Venture capital
If you are thinking of bringing finance into your business by
selling some of your equity, consider venture capital. This guide
should give you a better understanding of what using venture
capital (VC) entails and why it might be a good option for you.
What is venture capital?
- Venture capital firms invest large amounts of unsecured
funds into businesses in return for equity
- VCs look at:
- the nature and value of a business
- future potential
- the competition in the marketplace
- They are primarily interested in businesses set on
high-growth and expansionist strategies looking to
raise between £2m to £5m
- However, there are also regional VC organisations
that may invest in companies looking for finance over £50,000
- VCs look for a business that has a significant advantage
over its competitors and has potential to give them a high
return on their investment
- However, the vast majority of funding proposals put before
venture capitalists are turned down
What it offers your business
- As well as finance, VCs can bring in valuable skills and
expertise to your business and make crucial business
contacts available to you.
- They will not look to get involved in the day-to-day running of
your business, but will appoint someone to be a member of
your board.
- You will find it easier to access other streams of
funding because you have the credibility of having a VC on
board
- As your business grows further, the VC could bring in
extra funding
- They want a high return so will be committed to
helping your business grow further
What the downsides could be
- You have to be prepared to lose some of the
control in your business.
- Venture capitalists will look for:
- agreements on divided payments
- changes in business strategy
- decisions on appointments, dismissals and spending
- They often look for a mixture of debt and equity
so your business may have amounts to pay back over the investment
period
- You also have to pay fees and costs related to due
diligence
- Don't expect the funds to come all at
once. You will have to reach pre-agreed targets such as
revenue growth to get them
- It could take three to eight months to get a deal
with a VC
- Be prepared to give up at least 20% of your
business
Checklist
- Determine how much money you need; then work out whether you're
willing to lose as much as 20% of the business to secure it
- Make sure the plans you have for your business are
realistic
- Ensure you business is ready for VC investment
- If you are going forward for equity investment, it is a good
idea to seek advice from a business adviser and a lawyer
FAQ
Where can I find investors?
Networking is a good way to find potential investors: attend
events sponsored by your local Business Link and chamber of
commerce. Speak to friends and business associates about your
venture, too - word of mouth can spark investors' interest and
create a buzz around your company. Associations such as the British
Private Equity and Venture Capital Association can help connect you
with interested parties, as can financial advisers.
Jargon buster
Due diligence: research and evaluation carried out
on your company to determine whether it is a good investment
proposition. Finances, management team, market and track record are
all reviewed.
Resources
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Checklist
Determine how much money you need; then work out whether you're
willing to lose as much as 20% of the business to secure it
Make sure the plans you have for your business are realistic
Ensure you business is ready for VC investment
If you are going forward for equity investment, it is a good idea
to seek advice from a business adviser and a lawyer