Could venture capital be an option for your tech business?

20 March, 2018

 “It has never been less expensive to start a software company…”

(Will Bowmer, Managing Director, Lincoln International LLC)

Initial start up may be achievable for tech businesses from a combination of savings, loans from family and friends and early bank finance.  However, most  companies looking to scale-up will require some form of funding, and securing this by way of traditional bank funding may not be attractive or feasible.  “Venture capital” is therefore one of the most important sources of funding to early stage, rapidly growing tech companies in the U.K., who together attract around one-third of all venture capital money available in Europe.

Examples of successful tech companies that received venture capital backing in their early stages include Google, Facebook, Skype and Skyscanner. 

 

Venture capital 101

Venture capital provides finance and operational expertise for entrepreneurs and start-up companies in exchange for equity.  The main types of venture capital investment come from angel / corporate investors (i.e. individuals / companies who invest their own wealth), crowdfunding (online platforms that aggregate small amounts of money from a large number of individuals), or via venture capital funds, which pool together funds from various parties including institutional investors like pension funds and universities. 

The main difference between “private equity” and venture capital comes down to the age of the company in which money is invested.  Typically, private equity investors will invest in mature companies that have been in operation for many years.  Conversely, venture capitalists will invest in new, high risk start-up businesses that have the potential to offer strong growth. 

Venture capitalists usually take minority stakes in your business alongside other investors and will often participate in more than one round of fundraising (typically holding investments for between five and seven years).

 

Venture capital trends for 2018

It is predicted that tech start-ups will continue to dominate the venture capital investment market in the U.K.  Within the tech sphere, the following are some trends to watch out for in 2018:

  • Cyber security – corporate and consumer concerns regarding data integrity will fuel developments in mobile and cloud technology.
  • Consumer healthcare – the pressing need to develop more efficient medical treatments and ease access to healthcare services will drive this sector forward.
  • Robotics – making companies more efficient through the use of robotics will help streamline the way businesses operate meaning many tech companies are focusing on developing new and innovative technologies.

 

What do venture capitalists really want?

Overall, investors are looking for much more than a “nice idea” backed up by a few early sales.  Essentially, it comes down to two things: the make up of your leadership team; and the future earning potential of your business. Venture capitalists are looking for businesses with the potential to grow exponentially and those that they think will provide a good return on exit for example from an IPO (stock market float) or M&A event.   Therefore, more often than not the business idea needs to be one that appeals to the mass market – usually achieved by offering a product and /or service that is a “must have” or solves an every day problem. Although the business does not necessarily have to be offering “breakthrough” tech to be an attractive proposition.

 

For more information as to how Cripps Pemberton Greenish can assist your business to deal with its investment and fundraising needs please contact Laura Wilson by email (laura.wilson@crippspg.co.uk) or by phone (01892 506 047).

 

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