Suggestions on selecting a venture capital partner
Selection Overview
Stage/type of investment
Seed
Start-up
Other early stage
Expansion
Management buy-out (MBO)
The investment process
Selection overview
The most effective way of raising venture capital is to select just
a few venture capital firms to target with your business proposition.
The key considerations should be to assess:
1. The stage of your company’s development or the type of venture
capital investment required.
2. The industry sector in which your business operates.
3. The amount of finance your company needs.
You should select only those venture capital firms whose investment preferences
match these attributes. The IVCA Directory of members specifies their
investment preferences and contact details. It also includes the names
of some of the companies in which they have invested.
Stage/type of investment
The terms that most venture capital firms use to define the stage of
a company’s development are determined by the purpose for which
the financing is required.
Seed
To allow a business concept to be developed, perhaps involving the production
of a business plan, prototypes and additional research, prior to bringing
a product to market and commencing large-scale manufacturing.
Only a few seed financings are undertaken each year by venture capital
firms. Many seed financings are too small and require too much hands-on
support from the venture capital firm to make them economically viable
as investments. There are, however, some specialist venture capital firms
which are worth approaching, subject to the company meeting their other
investment preferences. Business angel capital should also be considered,
as with a business angel on a company’s board, it may be more attractive
to venture capital firms when later stage funds are required.
Start-up
To develop the company’s products and fund their initial marketing.
Companies may be in the process of being set up or may have been trading
for a short time, but not have sold their product commercially.
Although many start-ups are typically smaller companies, there is an increasing
number of multi-million pound start-ups. Around half of IVCA members will
consider high quality and generally larger start-up propositions. However,
there are those who specialise in this stage, subject to the company seeking
investment meeting the firm’s other investment preferences. Around
15% of companies receiving venture capital each year are start-ups.
Other early stage
To initiate commercial manufacturing and sales in companies that have
completed the product development stage, but may not yet be generating
profits.
This is a stage that has been attracting an increasing amount of venture
capital over the past few years, accounting for around 20% of the number
of financings each year by IVCA members.
Expansion
To grow and expand an established company. For example, to finance increased
production capacity, product development, marketing and to provide additional
working capital. Also known as “development” or “growth”
capital.
More UK companies at this stage of development receive venture capital
than any other, generally accounting for around 50% of financings each
year by IVCA members.
Management buy-out (MBO)
To enable the current operating management and investors to acquire or
to purchase a significant shareholding in the product line or business
they manage. MBOs range from the acquisition of relatively small formerly
family owned businesses to £100 million plus buy-outs. The amounts
concerned tend to be larger than other types of financing, as they involve
the acquisition of an entire business. They tend to account for around
15% of financings undertaken each year by IVCA member companies.
The investment process
The investment process, from reviewing the business plan to actually
investing in a proposition, can take a venture capital firm anything from
one month to one year but typically it takes between three and six months.
There are always exceptions to the rule and deals can be done in extremely
short time frames. Much depends on the quality of information provided
and made available to the venture
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