Venture capital is a means of securing a significant capital investment where avenues such as personal funding and bank loans may not be available or appropriate. This investment is used to fund the growth and development of the business, turning the potential value of your company into hard cash as quickly as possible.
What are the benefits?
Venture capitalists will bring cash straight into a business, allowing the purchase of equipment, property, the hiring of employees and the opportunity to gain market exposure with larger advertising budgets. If a business can be scaled up quickly, it can begin to realise its potential more quickly. It can protect its market share or first to market advantage against new and wealthier competitors.
VC firms will usually build up a portfolio of investments in line with the industry expertise of its members. The members will already have valuable contacts and credibility within your industry. Their expertise can create new opportunities, additional security and further potential for a company. There involvement will add value.
What’s the catch?
Firstly it is important to understand that the objective of a VC firm is to make a profit. They are not interested in nurturing “your baby” or protecting the traditions and ideals of your business model. They are buying a significant stake in your business to ultimately dispose of it in return for profit. A VC will be planning an ‘exit strategy’ in 3 years although this can be longer if it is in there interest to stay. Their profit is usually realised through the sale or floatation of the company.
Competition to acquire VC funding is fierce. You will need to prepare a VERY good business plan and present a strong proposition. You will then be expected to fund a thorough examination of your business known as “due diligence”, to protect all concerned parties from any nasty shocks down the line. This process will be very demanding and take weeks to complete.
Venture Capital Investments typically start at a quarter of a million pounds, depending on the focus of the VC firm. For this investment, they will expect anything from 10-50% of your business. Therefore when your company is eventually sold, they will be taking this percentage of the sale value.
Your investors will insist on regular management information and an involvement in the running of your business, appropriate to their investment. This may be the most difficult change you will need to adapt to.
Is Venture Capital for me?
Whether you should seek VC really depends on your aims and objectives, and the condition and potential of your business. In ALL circumstances however, it is vital you seek the help of an advisor. For more information, visit the British venture capital association.