Venture Capital Investors
Venture capital investors can be categorised as:
- Friends & family - They provide the initial start-up capital, <£250,000.
- Business Angels - They provide small amounts of development capital, <£1 million.
- Venture Capital Funds - They provide later rounds including the pre-IPO round, £1-5 million.
Business Angels
Business Angels are private individuals who typically provide smaller amounts of equity finance to companies at an early stage in their development.
Business angels can benefit from the tax incentives in the Enterprise Investment Scheme ("EIS") provided certain criteria are met by the investors and the investee Company.
Business angels are usually accessed through business angel networks which are largely regional. Further information on the sources of business angel finance can be obtained on the BVCA web site: www.bvca.co.uk
A recent development is for business angels to put up Pre-IPO finance coupled to an AIM listing.
Venture Capital Funds
The BVCA web site contains details of some 70 private equity firms in the UK which are interested in providing £1-5 million of expansion stage equity finance. However, because many venture capital funds are fully invested and don't have much prospect of raising new money, the number of funds which are really in the market place is more limited.
Venture capital funds tend to specialise in a limited number of industrial sectors, e.g. biotechnology or IT. A number of venture capital funds are Venture Capital Trusts ("VCTs"). VCTs are quoted vehicles which invest in both unquoted and AIM listed companies. VCTs receive their funds from private individuals who receive tax incentives provided certain criteria are met.
Venture capital funds generally seek to make investments in later stage companies as these are thought to be less risky.
High Volatility
Venture capial investments have a much higher failure rate than investments in mature companies. However, successful investments can generate considerably higher returns than mature companies. Venture capital investors need to earn a higher return on their investments to make up for the losses which they incur on companies which fail, in order to earn an acceptable overall return on their portfolios.
