Venture Capital sources – What are the options
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.
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 (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/MBI’s.
The overall average deal size is £5.6 million, although 51% of companies backed 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.
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.