What is venture capital?

• Venture capital provides long-term, committed, risk sharing equity capital, to help unquoted companies grow and compete.
• It seeks to increase a company's value to its owners, without taking day-to-day management control.
• Although lenders (e.g. banks) have a legal right to interest on a loan and its repayment, irrespective of the borrower's success or failure, the venture capital investor's returns are dependent on the growth and profitability of the business.
• Owners will need to sell some shares in their companies (generally a minority stake) to the venture backer, who may seek a non-executive board position and attend monthly Board meetings.

Questions to ask yourself

Before considering raising venture capital you need to answer these questions:

• Do you have high growth ambitions for your company?
• Are you willing 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.

A major recent survey demonstrated that:

Venture backed companies create more jobs

Over the four years to 1998, venture backed companies increased their staff levels at a rate over three times that of FTSE 100 companies and almost 60% faster than companies in the FTSE Mid-250.

The number of people employed in venture backed companies increased by 24% p.a., against a national growth rate of 1.3% p.a. Over two million people in the UK are estimated to be employed by companies backed by investment from British venture capital.

Investors have a wide range of investment preferences which include the amount of capital you require, your company's investment stage, industry sector and location, and these will affect the sources you target. Investment stages include: seed, start-up, early stage, expansion, management buy-in (MBI), management buy-out (MBO) and rescue/turnaround situations

Venture backed companies boost the UK economy

On average venture backed companies increased:

• sales by 40% p.a., or twice as fast as FTSE 100 companies
• profits by 24% p.a.
• exports by 44% p.a. compared with a national growth rate of 8%
• investment by 34% p.a. compared with a national increase of 7%

95% of the companies could not have existed or would have grown less rapidly without venture capital

Every early stage investee company ranked the importance of venture capital as crucial.

All the companies felt that the venture capital firms had made a major contribution beside the provision of money and 56% rated the venture capital firms as superior in terms of effectiveness and commitment to their commercial banks.

Other major contributions cited by venture backed companies included venture capital firms being used as a sounding board for ideas, challenging the status quo, for their financial advice, guidance on strategic matters and their contacts and market information.

The majority of firms said that with venture capital backing their level of employment and investments were all higher than would have been possible otherwise.

How to target a source of venture capital effectively

Raising any type of capital needs research and strategic targeting. Before approaching any source of venture capital you will need to have:

• a good business plan with an executive summary;
• assessed that venture capital is suitable for your business;
• know how much venture capital you require and what it will be used for