Your innovative new business is off the ground with seed funding in place but to really make it fly you now need significant additional investment.
Venture capital gives many enterprises the wings they need. It is financial investment for companies that have huge growth potential but little or no track record.
It can be used for product development and marketing, setting up marketing and sales operations or employing additional people to expand the business, with venture capital firms bringing with them business expertise, contacts and skills to take your company forward.
Giving up equity
But venture capital isn’t just a loan to be repaid with interest. It usually involves giving up both a degree of equity and a share of management control: aspects that warrant serious consideration.
In return you and your team get essential funding and invaluable business expertise, and although your slice of the business may be smaller, it could soon be worth far more than the entire enterprise was before.
Attracting venture capital involves two key challenges: finding the right venture capital firm and persuading them to invest in your business. Tom Allchorne, Communications Director for the British Venture Capital Association (BVCA), says: “To find the right firm, carry out thorough research because each has its own culture, with individual personalities and specialisations. You need to be sure your investor has the right cultural fit and expertise.
“Learn what you can from people you know who are venture capitalists (VCs) or who know VCs and check out firms’ websites to see what sort of businesses they like to invest in.”
He recommends targeting just a few firms, bearing firmly in mind what stage your business is at, the sector it operates in, geographical location and how much money you actually need.
“It’s important to ensure owners, managers and investors are on the same page,” adds Tom. “At some point an investor will be looking to sell but until then you’ll be working in partnership to add value to the business.”
He adds that it’s important not to give up more control than you’re comfortable with. “A seemingly good deal might feel less favourable once matters around board control and voting rights arise. It’s imperative everyone is very clear what the venture capital investment means in real terms.”
Your business plan
A sound business plan is the essential starting point to attract an investor. It should cover your market and competitors, products and services, management team and business operations, financial projections, the finance required and how it will be used. It should identify strengths and weaknesses as well critical success factors and targets, and always be up to date.
“You need to ensure the business has a good revenue model with good segmentation and mix of earnings,“ explains Martin Brown chief executive officer of SME business growth advisor, Elephant’s Child. “A venture capital firm will look at the strength of your entrepreneurial leadership, the owners’ views on borrowing versus equity and the cultural fit and clarity about how much funding is needed.”
He adds: “The venture capital space can be complex and difficult to understand and navigate, so you have to be selective, creative and smart about choosing non-executive directors and advisors to help guide you and improve your chances of success.”
Martin recommends using a high quality adviser who is good at explaining things clearly and simply.
“This will help you both find the right VC and get them interested. For example, you could perhaps get on board an entrepreneur with a proven track record – particularly in your sector and market. That will raise a VC investor’s confidence and reduce their risk, as will having competent, reliable seed funders.”
Please note that venture capital is unlikely to be the first option for raising finance as there will be conditions attached by the fund managers to any agreement reached, which by their nature will be more onerous than those attached by a high street lender.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.