How To Raise VC Funding

What have international business giants like Google, Facebook, Apple and Twitter got in common? The answer: they were all struggling companies that got their crucial jump-start when venture capitalists took a punt on them.

So what is venture capital? How does it work and should you be looking at it for your startup or small business when other possible funders have walked away?

First thing to know is that venture capitalists want value for their money –a ten times return over five to seven years is a good rule of thumb - plus a very strict time-scale.

The reason is that a VC fund usually raises money from a group of investors for a specific period, during which time it invests in perhaps ten or 20 companies hoping to grow them to the point where it can sell its stake for a large profit. Then the fund is liquidated and the investors get their money back with, hopefully, a good return.

Venture capital peaked at more than £100 billion during the boom years of the early 2000s but still amounts to more than £20 billion a year. Much of it goes into software start-ups, followed by biotech, energy and pharmaceuticals.

As the name suggests, venture capital can be risky – up to 40 per cent of VC-backed businesses will fail and 20per cent produce high returns.

According to financial consultant Andrew Blackman not only can you raise large amounts of money from venture capitalists but you can go back and ask for more – Twitter raised $6 in 2007 and went back for another $55 million in the following two years to fund its phenomenal growth.

*“And unlike loans, VC capital funds don’t have to be repaid and you don’t have to give guarantees using your own assets. Of course that doesn’t mean it’s a free handout – if things don’t work out you’ll find yourself under serious pressure to deliver some kind of return,”* Andrew Blackman says.

A word of warning: Your business could be profitable and well-run with good long-term prospects and still not interest a venture capitalist unless it can deliver spectacular growth in a specific time. Generally that means high-tech firms in the early stages of development with very good prospects.

Remember, too, that when you sign a VC agreement you lose a share of your company –usually a minority stake – but a venture capitalist could still take up to 25 per cent of the company if you become successful.

And venture capital firms don’t just write a cheque and leave you to run the business but often require a place on the management team or the board of directors. Which means that in future you will have to take account of the views of outsiders.

But if you still think VC could be the way to business success it’s worth talking to the British Venture Capital Association (www.bvca.co.uk) and professional advisers such as accountants and solicitors are can give guidance and approach possible venture capitalists. Fees are usually around five per cent of the money being raised – a hefty sum but probably worth it if you have a skilled advisor to guide you away from possible VC pitfalls.

As Andrew Blackman points out: “Venture capital is not right for every company. Many businesses simply don’t have the explosive growth potential that VC firms are looking for. And even if you are eligible, you may still eventually decide it’s not for you.”