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Venture capital

Complete guide to the in's and out's of VC funding

Venture capital is not for the faint-hearted. It involves substantial amounts of money and the venture capitalists themselves have a reputation for ruthlessness. It can, however, be worth it.

A venture capitalist isn't someone who is going to be terribly interested in your business. They see it as a vehicle for making money, reasonably enough if they're going to invest substantially. And they're interested in substantial investments; less than a quarter of a million (and that's an absolute minimum) and they generally don't want to know.

Michael Smith, firebox.comMichael Smith, founder of gadget website Firebox.com and game developer Mind Candy, found it relatively easy: "The Firebox team met their investors over a glass of wine at the First Tuesday networking event in 1999," he says. "Having a successful business behind me made it much easier to get meetings with investors the second time around when I was raising money for Mind Candy."

Venture Capitalists (or VCs) can be great as long as you are confident that your business can deliver exactly what they're after. This usually means a mix of the following:

A massive return – 20 or 30 per cent is usual

A management team with a solid track record

Commitment – in practice this often means the level of your personal investment

Key personnel tied in on mutually attractive terms – for example a software designer might be unappealing if a key engineer were able to leave with a month's notice

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The purpose of VC funding isn't fixed but they will typically be interested in offering backing for the following reasons:

Money for expansion

Money for management buyouts or buy-ins

Development and marketing costs if your company is a start-up

Clearly they want a financial return and traditionally that's their only interest. Smith believes this is changing and that more and more investors are interested in how the company is running as a whole, and several will take a role on the board – this is more like the attitude of a business angel but it's not a universal rule.


Understandably, given their financial motivation, VCs have a reputation for ruthlessness, which Smith accepts but tempers with some common sense. "It is their job to make sure that the business is worth as much as possible, they are far less likely to be emotional about it than the founders or the management team and at times that can be a very good thing," he says. "We have been very lucky with the VCs with whom we've worked because they've been supportive."

He cites his own experience with Index Ventures as an example of how VC funding should work. "They have added a great deal of value to our business in a number of ways such as recruitment advice and introductions to other firms," he says.

"Their reputation carries a lot of weight whenever we are speaking to third parties." If you should find yourself pitching your company to VCs, it's worth remembering that you're entirely within your rights to ask what sort of contribution, besides money, they can make. Introductions and connections are worth just as much as hard currency.

Finally remember it's important to a VC that you have planned an exit point. This can take a number of forms:

Sale to another company

Refinancing of an investment by another institution

A listing on a Stock Exchange

You'll repurchase the shares they bought

You'll have to make undertakings such as limiting the amount you're paid, or restricting the dividends paid to shareholders in order to protect the VC's investment, but in the right circumstances a VC investment can be an excellent boost and has enabled numerous companies to grow. In particular, think VCs if you have a proven business model in one place and want to massively expand - by opening new stores, for example. VCs are good at funding 'scaling' projects, where the risk is lower because you already know your product works, but the returns are potentially high.

What next?

Make sure you're fully prepared when you start looking for venture capitalists - we've got stacks of advice about business planning to help.

We've also got information on lots of other sources of funding, including grants, loans and overdrafts and business angels.

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