“Venture capital (VC) is a form of investment for early-stage, innovative businesses with strong growth potential. Venture capital provides finance and operational expertise for entrepreneurs and start-up companies, typically, although not exclusively, in technology-based sectors such as ICT, Life Sciences or Fintech.” British Private Equity & Venture Capital Association (BVCA)
“Private equity is medium to long-term finance provided in return for an equity stake in potentially high-growth unquoted companies. Private equity investments typically support management buyouts and managing buy-ins in mature companies, as opposed to venture capital which provides funding for early-stage and younger companies.”
For more information on private equity go to our Private Equity blog.
The BVCA says that 2,980 companies are currently backed by UK private equity and venture capital and 385,000 people are employed in the UK by companies backed by private equity and venture capital. So it is a major contributor to the UK’s business sector.
Other BVCA statistics that underpin the importance of private equity and venture capital include:
- Total fundraising in 2018 reached £34.12bn.
- Venture capital fundraising reached £1.09bn.
- Venture capital investment increased by 21% to £0.99bn and more than doubled since 2015.
- 698 companies were venture-backed: a 44% increase.
- Early stage investments increased 53% year-on-year in size to £480m.
- Start-up grew to £117m, which is an increase of 39%.
“The BVCA is the industry body and public policy advocate for the private equity and venture capital industry in the UK. With a membership of over 450 firms, the BVCA represents the vast majority of all UK-based private equity and venture capital firms and their advisors.” BVCA website
Venture Capital FAQs– with help from the BVCA
Qu: What is venture capital?
Ans: Venture capital is a form of investment in early-stage companies with strong growth potential. The types of businesses venture capital funds invest in tend to be young and often pre-profit, and potentially even pre-revenue. Venture capital funds buy minority equity stakes in these companies and provide them with financial support and business expertise to help them grow and succeed.
Qu: What does a venture capitalist look for when making an investment
Ans: The ultimate goal of venture capitalists is to create value through investing in early-stage or start-up companies with strong high-growth potential and with an innovative, disruptive business model or product. Venture capital firms generally, although not exclusively, focus on businesses operating in the technology industries.
Venture capital support entrepreneurs in finding and developing their business model so that they can bring their product to market, satisfy a business or consumer need and create genuine value. Since the businesses are nascent, venture capital investors will take a disciplined and holistic approach in evaluating not only the viability of the business idea, but also the motivation and background of the entrepreneur. Ultimately, venture capitalists look for bright ideas and even brighter entrepreneurs, with the desire and motivation to see their idea through to success.
Qu: Why would a company want venture capital investment?
Ans: Venture capital-backed companies are at the start-up to expansion stage of their lives and therefore have a huge growth potential. Often with little or no track record, these companies rely on venture capital backing to meet that potential. They often use venture capital funding for product development and marketing, to set up their manufacturing and sales operations and to expand their business by employing new staff.
Venture capital firms not only bring much needed investment but also a wealth of business expertise, skills and contacts to help with the development and growth of the company.
Qu: What are the different stages of venture capital investment?
Ans: There are different types of venture capital funding depending on the maturity of the business. The BVCA defines the stages of VC investment as:
- Seed: Financing that allows a business concept to be developed, perhaps involving the production of a business plan, prototypes and additional research, prior to bringing a product to market and commencing large-scale manufacturing.
- Start-up: Financing provided to companies for use in product development and initial marketing. Companies may be in the process of being setup or may have been in business for a short time, but have not yet sold their product commercially.
- Other early stage: Financing provided to companies that have completed the product development stage and require further funds to initiate commercial manufacturing and sales. They may not yet be generating profits.
- Late stage venture: Financing provided to companies that have reached a fairly stable growth rate; that is, not growing as fast as the rates attained in the early stage. These companies may or may not be profitable, but are more likely to be than in previous stages of development.
- Expansion: Sometimes known as ‘development’ or ‘growth’ capital, provided for the growth and expansion of an operating company which is trading profitably. Capital may be used to finance increased production capacity, market or product development, and/ or to provide additional working capital.
Qu: What is the difference between angel investment and venture capital?
Ans: Angel investment is also equity finance but an angel investor is a high net worth individual using their personal finance rather than an institutional fund like a venture capital firm.
Angel investment total an estimated £1.5 billion a year in the UK and will generally invest at an earlier stage in a company’s life than a venture capital firm, and invest smaller amount than an institutional VC fund, although it is common for both angel investment and venture capital firms to invest alongside each other.
Both angel investment and venture capital represent crucial funding steps in a company’s growth and exist together in an ‘innovation eco-system’ to provide capital and expertise to entrepreneurs and start-up businesses.
Visit the UK Business Angels Association website for more information
Qu: How do I find Venture Capital Funds?
Ans: The BVCA counts around 100 venture capital firms among its membership. To get a full list please go to the BVCA;s Member Directory here.
- THE BUSINESS FINANCE GUIDE (BRITISH BUSINESS BANK)
- GUIDE TO PRIVATE EQUITY (BVCA)
- UK BUSINESS ANGELS ASSOCIATION (UKBAA)
- INNOVATION NATION
“If your company’s been trading for less than 2 years, with less than £200,000 of assets, you may be able to attract investment of up to £150,000.”
“Schemes for qualifying companies or social enterprises with fewer than 500 employees who issue new shares or securities in their company.”
- How venture capital schemes work
- Who can apply
- Trades that qualify
- Limits on the money you raise
- The Enterprise Investment Scheme (EIS)
- The Seed Enterprise Investment Scheme (SEIS)
- Social Investment Tax Relief (SITR)
- Venture capital trust (VCT)
Venture Capital Schemes- Tax Relief for Investors– HMRC Guidance
“Information on the tax relief available when you invest, as an individual, in companies that qualify for venture capital schemes.”
- Income Tax relief
- Capital Gains Tax relief
- When you will not get tax relief on your investments
- Shares that qualify for tax relief
- Loans that qualify for tax relief
- When you can sell your investment and get tax relief
- When to claim your relief
- How to claim relief
Seedlegals.com (not a crowd funding site) provides proactive and cost effective support to entrepreneurs in financing their business start-ups.