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Venture Capital

Source: BVCA Site

What is venture capital? (Key facts about venture capital in the UK)
Venture capital provides commited and long-term risk sharing equity capital. This helps unquoted companies grow and compete in an increasingly competitive market place.   It increases a company's value to its owners, without the investor taking part in the day-to-day management control. (See our list of Venture Capitalist companies with interests in Scottish funding)

Lenders such as banks have a legal right to interest on a loan and its repayment, irrespective of the borrower's success or failure, whereas the venture capital investor's returns are dependent on the growth and profitability of the business.

Owners sell some shares in their companies to the venture backer, who may seek a non-executive board position and attend monthly Board meetings.

Venture capital investors will provide a developing company with:

  • equity capital

  • experience

  • contacts

  • advice

  • substance.

    Before raising venture capital
    When considering venture capital it is beneficial to think about the following points:

  • Do you have high growth ambitions for your company?

  • Are you willing to sell some of your company's shares to a venture capital investor in order to be able to increase your stake's value to more than that of your original holding within a few years? Venture capital firms only target companies with real growth prospects, driven by a skilled, ambitious management. So if you and your company fit this description and you answered 'yes' to the questions above, venture capital certainly is worth considering.

    Sources of Venture Capital
    Investors have a wide range of investment preferences. Factors which will effect the sources you target include:

  • Amount of capital you require

  • The company's investment stage

  • Industry sector

  • Location.

    As a basic guideline there are two main sources of venture capital with broadly different investment preferences.

    Venture capital firms
    The majority of venture capital firms target firms requiring investment of over 100,000, mainly companies in an expansion stage and MBOs/MBIs. The average in 1999 was 5.6 million, although 51% of companies backed in 1999 received sums of less than 1 million. There are some specialist and regional firms which invest outside these parameters.

    Business Angels
    Business angels tend to invest between 10,000 and 100,000 in start-up and other early stage financing. The average investment in 1998/9 was around 50,000.

    How to target a source of venture capital effectively
    Raising any type of capital requires research and strategic targeting. Before approaching any source of venture capital it is necessary to have:

  • A good business plan with an executive summary

  • Determined that venture capital is suitable for your business

  • Knowledge of how much venture capital you require and what it will be used for

  • Selected for approach only those venture capital sources that meet your requirements

    Types of investment
    There are many forms of investment. The most suitable form depends entirely upon the individual attributes of a given company.

    Some of the most common types of investment:

  • Seed:
    Finance to develop a business concept, perhaps involving the production of a business plan, prototypes and additional research, prior to marketing a product and commencing large-scale manufacturing.
  • Start-up:
    Finance to develop the company's product and fund their initial marketing. Companies may be in the process of setting up or may have been trading for a short time, but have not sold their product commercially.
  • Early stage:
    Finance to initiate commercial manufacturing and sales for companies which have completed the product development stage, but not yet generating profits.
  • Expansion:
    Finance to expand an established company - to increase production capacity, product development, marketing and to provide additional working capital. Also known as "development" or "growth" capital.
  • Bridge financing:
    Short-term venture capital funding, generally provided to a company planning to float within a year.
  • Refinancing bank debt:
    Finance to reduce a company's gearing level.
  • Secondary purchase/Replacement equity:
    When a venture capital firm acquires existing shares in a company from another venture capital firm; finance to allow existing non-venture capital investors to buy-back or redeem part, or all, of another investor's shareholding.
  • Rescue/turnaround:
    Finance to enable a company to resolve its financial difficulties or to rescue it from receivership.
  • Management Buy-Out(MBO):
    Finance to enable the current operating management to acquire, or to purchase a significant shareholding in, the business they manage.
  • Management Buy-In(MBI):
    Finance to enable a manager or group of managers from outside a company to buy into it.
  • Institutional Buy-Out(IBO):
    Finance to enable a venture capital firm to acquire a company, following which the incumbent and/or incoming management will be given or acquire a stake in the business.
  • Leveraged Build-Up(LBU):
    When a venture capital firm buys a company with the aim of making further relevant acquisitions to develop a business group.
  • Mezzanine:
    Loan finance which is halfway between equity and secured debt, generally more appropriate for larger transactions. Often provided as part of a venture capital package, it can also be provided by specialist mezzanine firms.
  • Public to private:
    Finance provided to take a quoted company into private ownership.
  • Purchase of quoted shares:
    Venture capital firms prepared to take stakes and/or acquire shares in quoted companies.

    Scottish Medical and Health Care Venture Capitalists
    The following companies have investment preferences for Scottish companies involved in the Healthcare and Medical Industries. This is a guide to assist with targeting, there is no guarantee of interest.

    British Venture Capital and Private Equity Association
    The British Venture Capital and Private Equity Association is a representative body for venture capital in the UK. It promotes private equity and venture capital for the benefit of entrepreneurs, investors, practitioners and the economy as a whole. There are over 267 corporate members of BVCA, including venture capital companies, accountants, lawyers and consultants.

    BVCA is involved in many different areas of business support, including

  • Training:
    Programmes are run exclusively for members, ranging from introductory courses on venture capital to specific tuition on legal agreements.
  • Research:
    Annual analysis on venture capital investments and the resulting effects. Membership directories, The Guide to Venture Capital and research documents are produced by the BVCA. Press releases on recently aided companies are also available.
  • Events:
    Nationwide events from workshops to dinners.
  • Publications:
    A wide range of publications aimed at those looking to raise venture capital and to promote awareness of private equity to entrepreneurs.

    For further information on the BVCA refer to their website

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