Outside Investment Finance – Venture Capitalists
Venture Capitalists
A venture capitalist invests large sums of money into businesses in exchange for a stake of the business. They look for businesses with good growth and profit potential, and rarely invest in amounts below £1million; although some smaller local venture capital organisations will invest smaller amounts.
To attract venture capital funding, your business needs to have a good track record and be making profits or progressing towards making them. You need to have a good management structure in place, one that the investor can have trust in. You also should have a product or service that has a competitive advantage or unique selling point (USP) of some kind; and a realistic but ambitious business plan that demonstrates to the venture capitalist where the business is going and how they will get a good return for their money.
Most venture capitalists will look for a good return within 3 to 5 years, so if your growth plan is over 10 years you may have difficulty finding an investor.
Advantages of Venture Capitalists
Amount of Investment – Venture capitalists invest very large sums of money into businesses, significantly more than business angels; which is better if your business pl ans involve a lot of expense or you are making great profits.
Future Investment – If your business is capable of attracting venture capital funding, it makes investing much more attractive for other investors, banks and lenders.
Experience – Whilst venture capitalists are rarely as hands on as business angels, they can have a huge amount of experience that they are able to bring to your business. Some venture capitalists will help with the planning and strategy side of your businesses.
Disadvantages of Venture Capitalists
Track Record – Unlike many business angels, venture capitalists rarely invest in startup businesses; they look for a proven track record, though if you have previously run successful businesses that would count in your favour.
Fees – When negotiating a deal you will need to pay legal fees and accounting fees; regardless of whether you secure funding or not.
Complexity – The process of dealing with a venture capitalist is much more complicated than dealing with a business angel; you will need a thorough business plan featuring detailed financial projections.
Equity – Investing large amounts of money means that most venture capitalists will expect a decent share of your business in return for their investment. Remember that the larger stake an investor has in your businesses, the more say they have in the running of it; though unless they feel something can be improved most will usually stay in the background.
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