Before giving a business or prospective business an injection of venture capital, entrepreneurs need to assess their current and future situation.
A company is suitable for venture capital investment if it exhibits high growth prospects, has a product or service with a competitive edge or unique selling point and has a strong management team. Currently, that translates into technology companies but it does go beyond the dot com trend.
The technology of a company should be as compelling as the potential growth of the company, but even with convincing technology, a top management team is still required.
Managers must exhibit an understanding of their market, their own unique position and how to grab market share.
Many small companies are lifestyle businesses whose main purpose is to provide a good standard of living and job satisfaction for their owners. These businesses are not generally suitable for venture capital investment, as they are unlikely to provide the high financial return for investors.
Venture capital firms are only interested in companies with high growth prospects that are managed by experienced and ambitious teams who are capable of turning their business plan into a reality.
What is venture capital?
So what exactly is venture capital? Simply put, venture capital provides long-term, committed share capital to help unquoted companies grow and succeed. Obtaining venture capital is very different from raising a loan. Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of your success or failure.
Venture capital is invested in exchange for a stake in your company and, as shareholders, the investors' returns are dependent upon the growth and profitability of your business.
There are now hundreds of active venture capital firms in the UK, which provide several billion pounds each year to unquoted companies mostly located in the UK. The venture capital firm is an equity business partner and is rewarded by the company's success, generally achieving its principal return through an exit. An exit may include selling shares back to management, selling shares to another investor, a trade sale – where the whole company is sold to another – or a stock market listing.
Generally, venture capital firms look to retain their investment in between three to seven years and during that time, they also look to generate at least a 20% return per annum.