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It provides equity (share) capital to enterprises not quoted on a stock market.
The venture capitalist provides medium or long-term financing in return for a proportion of the equity capital of the company it is funding.
Venture capital is a way of investing in small, fast-growing companies who cannot raise funds on the stock market.
To raise such capital, owners sell some shares in their companies (generally a minority stake) to the venture backer, who may seek a non-executive board position and attend monthly Board meetings.
Investors not only provide equity capital, but experience, contacts and advice when required, which sets venture capital apart from other sources of business capital.
Who gets it?
Venture capital is usually concentrated in the newer fast growing sectors of the economy - such areas as computers, biotechnology, or communications companies.
In these sectors, there is a great potential for growth - but companies may not have time to establish a track record that would attract traditional investors in the stock market, who tend to be more averse to risk.
In 1997 a total of £3 billion ($5bn) was invested in 1,100 UK companies by venture capital firms, of which nearly £700 million ($1,100m) was in the high technology sector. In the past seven years, venture capital investment has tripled, and 1 million people now work for firms funded by venture capital. Half of all venture capital invested in Europe goes to the UK.
In the USA, $12.8 billion (£7.8bn) was invested by venture capitalists in 1997, of which one quarter was in the high-tech companies in Silicon Valley California.
What kinds of venture capital are there?
There are two main sources with broadly different investment preferences - venture capital firms and business angels.
The majority of venture capital firms in the UK target firms requiring investment of over £100,000 ($160,000), mainly in expanding companies and management buyouts. The overall average deal size in 1996 was £2.3m ($3.7m).
Business angels are individuals who tend to invest between £10,000 and £100,000 in start-up and other early stage financing. The average deal size in 1995/6 was £50,000 ($80,000).
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