PracticeConsultingIs venture capital for you?

Is venture capital for you?

The UK venture capital industry is the largest and most developed in Europe accounting for 49% of total annual venture capital investment. The industry, second to only the USA in world importance, has invested over £35bn (£29bn in the UK) in around 19,000 companies since 1983. Almost 50% of financings are for expansion.

What is venture capital?

Venture capital provides long-term, committed, risk sharing equity capital, to help unquoted companies grow and compete, without taking day-to-day control. Although lenders have a legal right to interest on a loan and its repayment, irrespective of the borrower’s success or failure, the investor’s returns are dependent on the growth and profitability of the business. Owners will need to sell some shares (generally a minority stake) to the venture backer, who may seek a non-executive board position and attend monthly board meetings. Investors provide equity capital plus experience, contacts and advice.

Questions to ask before considering or recommending raising venture capital

  • Does your company have high growth ambitions?
  • Are you or the company’s owner willing to sell shares to an investor to increase your stake’s value within a few years?
  • Venture capital firms only target companies with real growth prospects, driven by a skilled, ambitious management. So if you and your company fit this description and you answered ‘yes’ to the questions above, venture capital certainly is worth considering.

Venture capital sources

Investors have a range of investment preferences which include the amount of capital you require, your company’s investment stage, industry sector and location. These will affect the sources you target.

Investment stages include: seed, start-up, early stage, expansion, management buy-in, management buy-out and rescue/turnaround situations.

As a guideline there are two main sources of venture capital with different investment preferences – venture capital firms and business angels. Venture capital firms usually target firms requiring investment over £100,000 mainly in expansion stage companies and MBOs/MBIs.

The overall average deal size in 1999 was £5.6m, although 51% of companies backed in 1999 received sums of less than £1m.

Some specialist and regional firms invest outside these parameters. Business angels tend to invest between £10,000 and £100,000 in start-up and other early stage financings – the average investment in 1998/9 was around £50,000.

Target venture capital effectively

Raising any type of capital needs research and strategic targeting. Before approaching any source of venture capital you’ll need to:

  • Have a good business plan with an executive summary; assess that venture capital is suitable
  • Know how much capital you require and what it will be used for
  • Have selected for approach only those venture capital sources that meet your requirements.

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