What exactly is venture capital and how does it work?

Any new business start-up needs some form of initial funding, cash money to get the new “venture” off the ground. This could be for any number of things; rent on premises, equipment, furniture, vehicles, stock, staffing etc etc.

There are several methods of financing a new business; traditionally these are by personal savings or by funding the business yourself from a redundancy payment, or by getting a second mortgage on your home or a loan from the bank.

These methods are all well and good for a relatively simple business start-up, but unless you are a particularly wealthy individual, funding a larger, more complex, business start-up can be a big problem.

Is venture capital for you?

So, if your new business requires a large amount of start-up money, or you need the business to grow very quickly, then venture capital could be the answer.

You would need to prepare a pretty comprehensive and supportive business plan, detailing in full your plans and requirements together with how you foresee the business performing over the next few years.

Venture capital could be a great way to get some serious funding for your fledgling business or to grow your existing business rapidly, but of course it comes with a down side and that is usually in the form of the large chunk of equity in the business that a venture capitalist would look for. It is a high risk venture for them so they want to make sure that the potential return on their investment is good.

High risk for high return

Some venture capitalists prefer to invest in firms only during start-up, where the risk is highest but so is the potential for return and often they may bring their own experience and expertise to the table also, making even more attractive to start-up businesses.

So, if your new business needs considerable funding to get started, maybe you should consider a venture capital partner, your accountant could be able to help you. Failing that there is always “Dragon’s Den”… venture capital in action!