Venture capital is a form of equity finance. It is a source of risk capital that is invested into businesses by professional outside investors to new and growth businesses. With this investment money will also more than likely get expert managerial and technical help with aspects of your business and decision making.
It should be noted that venture capitalists are not suitable for everyone and they are typically very selective in deciding what they want to invest in. Venture capitalists are most interested in ventures with high growth potential.
A venture capitalist can be used as a financial tool for development within your business. They provide long term committed share capital and the return that a venture capitalist will receive is dependent on the growth and profitability of the business.
The first example of a venture capitalist dates back as late as the 18th century and a venture capitalist will look to retain their investment for around three to seven years. Venture Capitalists are used globally and Europe has a large and growing number of active venture capital firms. Figures from 2003 showed that about three million people in the UK are employed by companies that are backed by venture capital and over half of all the business within the UK that are backed by venture capital are high tech firms.
If a company has the qualities that a venture capitalist seeks such as a structured and detailed business plan, a good management team and a good potential to exit the investment before the end of their funding cycle, as well as the target minimum returns in excess of 40% per year; they will find it easier to raise venture capital.
Venture capital also acts as a source of job creation and improves the corporate governance and accounting standards of a companies. So how does a business go about attracting the help and investment of a venture capital firm? Well it should be noted that venture capitals typically invest in businesses that have:
o A minimum investment need of around £2 million, though many smaller regional VC organisations may invest from £50,000
o An ambitious but realistic business plan
o A product or service that provides a unique selling point or other competitive advantage
o Large earning potential and offering a high return on investment within a specific time frame, e.g. five years
o Sound management expertise – although venture capitalists tend not to get involved in the day-to-day running of the business, they often help with a business’ strategy
o A proven track record – for this reason start-ups are generally not considered by venture capitalists for investment
As well as all of the initial help that a venture capitalist can provide to your business such as risk capital, management expertises and experience they also make it easier to gain funding in the future for your business.
Before you start looking for the financial help of a venture capitalist you need to ensure that your business plan is thoroughly arranged and that everything about your business is detailed and made clear to potential investors.
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