Venture capital

Let’s say you’re a startup – or a new business with a limited operating history (i.e. under two years) – and you need capital. Maybe you need it to expand, to fund a management buyout or buy-in, or to develop a new product. Venture capital funding might be your best or only option. A VC fund, also known as a Limited Partnership, usually partners with institutional investors (e.g. pension funds, insurance companies and family offices) to provide finance to companies with high growth potential, in return for an equity stake.

As with all equity finance, the appeal (in contrast to a loan or any debt financing) is that you won’t have to pay interest – nor will you have to repay any capital. The downside is that you give away equity to your investors, who also get a say in company decisions.

The VC mindset is similar to that of business angels (private investors) – both are interested in businesses with high growth potential. Investors who are impressed enough by an entrepreneur’s idea or company to give them a VC investment expect to receive a high percentage return if the business succeeds.

• Private equity – Private equity is a type of equity financing suitable for established private businesses. Private Equity funds give your business money in return for a large or controlling share in your business. Both private equity (PE) and venture capital (VC) firms invest in businesses and grow them (usually for up to 5 years) in order to make ‘above-market’ returns when businesses are sold or listed (IPO).
• Business angels – Business angels are private individuals who are prepared to put their own money into startup or early-stage businesses in exchange for a share of the company’s equity (i.e. equity finance). Angels may invest on their own or as part of an angel network. Typically they are experienced entrepreneurs and, in addition to money, they bring their own skills, expertise and contacts to the table.
• Equity crowdfunding – Equity crowdfunding is a type of equity finance whereby people (‘the crowd’) invest in an early-stage unlisted company, in exchange for shares (equity) in that company. Individual investors thus become shareholders and stand to profit if the business does well – they might also lose some or all of their investment. Equity crowdfunding usually takes place over an online platform.
• Initial public offering (IPO).