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What is venture capital? A guide for small businesses

4-minute read

What is venture capital? A guide for small businesses
Conor Shilling

Conor Shilling

3 September 2021

If your small business is growing, you may need investment to get to the next stage. Venture capital is one of the most common types of investment and may be suitable for your business.

Find out the pros and cons of venture capital funding, how to get investment, and the difference between private equity and venture capital.

What is venture capital?

The venture capital definition is private equity funding from a group of investors given to a growing business.

Venture capitalists tend to target businesses with high growth potential, the ability to scale, or a unique product or service. These are also usually businesses with a proven track record, rather than startups that haven’t launched.

Venture capital (VC) funds are made up of experienced investors and businesspeople. This means that as well as providing cash for growth, they’re able to help give strategic advice to the companies they invest in.

What do small businesses use venture capital funding for?

Businesses can use venture capital funding for any reason, but some of the most common include:

  • hiring new staff
  • expanding manufacturing and sales
  • developing new products
  • increasing marketing spend

The average venture capital investment is between £1 million and £2 million, although some funds inject smaller amounts from £50,000+.

Venture capital investment is made across a number of years (typically five to seven), with the aim of making a return as the company grows.

After VC investment, growing companies can target other types of funding, such as ‘Series A investment’.

What is a venture capital firm?

A venture capital firm raises the funds to invest in your company. The money is sourced from institutional investors and private investors.

A venture capital firm’s fund is likely to be split across a number of businesses in different sectors – this is known as its portfolio.

What is a venture capital trust?

A venture capital trust is a type of VC company which is listed on the stock exchange. They raise money from investors and then invest it in a range of growing companies with the aim of getting a return.

Venture capital trusts receive a range of tax benefits from the government because of the support they offer small businesses.

Advantages of venture capital

If your business gets venture capital funding, it means it has strong potential for fast growth and profitability. Here are some of the other benefits:

  • the business experience and contacts of your venture capital fund can help you grow
  • you could receive millions of pounds in funding with no cost to your business
  • VC investment is generally made over five to seven years, giving your business time to grow and mature

Disadvantages of venture capital

As with most types of private equity funding, the downsides usually relate to giving away part of your business in exchange for investment.

These are three of the potential disadvantages you’ll need to think about:

  • giving away a stake in your business, as well as board seats, can be tricky for entrepreneurs
  • venture capital funds are companies looking to make a profit, so you could lose some control if things aren’t going to plan
  • it’s a competitive market, so it can be hard to get VC funding or could take a long time

What’s the difference between private equity and venture capital?

Venture capital is a type of private equity funding. In the UK, any type of investment in a private company is known as private equity funding.

Some other common types of private equity funding include angel investment and buyout or leveraged buyout.

Business owner researching

What’s the difference between an angel investor and venture capital?

Angel investors are individuals (or a small group) with a bigger focus on startups and companies that have identified a gap in the market, hoping they could be the next big thing.

They’ll be looking for a stake in your business (around 10 to 25 per cent) in exchange for their cash.

Angel investors are different from VC funds as they’re not companies, the investment is likely to be smaller, and they don’t tend to target established businesses.

Read our angel investors guide for insight on how to prepare for angel investment, including documenting your expected turnover and investment target.

How do I get venture capital funding?

You’ll need to do plenty of networking to get to know venture capital firms and what they’re looking for.

When it comes to getting investment, you could approach a VC or they could approach you. After initial conversations, it often takes up to a year to strike a deal.

Once you’re in touch with a VC firm, you’ll need to pitch your business to them. They’ll want to see an in-depth business plan and understand your credentials as an entrepreneur.

The British Business Bank has a useful venture capital checklist, which includes tips on preparing for the pitch and thinking ahead to the deal.

We’ve also got guides on how to write a business plan and how to write a business proposal.

Questions to ask yourself when choosing a VC fund

  • is the VC interested in your product, or you as an entrepreneur?
  • what kind of business strategy support can they give you?
  • what stake in your business and how many board seats do they want?

Is venture capital investment right for my business?

You’ll need to think about how much money you need, and the current status of your business.

For example, if you’re a startup with a limited record of success and looking for a smaller investment, you may be better suited to crowdfunding or angel investment.

However, if you’re looking for a significant investment, and your business is disruptive with growth potential, VC funding could give you the cash injection you need to get to the next level quickly.

At the same time, to accept VC funding you need to be willing to give away a minor stake in your business and have new members on your board.

Seeking venture capital investment is complicated, so you should speak to a financial advisor or sector expert before you get started.

Do you have any unanswered questions about venture capital investment? Let us know in the comments below.

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We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer

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