Venture capital

Quick facts

Venture capital is financing given to start-ups and early-stage businesses. Venture capital funds look to invest larger sums of money than business angels – typically more than £250,000 – in return for an equity stake. Venture capital is most suited to high-growth businesses with long-term growth potential, i.e. those destined for sale or public listing (IPO).
 
You can think of venture capital is a subset of private equity. VC firms tend to invest in promising start-ups that need growth capital and business expertise to take them to the next level, whereas PE firms prefer to invest in established businesses that require a cash injection or a new strategy to move them forwards.

Both VC and PE firms share the same aim: to improve the companies in which they invest before selling them on at a profit (typically to a strategic buyer or by IPO), generating good investment returns for their own institutional investors.

Let’s say you’re a start-up – 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 (VC) 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 start-up 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.
     
  • The government’s Enterprise Investment Scheme (EIS and SEIS) and VCTs.
  • Initial public offering (IPO).

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