Venture capital (VC) works in a similar way to business angels. VC funds invest money into businesses with high growth prospects in order to obtain high returns.
Where VC funds and business angels differ is that the funding from VC funds are from institutional sources, such as pension schemes and investment firms, as well as corporates and individual investors. These are each known as ‘Limited Partners’. Their money will be pooled together in an investment fund, managed by an investment manager, who will use the funds to build a portfolio usually comprised of many high-risk businesses. Many of these businesses fail, but those that succeed grow to such an extent that the returns exceed the losses. Although they are high-risk businesses, they are often proven companies that are past the start-up stage and have high growth prospects.
Similar to business angels, VC investment will also bring with it a wealth of experience which is often sector specific. That being said, due to the volume of companies within their portfolio, they won’t become as involved with the business as business angels and will more likely be involved in the overall business strategy.
Due to the structure and requirements of becoming a portfolio company in a VC fund, it can be quite time consuming to secure investment. There is a large amount of due diligence required, and substantial legal fees can be incurred as the amount of money invested is often larger, purely for growth purposes.
Typical Investment Size: £500,000 - Millions
Stake: Typically less than 30%
Involvement Timeframe: 5-10 years
Can be a cheap form of finance. Many venture capitalists don’t expect dividend returns, but rather a capital gain.
Venture capitalists can offer strategic guidance to your business and will also provide a positive networking effect.
Provides confidence in your product which can help with gaining additional funding from the bank.
Dilutes the founder’s ownership of the business.
The process can be costly, demanding and time-consuming.
Generally, this is not suited for people who are just starting out or looking for small investments.
It is difficult to secure venture capital investment. Sometimes it is hard to find the right fit, and it is also highly competitive.
This document is intended to be an aide-mémoire to help you consider different forms of finance and which ones might be appropriate for your business; it is not a comprehensive guide to all forms of finance. There could be different tax and legal implications associated with different forms of finance. Professional tax and legal advice should be sought to prepare for these different forms of finance.