Venture capital (VC) firms seek to invest in risky business ventures by providing capital for start-up or early expansion. They evaluate business potential and pool investment funds from private sources with the aim of securing a high rate of return.
Is venture capital a quick fix?
As a form of equity finance, venture capitalists will assume a stake, as well as a vested interested, in your business. Their focus is on maximising their return, so long-term growth potential is key; investment over five to eight years is typical to give equity shares a chance to reach a good value.
What level of return is sought?
The risk profile of companies seeking VC tends to be particularly high and therefore mainstream finance is often not an option. In exchange for taking such a risk, venture capitalists expect a return of at least 25% on their investment.
Is this finance relevant to my business?
Venture capitalists are in search of high-risk, entrepreneurial companies to invest in. From providing the seed money for start-up and financing early expansion, to buying into a business and funding the turnaround, venture capitalists are about getting in promptly and making a maximum return. If your business is risky with potential, and showing good investment aspiration, it will appeal to a VC fund.
What will a venture capitalist look for?
A fundamental part of the VC investment process is to evaluate the business plan so you need to make sure it’s airtight. Some of the key criteria looked at are:
- Commercial viability of the product/service
- Strong potential for growth
- A sound management team
- A reward that justifies the risk
- The ability to meet the investment criteria
A strong business proposal is essential because a lot of venture capital requests are rejected at this stage.
What are the key considerations?
Obtaining VC funding can be a great finance option as you will gain business expertise and valuable connections as well as active support in the areas such as legal, tax and personnel.
You should ask yourself the following questions before engaging with a VC firm:
- Are you ready for the hands-on input?
- Could you benefit from the additional expertise and resources?
- Are you prepared to hand over an equity share in your business?
- Could you gain from wider business connections?
“We have recently received £500k of equity funding from a VCT following an introduction by Pegasus. They helped us to prepare the business plan and financial model and guided us through the process leading to successful investment. We would not have been able to get the funding needed without the efforts of the Pegasus team!”