Venture capital Guide 2024
Venture capital provides long-term, committed, risk-sharing equity capital to help unquoted companies grow and compete.
It seeks to increase a company’s value to its owners without taking day-to-day management control.
Although lenders (eg. banks) have a legal right to interest on a loan and its repayment, irrespective of the borrower’s success or failure, the venture capital investor’s returns are dependent on the growth and profitability of the business.
Owners will need to 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.
Venture capital investors not only provide equity capital but experience, contacts and advice when required, which sets venture capital apart from other sources of business capital.
Questions to ask yourself
Before considering raising venture capital, you need to answer these questions:
Do you have high growth ambitions for your company?
Are you willing to sell some of your company’s shares to a venture capital investor in order to be able to increase your stake’s value to more than that of your original holding within a few years?
Venture capital firms only target companies with real growth prospects driven by skilled, ambitious management. So if you and your company fit this description and answered ‘yes’ to the above questions, venture capital certainly is worth considering.
Venture capital resources
Investors have a wide range of investment preferences which include the amount of capital you require, your company’s investment stage, industry sector and location, and these will affect the sources you target. Investment stages include seed, start-up, early stage, expansion, management buy-in (MBI), management buy-out (MBO) and rescue/turnaround situations.
As a basic guideline, there are two main sources of venture capital with broadly different investment preferences – venture capital firms and business angels.
Most venture capital firms target firms requiring an investment of over £500,000, mainly in expansion-stage companies and MBOs/MBIs. The overall average deal size in 2023 was £15.6 million, although 51% of companies backed in 2023 received sums of venture capital of less than £5 million. There are some specialist and regional firms which invest outside these parameters.
Business angels tend to invest between £50,000 and £35,000 in start-ups and other early-stage financings – the average investment in 2008/9 was around £50,000.
How to target a source of venture capital effectively
Raising any type of capital needs research and strategic targeting. Before approaching any source of venture capital, you will need to have:
a good business plan with an executive summary;
assessed that venture capital is suitable for your business;
know how much venture capital you require and what it will be used for;
selected for approach only those venture capital sources that meet your requirements.
The Venture Capital UK ‘Directory’, ‘Sources of Business Angel Capital’ and ‘A Guide to Venture Capital’, together with professional advisers (some are listed in the Venture Capital UK ‘Directory’) will assist with this process, please read the Venture Capital UK publications, research and press releases for further information, and you can search the Venture Capital UK ‘s ‘Directory’ of members on line.