Venture Capital

A Sample List of Venture Capital Companies

Introduction

Venture Capital is one of the most common forms of finance for fast-growing companies and is typically used to facilitate the initial formation and start-up, development and expansion – both organically and through acquisition and for the purchase of companies in management buy-in and management buy-out scenarios.

Most growing businesses need additional capital and there are many sources of venture capital (also known as private equity) such as VC funds, corporate venture providers and individual angel investors. (see: Venture Capital Overview).

These are not the only sources of business finance however, and it is usually prudent to explore all options of financing the business, including bank finance through overdraft, invoice discounting & factoring, as well as specialised financing for the purchase of assets such as computer equipment, company vehicles and plant and machinery (see: Leasing Services).

Venture capital investors acquire shares in private companies in exchange for providing the cash investment required. Because of the lack of liquidity in private companies i.e. it is often a slow and difficult process to sell them, the risks associated with venture capital investing are high. Increasing the risk is the fact that venture capital investments do not normally carry an interest charge. Instead, the investor looks for a high rate of return over the medium term (typically three to five years) through capital appreciation, which is realised when the company is either sold or is listed on a Stock Exchange.

The failure rate of private companies is also high, which means the venture capitalist must look to invest in opportunities that have the prospect of growing very quickly and significantly increasing their value.

Typically, a VC will acquire a minority stake in an investee company will not normally seek day-to-day control. The exception to this rule tends to be in highly leveraged situations such as management buy-outs or management buy-ins where the proportion of funds provided by management is often small relative to the acquisition cost.

In order to help guide the companies they invest in, most venture capitalists will require a seat on the board. This serves the dual purpose of enabling the company to benefit from the VC’s experience and contacts while enabling the VC to monitor their investment and offer assistance if and when required to ensure the company reaches its full potential. Board representation and the accompanying management support provided is often sited as the most important aspect of obtaining VC funding.

Not all VC’s will invest at the same stage in a company’s life cycle; typically referred to as seed/start-up, early stage, development/expansion and pre-IPO. These are discussed in more detail in the section titled Venture Capital Overview.

Size of Investment

Traditionally, the amount of money invested in a company was closely related to the maturity of the business, its size, market share, level of profitability, perceived risks and opportunities together with the anticipated time-frame to achieve a successful exit. Over recent years, this has changed as a result of factors such as time to market with a groundbreaking product, the globalisation of many industries and markets and the infrastructure costs associated with many businesses. The phenomenon of “Land Grab” i.e. being the first in a market sector to obtain the dominant position as seen with Amazon and Ebay, often adds to the need for substantial funding earlier in a company’s life cycle than was previously experienced.

Industry Sectors

Some of the industries most actively invested in are IT Services, Internet, Telecoms, wireless communications, computer software, Internet, business services and communications, distribution and retailing. There are also specialist funds investing in sectors such as biotechnology and healthcare.