A new business venture requires good investments which the owner will not be able to shell out. In such cases the startups depend on business funding, mainly venture capital. Venture capital is the kind of business funding offered for big businesses. This is also called risk capital for the risk involved in the businesses regarding ROI. Venture capital is often procured as shares with high return expectations. The primary source of venture capital in the UK is private investors.
About Venture Capital
Venture capital is a solid economic foundation required for a newly launched venture to thrive and succeed. Venture capital facilitates every function of a business such as acquiring, divesting, revitalize or revamp. An equity stake is often procured in lieu of venture capital. The return of venture capital depends on the performance of the company. An 18th century product, the venture capital concept in the UK took roots when the rich were sought after by entrepreneurs to support their startups. The idea got widespread acceptance which saw the mushrooming of venture capital companies all over the UK in the 80s. Currently, there are more than hundred firms involved in offering venture capitals in the UK.
Venture Capital Trusts provides private fund tax incentives for an investment commitment of five years. These trusts were introduced in the UK in 1995, run by venture capital companies. The venture capitalists are careful investors who focus on high return businesses. The criteria they look for are strict including technological innovations, growth potentials, perfect business models and a skilled management team. The rigid rules make them reject a major chunk of investment requests. The illiquid investments take some years to reap benefits so the venture capitalists conduct surveys prior to any investment. The role of the investor does not stop at funding. They are supposed to give additional support through advice and see to it that the startup reaches the final IPO stage successfully.
Business Requiring Venture Capital
Entrepreneurial ventures are the preferred investment focus of venture capital due to its development potentials. The criteria for investments are zealous entrepreneurs, growth prospects and a dedicated team that turns business plans to huge returns. A term of three to seven year is the usual investment period of venture capitalists. The investment period of venture capital depends on the progress of the business. The fund sources of venture capitalists are numerous including insurance firms and pension funds. The investment options of venture capital companies are affected by the sources. The outside funds have limited life span of about a decade by the time they need to receive the ROI and its additions. To achieve the target the venture capitalists need to divest the investment or get quoted shares.
A venture capital investment process starts with a careful scrutiny of the business plan. After inferring the nature of the business the proposition of the investment is decided. This procedure will take up to 6 months. The investment process usually includes:
- Analysis of the business plan. A
well draftedbusiness plan is crucial to attractinvestments for a business. Depending on the analysis the venture capitalists agrees or rejects investment proposals.
- An estimate of the commercial success of the business to be launched.
- Is the company potential profit reaping venture.
- Can the prospective ROI meet investment?
Share Capitals used for Venture Capital
Equity shares which are usually held by family and management are one of the sources of the forms of venture capital. Other type of share is the preferred ordinary shares which hold special rights. Theses shares garner a percentage of profits or fixed dividend. These shares are either redeemable or irredeemable. Loans of venture capitals have interest attached to it and the repayment is optional. Loans are secured and unsecured in which the former is the most preferred. Loans of venture capital have the advantage of being changed into equity shares with a high rate of interest than bank loans. A well-established business often requires additional funding at the time of investment. This is often provided by private firms and other lending agencies.
Difference between venture capital firms and angel investors
Venture capital and angel investment are same in the aspect of financial support for the development of a start up with certain degree of administrative powers. The difference of these two funding sources depends on certain things which a new business venture needs to understand prior to finalizing on business funding. Angel investors are high net worth entrepreneurs who invest their own money in businesses. In venture capital, the funds come from a pool of individual and institutional investors.
An angel investor alone will not be able to support a large business, where as a group of angel investors can offer a greater amount. Venture capital scores here as it can support large business also and provide a second round funding post angel investing.
A new business funding involves seed funding, first and second round investment, mezzanine investment and finally the initial public offering. When angel investors are initial stage investors who take risks, venture capital firms focus on various stages of business growths. Venture capital investors are focused on businesses with high potentials. Venture capital and angel investment are often offered to businesses which are in the same locality. While venture capitalist like to invest in IT and other high growth sectors, angel investors look for expertise in startups.
Angel investors are easy to find since information about them are available in local resources and other contacts. It is a bit difficult to find an ideal venture capital firm since the investment involved will be huge. A venture capital firm expects higher returns than an angel investor.