Obtaining Venture Capital or Development Capital
Where you need to finance a new project (e.g. a new product or new business) but cannot fund the cost from your own resources, you might consider seeking venture capital. With venture capital the investor shares both risk and reward in the project. He also shares in the value of the business rather than, as a lender would, receiving a return based on interest payments.
Development capital applies in management buy-out or other situations when a relatively mature business needs capital finance to undertake a particular project such as the acquisition of another company or business.
Any capital investment usually involves a package including secured loans (senior debt), loan stock or preference shares (mezzanine finance) and ordinary shares (equity).
Capital investment will normally result in restrictions on your freedom of action. Despite the risk assumed by the investor, he will nevertheless expect to have some recourse to directors if things go wrong. He may seek corporate warranties from directors and the right to assume control, remove executives and acquire management shares (cheaply) if the company does not perform to expectations.
Venture capital and development capital are available from a wide range of sources ranging from local enterprise bodies to capital investment institutions such as merchant banks. The AIM and other secondary stock markets can also be used to raise capital. The routes to providers of such funding are generally through introductions from high street banks, accountants or solicitors or through advertisements in the financial press. Training and Enterprise Councils and similar local bodies may have their own funds but can also introduce local companies to other sources of venture capital.
Merchant banks are a potential source of venture and development finance. Most merchant banks are however only likely to be interested in substantial transactions, but several smaller specialists exist who arrange finance at lower levels.
Presentation is critical when seeking this sort of finance. It is common to put your proposition to a relatively small number of chosen investors at the outset.
Professional fees when obtaining venture capital and development capital can be significant. You may require engagement letters and terms. In addition, the financiers involved expect very high rates of return. There is little point in proceeding unless there is a realistic prospect of a successful project and significant growth in value.