Decide if a venture capitalist is right for your business

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21/09/2017

Venture capitalists (VC’s) are companies that professionally manage a pool of funds to invest in a number of different companies.

They provide funding in exchange for a share in your business and typically invest on a large scale – hundreds of thousands to millions of pounds.

For this reason, venture capitalists rarely invest in an untested idea, preferring businesses that can demonstrate rapid, consistent growth and guarantee a worthwhile return. As shareholders, venture capitalists make the real profit once the company is sold.

What venture capitalists will expect?

Before you start researching venture capital firms, you should know the type of business VCs consider a good risk. Your business should:

• Be in a fast-growing industry (for example, information technology or biotechnology)
• Be part of a large market (for instance, one that generates £1 billion or more in revenue)
• Poised to take first or second place in that market
• Have a solid and up-to-date business plan for continued sales growth
• Be supported by a proven management team that can generate high revenue
• Be able to bring in investment returns of 20% to 30% each year

In addition to these pre-qualifying questions, ask yourself how comfortable you are with giving up control of your company. Accepting venture capital funding means you'll be selling a portion of your business, which is a serious consideration for many business owners.

Find the right VC

If you're eager to seek out venture capital funding, start by researching firms that invest in your type of business or industry. One of the benefits of working with a venture capitalist is getting invaluable advice from someone who knows how to quickly grow a highly profitable business in your industry.

The next step is to find a fellow business owner or financial professional who can approach a VC. A warm introduction will go a long way to building trust and minimising a sense of risk for VCs.

If you believe in your company's multi-million pound potential, know that venture capital deals take time. Don't be put off in the beginning by how long it takes to find the right investor and opportunity.

It's worth it in the long run to be just as particular about an interested investor as they are about you. That way, you can go into any financial deal confident you're making a good decision in the best interests of your company

Resources, connections and expertise

Getting a VC on board means you’ll have access to more than just their cash. Because they’re experienced in business themselves, it’s likely that they’ll have other resources you can take advantage of, such as:

• Business connections and networking. They’ll know people from many different industries, some of whom will be able to offer you valuable advice. Tapping into the knowledge of business people who’ve successfully grown their own businesses is one of the best ways to see your own growth plans come to fruition.
• Business expertise. The right VC can add unique expertise and key management skills to your business. Since the VC has a vested interest in your success, they will want you to have the best business and management assistance possible. They also may have deep-pocketed friends who might be interested in investing in your business as well.
• Additional resources such as legal, tax and staff management experience. Often VCs can provide active support in these areas, all the more important when your business is at a key stage in its growth.

The challenges of VC investors

Taking money from VCs is not always easy going. You’ll need to be aware of;

• The possible loss of control. As VCs own part of your business, they’ll expect a say in how its run, even the right to make controlling decisions.
• The differences in goals and priorities. What you think is best for your business might not dovetail with that of a VC. Their priority is doing what’s best for the bottom line, and that’s what their decision-making will be geared towards. That’s why it’s important to make sure that all objectives are aligned before you sign on the dotted line with a VC.
• The VC’s need for a successful and profitable exit. Before taking investment dollars from a VC, consider the balance between their money now and the percentage of ownership you’re selling.

Summary

For VCs to be interested in a small business, they’re after a fast-growing industry. And they’re looking eventually for a large return on their investment. If your business does happen to be in an industry that a VC would find interesting, a solid business plan is essential for attracting them. Remember that VCs will probably expect to become involved in your business, helping making controlling decisions, so you need to happy with who you are involving in the business.

Additional resources

• Highland Venture Capital
• Scottish Equity Partners
• Entrepreneurs list of VCs in the UK