If you’ve just launched a promising start-up but don’t have enough funds to take your venture to the next level, you might be able to get venture capital. But what exactly is venture capital?

This guide will explain by covering the following:

●        What it is, and how it works

●        What are venture capitalists and angel investors?

●        Why entrepreneurs might need venture capital

●        What are the potential downsides?

●        How the process of applying for capital funding works

What is venture capital, and how does it work?

Venture capital (or VC) is a form of private financing that some investors offer to startup companies that show long-term growth potential. This form of funding generally comes from wealthy investors, investment banks, and other financial institutions. You can also get venture capital in the form of technical or managerial expertise to help you achieve your full potential.

For new companies, venture capital can be a great solution, especially if they don’t have access to other types of financial backing like business loans. However, a downside to venture capital is that the investors usually buy shares in the company, meaning that they own a part of it and get a say in business decisions.

What is a venture capitalist?

A venture capitalist is an investor who gives you the venture capital. Venture capitalists can be individuals or companies but are usually limited partnerships (LPs) where the partners invest in the venture capital fund. These funds normally have a committee that makes investment decisions.

Once the committee finds a company that shows growth potential, they can use some investor funds to give the startup its venture capital. In exchange, they take ownership of a portion of the company.

However, venture capitalists don’t typically fund startups from the beginning. Instead, they target companies that have become established enough to commercialise their ideas; this means that the startup has expanded to maximise gross and net profits.

Unlike banks extending loans, the main goal of venture capitalists is to make a profit. They essentially buy into these firms and nurture their growth to make as much money as possible.

The London Venture Partners (LVD) and SPARK Ventures are both examples of UK-based venture capitalists.

What are angel investors?

Wealthy investors who provide venture capital are often referred to as ‘angel investors’. These investors are often entrepreneurs themselves or former entrepreneurs who have retired from the business empires they built.

Unlike venture capitalists, angel investors are more likely to fund startups from the very beginning, before they even show signs of growth potential. Instead of pulling funds from a partnership, angel investors put their own money into business ideas that they like and want to support.

Why might entrepreneurs need venture capital?

Getting venture capital to help grow your business can have many benefits. Not only does it give you much-needed money at a crucial time, but also you will often get access to the investor’s network.

Additionally, these business experts will probably share their knowledge about how you can grow your business. You can tap into the venture capital firm’s resources, using their connections to help spread the word about your idea. Since both venture capitalists and angel investors stand to win and lose with your business, it’s likely they’ll be more than keen to help.

What is the process for securing venture capital?

The first step to securing venture capital is to send a business plan to a venture capitalist or angel investor. You’ll need to sell your business idea and essentially prove to these investors that they will benefit from giving you capital. 

If the investor is interested in your proposal, they must first perform due diligence to make sure you do everything by the book. This process includes a thorough investigation into your business model, management, operation history, and the products or services you sell.

Once they complete the due diligence, the firm or investor will offer an investment sum in exchange for equity (ownership) in your company. Investors may either provide all the funds at once or give them to you in instalments.

Once you’ve signed a deal with your investor, they may take on an active role in the company, monitoring and advising its progress before sharing more funds.

The investor typically exits the company after some time by initiating a merger (turning two companies into one), acquisition (buying another company), or initial public offering (IPO).

What are the downsides to venture capital?

While securing venture capital may sound like an excellent idea, there are some things you should consider before you decide to go for it.

It’s important to remember that both venture capitalists and angel investors have their own goals for the investment. You and your investor may not see eye-to-eye regarding company decisions, but since they foot the bill, you have to consider their opinions.

Additionally, if your company doesn’t achieve the business growth that the investor had in mind when funding your venture, they may plan an exit strategy for how to get their money back.

For example, they may exit their investments through an initial public offering (IPO), where they sell their shares in your business to public trade investors. Alternatively, they may want you to merge with another company to make more profit.

If it’s important for you to stay in control of your business and how it evolves, venture capital may not be the right choice for you.

Keep organised when it comes to financial admin 

The Countingup business current account makes it easy to keep on top of your business financial admin. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes.

You can view real-time insights into your business’s finances, profit and loss statements, tax estimates and invoices. You can also share your bookkeeping with your accountant instantly, without worrying about duplication errors, data lags or inaccuracies. Find out more here.

Related Resources

Read more