What is venture capital?

What is venture capital?

Every company begins with a great idea, but the organisation will not develop and grow without access to cash. There are traditional loans to bolster your initial investment, but venture capital is a great way of funding growth.
Venture Capital Funds

Venture capital, often referred to as VC, is private equity which helps to finance start-ups and fledgling businesses that have not had time to create a strong credit rating. The way it works is that the company sells stakes in the company to venture capital funds and receives money and support along with managerial expertise.

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Companies can also access the VC fund’s network and this may well help to raise more money in the future as the company grows. These funds often have high net worth investors, wealth managers and even pension funds as investors.

UK Venture Capital

Venture capital in the UK is the second most capital-intensive and active market in the world. In 2022 it deployed £22bn worth of venture capital. A huge proportion of this money is raised from international investors from North America, Asia and Europe. During that year 3,900 venture capital deals took place in the UK with a median value of 7.1m. The largest individual deal was a staggering £745.2m.

Typically venture capital operates as follows:

.       Invests in startups.

.       May have portfolio companies.

.       Typically acquires stakes of less than 50% of the company’s equity.

.       May participate in the management of portfolio companies.

.       Invests in companies that have yet to generate significant revenue or profit.

.       Is popular in the tech sector.

Role of a Directors Personal Guarantee

Before making any venture capital investment, the investor will carry out due diligence on the company. This will be in-depth and, depending on the level of risk, the agreements will contain warranties about the company and a business plan from the founders. These investment terms will also include commercial terms relating to investment policies, fees, recovery of capital and profit sharing.

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Unlike standard loans, a directors personal guarantee is not normally required, although if any are in existence the investor will want to know the details. You can find plenty of information about directors personal guarantees online at sites such as https://www.parachutelaw.co.uk/director-guarantee.

If you think your company could benefit from venture capital investment, it is a great way of raising capital, but expect your plans to be scrutinised closely.

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