![]() Venture capital firms' investment preferences may be affected by the source of their funds. Most UK venture capital firms raise their funds for investment from external sources, mainly institutional investors, such as pension funds and insurance companies. To obtain their funds, venture capital firms have to demonstrate a good track record and the prospect of producing returns greater than can be achieved through fixed interest or quoted equity investments. They raise their funds from several sources. Just as management teams compete for finance, so do venture capital firms. Where do venture capital firms obtain their money? Investments in more mature businesses, where the business performance can be improved quicker and easier, are often sold sooner than investments in early-stage or technology companies where it takes time to develop the business model. The term of the investment is often linked to the growth profile of the business. Venture capital firms usually look to retain their investment for between three and seven years or more. Venture capital investors are only interested in companies with high growth prospects, which are managed by experienced and ambitious teams who are capable of turning their business plan into reality.įor how long do venture capitalists invest in a business? As a rule of thumb, unless a business can offer the prospect of significant turnover growth within five years, it is unlikely to be of interest to a venture capital firm. Such businesses are aiming to grow rapidly to a significant size. Rather, it is more about the investment's aspirations and potential for growth, rather than by current size. This does not necessarily mean small or new businesses. Venture capitalist prefer to invest in "entrepreneurial businesses". What kind of businesses are attractive to venture capitalists? There are now over 100 active venture capital firms in the UK, which provide several billion pounds each year to unquoted companies mostly located in the UK. This informal method of financing became an industry in the late 1970s and early 1980s when a number of venture capital firms were founded. Venture capital in the UK originated in the late 18th century, when entrepreneurs found wealthy individuals to back their projects on an ad hoc basis. This return is generally earned when the venture capitalist "exits" by selling its shareholding when the business is sold to another owner. As a shareholder, the venture capitalist's return is dependent on the growth and profitability of the business. Venture capital is invested in exchange for an equity stake in the business. Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the success or failure of a business. Obtaining venture capital is substantially different from raising debt or a loan from a lender. If an entrepreneur is looking to start-up, expand, buy-into a business, buy-out a business in which he works, turnaround or revitalise a company, venture capital could help do this. ![]() Venture capital provides long-term, committed share capital, to help unquoted companies grow and succeed. However, it should be pointed out the attributes that both venture capital firms and business angels look for in potential investments are often very similar. In these notes, we principally focus on venture capital firms. Separate Tutor2u revision notes cover the operation of business angels. The main sources of venture capital in the UK are venture capital firms and "business angels" - private investors. ![]() ![]() Risk capital is invested as shares (equity) rather than as a loan and the investor requires a higher"rate of return" to compensate him for his risk. In other words, capital that is invested in a project (in this case - a business) where there is a substantial element of risk relating to the future creation of profits and cash flows. Venture Capital is a form of "risk capital".
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