- Venture Capital (VC) is an investment type for innovative, early stage businesses with the potential for strong growth.
The primary difference between Venture Capital investment and Private Equity investment is simply the age of the company. Private Equity investment is typically reserved for more mature and established businesses whereas Venture Capital investments are for new companies looking to disrupt a sector and which may not be making a profit but where the potential for growth is high.
Many well-known businesses such as Google, Facebook and Skype all received Venture Capital investment in their early years.
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How Venture Capitalists Work
Venture Capital firms will take minority stakes in a business and this is often alongside other VC’s as well as other investors.
Businesses in the early stages raise money in ‘rounds’ – known as series A, B, C etc.. Each round sees further investment. This can be from the same investor and/or from new ones. Start-up companies will also, typically, receive funding prior to series A from Angel Investment, crowdfunding, grants and even family and friends.
All the investments together form what is known as the ‘innovation eco-system.’ This a funding the chain that provides both capitals as well as business expertise to a new start or early stage but fast-growing companies at different stages of their growth cycle.
For the business founder, giving away slices of equity is a particularly hard thing to do as is accepting someone else’s valuation of their business. However, reconciling the benefit of giving away equity and not being unyielding in their assessment of the value of their business is the route to successful capital raise.
843,000 people are employed in the UK by companies backed by Private Equity and Venture Capital
Stages Of Venture Capital Investment?
Depending on the maturity of the business there are different stages of Venture Capital funding. These are defined as:
Seed: Financing that allows a business concept to be developed, perhaps involving the production of a business plan, prototypes and additional research, prior to bringing a product to market and commencing large-scale manufacturing.
Start-up: Financing provided to companies for use in product development and initial marketing. Companies may be in the process of being set up or may have been in business for a short time, but have not yet sold their product commercially.
Other early-stage: Financing provided to companies that have completed the product development stage and require further funds to initiate commercial manufacturing and sales. They may not yet be generating profits.
Late-stage venture: financing provided to companies that have reached a fairly stable growth rate that is, not growing as fast as the rates attained in the early stage. These companies may or may not be profitable, but are more likely to be than in previous stages of development.
Expansion: Sometimes known as ‘development’ or ‘growth’ capital, provided for the growth and expansion of an operating company which is trading profitably. Capital may be used to finance increased production capacity, market or product development, and/ or to provide additional working capital.
87% of private equity and venture capital investments in 2018 were directed at small and medium-sized businesses
What Does A Venture Capitalist Look For When Making An Investment?
A Venture Capitalist’s goal is to create value through investing in the new start or early-stage businesses that have the potential for high growth and which have an innovative and/or disruptive business model. Since the businesses they invest in are unproven with no track record the Venture Capitalist will evaluate the business idea but also the entrepreneur.
They will assess the motivation and backgrounds of the entrepreneur and look for bright, energetic candidates who they believe have the desire and motivation to see their ideas through to success.
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Why Would A Company Want Venture Capital Investment?
Venture Capital firms invest in and back businesses that are at the start of their growth curve. They will typically have no track record behind them. This makes them unsuitable for traditional debt finance providers who will look for historic financial performance and security in support of a lending decision.
By contrast, Venture Capital will invest in the potential of a business and provide capital to the early stage needs of a company such as product development, manufacturing, marketing and sales. They will also bring significant business expertise, skills that entrepreneurs lack but need and also contacts.