Venture capital: how does it work?

Venture capital is the term used for unsecured funding provided by specialist firms in return for a proportion of the company's shares.

Venture capital investments are seen as relatively high risk because they are unsecured.

The venture capital firm will therefore be looking for a high return (perhaps a compound return of 25% or more), largely generated by growth in the capital value of the business.

It may well also require representation on the company's board.

Venture capital (VC) is worth considering if your business needs funding for growth, but can't raise necessary funds through a bank loan, overdraft or by an injection of further capital from the current owner.

VC money is commonly used in conjunction with a management buy-out (MBO) or buy-in (MBI), where the management team are themselves investing in the business and so demonstrating their commitment to its success.

Track record

Venture capital investors will look at the track record of the business and the proven ability of the management team when deciding whether to go ahead.

The team will need to prove that growth plans for the business are credible.

WHAT CAN YOU FUND?

• Expansion into new markets
• Geographical growth
• Marketing and advertising

The venture capital firm will also want an idea as to how its exit will be achieved within a preferred timescale, usually within the next three to five years.

This may be by a trade sale, stock market listing, refinancing by another institution or a repurchasing of the entire capital by management.

Businesses seeking venture capital require expert legal and financial advice when negotiating the agreement.

Management teams should also be aware of the significant time required in completing the process.

RELATED INTERNET LINKS
The British Venture Capital Association
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