Venture capital is a disruptive innovation in the business and it has changed tremendously the way we do business by changing the dynamics and instruments of conducting a business. Venture capital has transformed the business fads and multiplied the chances of the success of a business.
Since World War II, many businesses were able to make a huge impact on the lives of people by receiving huge funding from world-class venture capitalists as they had not enough resources to grow their business. Moreover, the lack of access to managerial and financial expertise was also a hurdle in their trajectory towards the growth of their business.
As a result, many adventure capitalists, venture capitalists, and angel capitalists made their way into the success of small but high-growth potential businesses. Startups have become a fashion in the business world due to the high growth nature of many new and innovative business ideas in need of financial support. According to one research, there are 327 active venture capital firms in the UK and this number is growing exponentially with every passing year.
In this blog, we will provide you a holistic guide on what venture capital is and why it is important? Moreover, we will discuss the process of venture capital in the UK briefly. So, let’s get the ball rolling!
What Is Venture Capital?
When a business is in the initial stages of growth and needs some funding to carry on the growth of the business, then the funds can be raised using different methods.
- Family & Friends
- Angel Capital
- Venture Capital
However, our focus will remain limited to only venture capital. So, let’s discuss what venture capital is!
Venture capital is a way to obtain funds from individual funds or a group of investors who seek a certain percentage of equity in your business with an exit plan. If your business thrives with sustainable growth prospects, you have to lose some part of your ownership as the investors will take a huge chunk of control in return for their funds.
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Venture capital is provided to fledgling and emerging businesses with a high potential of growth. The investors provide funding after a critical evaluation and you will get all the funding in just one round or in different rounds.
In the UK, many innovative and feasible startups have been launched with the help of venture capital. The UK ranks fourth on the global chart of the startup ecosystem with favorable funding processes. The UK startup companies have earned $115 billion via venture capital.
Why Venture Capital Is Important For Your Business?
Venture capital helps businesses expand and carry their functions seamlessly by getting financial, managerial, and technical support from professional and experienced capital investors who seek to invest their money in the growing businesses to merge these businesses into their own business or to get ownership of this business.
So, if you have scarce monetary or managerial resources and have no idea how to expand your business while you have a pitching business idea with high-return prospects and potential to flourish in the upcoming years, then venture capital is ideal for you.
To obtain venture capital, you have to go through the following steps:
- Submit a solid business plan
- Due Diligence by Investors
- Pledge for equity or active participation
- Exit Plan
- Acquisition & Merger or Initial Public Offering (IPO) of the business
Usually, venture capital firms take interest in tech firms, innovative businesses, and financial companies with the potential to grow. The main reason behind their investment in these spheres is to merge these firms in their own business or list the company on stock exchanges at the end of the funding.
So, if your business is in early stages of growth and it has the potential to leverage up, you must prepare a plan to get venture capital from renowned investors to further expand your business. However, you are liable to lose ownership in your business partially. As a result, the investors will participate actively in the decisions by becoming a member of the Board of Directors.
Difference Between Angel Investors and Capital Venture
Some people get confused between an angel investor and a capital venture when they decide to obtain funding for their business. An angel investor is an individual investor who provides funding to a business in the same industry of his business.
On the other hand, a capital venture consists of a pool of investors who invest in many projects to get equity in that business after the funding process is complete.
Venture Capital Funding Process
Venture capital funding process in the UK contains different rounds and stages. The basic stages are as follows:
Seed Funding Stage
In this stage, the businesses attempt to get funding from the potential investors by representing their business plan and convincing them their business has growth potential. Small-scale business with new products starts their funding from this stage.
The second stage comes with the preparation to launch a product. The investors provide huge sums of cash to make research and development and market the product.
The First-Stage Funding
The first-stage funding is the most exciting stage in the venture capital process where a product is about to launch with expanding marketing facilities. As a result, the business calls for more investment funds from the investors.
The Expansion Funding
Product diversification and market research after the business is experiencing more demand and has potential to grow further requires funding for the business expansion. It is one of the most favorite of the investors where the business is gaining profits with a high margin of profitability.
The Bridge Stage
The bridge stage is the last stage and a stage the investors were investing their funds into a company. It is a stage when a business is mature enough to sustain its business activities and have become commercially viable. The company will be merged or listed as an IPO on the stock exchange.
On the other hand, there are other stages where a scalable business receives funding in three different rounds. These rounds are for those businesses which are already profitable but need more funds to carry out their business research and development and other activities.
Series A Round
Series A funding is ideal for businesses with a track record of earning higher returns and a potential to scale up their business within 18 months. This funding is for the businesses with their products already launched. The investors provide a huge chunk of investment between 2 million to 15 million. However, they also ask for as large equity as 20% of your business.
Series B Round
After the product launch and ensuring to scale their business successfully, the investors provide more funds to compete with larger and established firms in that industry and expand research and development to fetch more market share.
Series C Round
Finally, series C round is the final stage of a venture in which the investors obtain the acquisition or merger of a business or list it at the stock exchange. As a result, the funding rounds come to an end with sustained growth and fully established business.
Finally, if a startup is novice, it can go for a seed funding. On the other hand, a startup with a potential to scale their business can opt for Series A round as it will help an already established business grow instantly. So, venture capital helps businesses spread the risk across many investors. But, the companies and startups have to lose autonomy and sovereignty in the decision-making process by the venture capital investors who will get equity in your business. Startups have raised billions of rupees in the UK. So, you can join this rising wave of funding the startups by providing an innovative and viable business idea. So, you have learned about ‘what is venture capital?’ When are you going to start a startup company in the UK?
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Disclaimer: This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Search online for an accounting expert at Accounting Firms instantly.