Venture capital provides finance and operational expertise for entrepreneurs and start-up companies, typically, although not exclusively, in technology-based sectors such as ICT, life sciences or fintech.
The main difference between private equity and venture capital comes down to the age of the company. Private equity will typically invest in a mature company, one which has been in operation for many years, if not decades.
Venture capital, by contrast, will invest in new companies, many, if not most, of which will not yet be making a profit, but which have a disruptive business offering with the potential of very strong growth. Businesses seek venture capital investment for a number of reasons, such as to grow their manufacturing and sales operations, enhance their product development and/or expand their business and hire new staff.
Many of the world’s best-known companies began life with venture capital funding. In the UK, this includes the likes of Wise, Moonpig and Skyscanner, and globally household names such as Google, Facebook and Skype all received venture backing in their early stages.
VCs take minority stakes in businesses, very often alongside other VCs and investors. Early-stage companies raise money in ‘rounds’ - Series A, B, C etc - which will see further investment from either the same investors and/or new ones to support the company as it grows. Many start-ups will also receive funding prior to Series A, via angel investment, crowdfunding, grants, incubators or even friends and family.
Together, these form what is known as the ‘innovation eco-system’, a funding chain that provides capital and business expertise to early-stage, fast-growing companies at different stages in a company’s life. Venture capital houses typically hold their investments for between five and seven years, at which point the business will either be floated on the stock exchange, acquired by a multinational corporation or another investor such as a private equity house.
FAQs in Venture Capital
What is venture capital?
Venture capital is a form of investment in early-stage companies with strong growth potential. The types of businesses venture capital funds invest in tend to be young and often pre-profit, and potentially even pre-revenue. Venture capital funds buy minority equity stakes in these companies and provide them with financial support and business expertise to help them grow and succeed.
What does a venture capitalist look for when making an investment?
The ultimate goal of venture capitalists is to create value through investing in early-stage or start-up companies with strong high-growth potential and with an innovative, disruptive business model or product. Venture capital firms generally, although not exclusively, focus on businesses operating in the technology industries.
Venture capital support entrepreneurs in finding and developing their business model so that they can bring their product to market, satisfy a business or consumer need and create genuine value. Since the businesses are nascent, venture capital investors will take a disciplined and holistic approach in evaluating not only the viability of the business idea, but also the motivation and background of the entrepreneur. Ultimately, venture capitalists look for bright ideas and even brighter entrepreneurs, with the desire and motivation to see their idea through to success.
Why would a company want venture capital investment?
Venture capital-backed companies are at the start-up to expansion stage of their lives and therefore have a huge growth potential. Often with little or no track record, these companies rely on venture capital backing to meet that potential. They often use venture capital funding for product development and marketing, to set up their manufacturing and sales operations and to expand their business by employing new staff.
Venture capital firms not only bring much needed investment but also a wealth of business expertise, skills and contacts to help with the development and growth of the company.
What is the difference between angel investment and venture capital?
Angel investment is also equity finance but an angel investor is a high net worth individual using their personal finance rather than an institutional fund like a venture capital firm.
Angel investment total an estimated £1.5 billion a year in the UK and will generally invest at an earlier stage in a company’s life than a venture capital firm, and invest smaller amount than an institutional VC fund, although it is common for both angel investment and venture capital firms to invest alongside each other.
Both angel investment and venture capital represent crucial funding steps in a company’s growth and exist together in an ‘innovation eco-system’ to provide capital and expertise to entrepreneurs and start-up businesses.
Visit the UK Business Angels Association website for more information.
What are the different stages of venture capital investment?
There are different types of venture capital funding depending on the maturity of the business. The BVCA defines the stages of VC investment 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 setup 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.
