6 things you need to know about venture capital funding

By Jake Martin

3 min read

New businesses today have more funding channels open to them than ever before. The internet has made new approaches like crowdfunding a reality, but often the tried-and-tested approaches remain the most popular.

Venture capital is still one of the primary sources of funding for innovative, high-growth companies, so if your business fits that description, it’s about time you started thinking about the way VC funding could help.

1. Venture capital is a high-risk investment

Venture capital is a type of private equity, usually provided by venture capitalists or finance houses. It’s a high-risk investment, given that return is dependent on the company flourishing. For that reason, venture capitalists will usually invest in companies with a recent record of success or a particularly innovative business proposition. Given that risk, the investor will expect quite a lot in return.

2. Think of it as taking on a new business partner

Rather than a straightforward loan a company might obtain through a bank or similar provider, venture capital is an equity investment. This means that the venture capitalist will acquire some ownership of the business in the form of shares. On the one hand, that dilutes your ownership of the company and you essentially take on a new business partner. On the other hand, there are no repayment terms to worry about, and venture capitalists will often take an active role in running the business, potentially lending valuable expertise.

3. There are big sums of money involved

Venture capitalists are looking to make strategic investments which provide potential for big returns and therefore investment amounts are typically high. Investments would usually start from £1m and tend to get bigger during later stages of the funding process. It’s worth reiterating that if you don’t have big plans for your business, VC funding might not be for you.

4. The market you’re in makes a huge difference

Many venture capital firms will specialise in specific sectors, with preferences for areas such as technology, since the innovative nature of those fields provides novel business opportunities. More mature, well-established markets, where it’s often much harder for smaller companies to steal share from market leaders, make for less attractive VC investment opportunities.

5. You and your business plan will be scrutinised

Prospective investors will obviously want to pore over your business plan, but they won’t stop there. They’ll want to know about you, your background, your business credentials and who’ll be running the company’s day-to-day operations. Since VCs will often give you their time and expertise as well as their money, they’ll want to know a lot about who they’re partnering up with.

6. You’ll need to have something the competition don’t

With a technical understanding of the markets in which they operate, VCs will be constantly on the look-out for revolutionary products and services that will change the industry landscape. Before pursuing VC funding think about your unique selling point: what are you doing that sets you apart from the rest of the sector? Attracting VC will mean demonstrating that your company has the potential to change your industry.

All of this should make it fairly clear that venture capital is very tough to obtain and might be unsuitable for the average business. For the right company, though, it can make a world of difference, and the expertise that veteran investors bring with them can be a huge leg-up.

For more help with the funding channels available to your business, and whether they might be right for you, visit our finance resources page or find out more about starting your business via our Small Business Centre.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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