What is venture capital in business?

What if you could grow your business with no debt and gain access to entrepreneurial experts at the same time? Venture capital financing could be just the funding strategy you’re looking for.

Learn more about what venture capital is in the business world and how you can secure it for your business, including:

• What is venture capital in business?
• How can I get venture capital?
• What’s a good share price for my business?
• What if I need more money to grow my business?
• Track your capital more efficiently with Countingup

Venture capital is a type of business financing that allows you to secure funding to grow your business. It works by exchanging equity (or ownership) in your business for a certain price: you get money to fund your growth and investors get a piece of your future profits as a return. For this reason, venture capital (or equity financing) is only a funding option for limited companies and not sole traders.

As there is an exchange of money, this is where the term ‘capital’ becomes relevant while ‘venture’ explains where the capital comes from. Venture capital is unlike other types of financing options your business has. Principally, while venture capital agreements still provide your business with money (just like business loans or government grants), venture capital agreements are also free from debt obligations. This means your business can be more flexible in who it manages its money in the future.

As an example, business loans require that you pay them back regardless of how well your business does month to month. In contrast, dividend payments (which operate in a somewhat similar fashion as debt repayments) are only issued by your company to its investors if the company does well enough to do so, and shareholders agree to the issuing.

And so, if your business does poorly across part of the financial year, or you and your investors are completely focused on business growth, you can forego issuing dividends as repayments to shareholders and reinvest every penny for even more growth.

While it’s not always guaranteed, some venture capital arrangements also provide small businesses with expertise in the form of their investor(s). Some investors may want a directorship or are simply open to regular contact for business advice and help. From this, you can learn from some of the best entrepreneurs available and your investors can make sure their investment (your company) is on the right track.

There are a few different ways you can source venture capital for your business. Some of the more popular ways are applying to venture capital firms, attending start-up mixers or trade shows, or finding private investors on LinkedIn. Similarly, you could also look for an angel investor, a type of venture capitalist who seeks to invest in companies with potential as early as possible and who could help you save on equity. 

Whatever you choose, you’ll need to make sure you have a well-prepared business proposal. You need to be able to demonstrate your value, your expertise, and the opportunity your business offers to investors in order for them to be interested. In turn, investors will likely want to perform due diligence on your business to verify your claims before they invest. Prepare yourself the right way and read our articles:

• How to find the right investors for your business
• How to present a business plan to potential investors
• How to write an elevator pitch

You may also wish to speak to your accountant and lawyer to understand if you need to restructure your company to do multiple rounds of venture fundraising or manage the voting rights throughout. 

As you’re looking to offer part of your business for sale, what’s a good price to sell it for?

There isn’t an exact science to it. While your equity figure should be a realistic reflection of the value your business holds and grounded in your business’s current assets, there is also some room for speculation. In particular because investors are concerned about future growth and they are more open to inflated business evaluations.

This still means you have to provide well-researched thoughtful proposals. Many investors will turn down your proposal if your expectations for funding are too high. You need to be able to instil confidence in your abilities to grow your business to what you claim it’s worth. Learn our 8 must-know measure financial metrics for small business owners to start building your own financial literacy and business confidence.

It’s worth noting that venture capital isn’t your only option for financing limited companies. Debt financing (using the bank loans and government grants we mentioned previously) is a perfectly common and acceptable way of growing your business, and even comes with the benefit of full ownership over your future profits.

If you’d like to learn more about capital and growth management between debt and equity financing, read more in our article How to calculate cost of capital.

Whatever route you choose to grow your business, managing your investment capital is a critical task for new business owners, which is why it needs proper time and attention. Join the thousands of other UK business owners using the Countingup app to save time on your financial admin and focus on using your venture capital and business loans more effectively. 

Countingup is the business current account and accounting software in one app. It automates time-consuming bookkeeping admin for self-employed people across the UK.

With automatic expense categorisation, receipt capture tools and cash flow insights, you can confidently keep on top of your business finances and save yourself hours of accounting admin, so you can focus on doing what you do best. Find out more here and sign up for free today.