venture Capital

Global represents a majority of venture capital and private equity around the world, and is dedicated to promoting the industry for the benefit of entrepreneurs, investors, its practitioners and the economy as a whole.

What is venture capital

Venture capital provides long-term, committed, risk sharing equity capital, to help unquoted companies grow and compete. It seeks to increase a company's value to its owners, without taking day-to-day management control. Although lenders (e.g. banks) have a legal right to interest on a loan and its repayment, irrespective of the borrower's success or failure, the venture capital investor's returns are dependent on the growth and profitability of the business. Owners will need to sell some shares in their companies (generally a minority stake) to the venture backer, who may seek a non-executive board position and attend monthly Board meetings. Venture capital investors not only provide equity capital, but experience, contacts and advice when required, which sets venture capital apart from other sources of business capital.

Questions to ask yourself

Before considering raising venture capital you need to answer these questions: Do you have high growth ambitions for your company? Are you willing sell some of your company's shares to a venture capital investor in order to be able to increase your stake's value to more than that of your original holding within a few years? Venture capital firms only target companies with real growth prospects, driven by a skilled, ambitious management. So if you and your company fit this description and you answered 'yes' to the questions above, venture capital certainly is worth considering.

Venture capital sources

Investors have a wide range of investment preferences which include the amount of capital you require, your company's investment stage, industry sector and location, and these will affect the sources you target. Investment stages include: seed, start-up, early stage, expansion, management buy-in (MBI), management buy-out (MBO) and rescue/turnaround situations. As a basic guideline there are two main sources of venture capital with broadly different investment preferences - venture capital firms and business angels. The majority of venture capital firms target firms requiring investment of over £100,000, mainly in expansion stage companies and MBOs/MBIs. The overall average deal size in 1999 was £5.6 million, although 51% of companies backed in 1999 received sums of venture capital of less than £1 million. There are some specialist and regional firms which invest outside these parameters. Business angels tend to invest between £10,000 and £100,000 in start-up and other early stage financing - the average investment is around £50,000.

How to target a source of venture capital

Raising any type of capital needs research and strategic targeting. Before approaching any source of venture capital you will need to have: a good business plan with an executive summary; assessed that venture capital is suitable for your business; know how much venture capital you require and what it will be used for; selected for approach only those venture capital sources that meet your requirements.

Private investors

For individuals who would like to invest in private companies there are a number of options available including:

Venture and Development Capital Investment Trusts (VDCITs) These investment vehicles invest principally in a range of unquoted companies and are mainly managed. The type of investments they undertake are not restricted by legislation and so they do not offer tax benefits to private investors. They are quoted on the London Stock Exchange. Their share prices are listed in the Financial Times and some other newspapers.

Venture Capital Trusts (VCTs) VCTs are investment vehicles similar in structure to investment trusts, but they offer tax incentives to private investors as the type of investments they can make are restricted by legislation. After their initial fund raising their shares are quoted on the London Stock Exchange and are listed in the Financial Times and some other newspapers.

Business Angel Investment - (282k) Private investors who invest directly in private companies in return for an equity stake and perhaps take a seat on the company's board are frequently known as "business angels". There are tax incentives available through the "Enterprise Investment Scheme" (EIS) where certain criteria are fulfilled.