Where do venture capital firms obtain their money?
Just as management teams compete for finance, so do venture capital firms. They raise their
funds from several sources. 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. Most UK venture capital firms raise their funds for
investment from external sources, mainly institutional investors, such as pension funds and
Venture capital firms' investment preferences may be affected by the source of their funds. Many
funds raised from external sources are structured as Limited Partnerships and usually have a
fixed life of 10 years. Within this period the funds invest the money committed to them and by
the end of the 10 years they will have had to return the investors' original money, plus any
additional returns made. This generally requires the investments to be sold, or to be in the form
of quoted shares, before the end of the fund.
Venture Capital Trusts (VCT's) are quoted vehicles that aim to encourage investment in smaller
unlisted (unquoted and AIM quoted companies) UK companies by offering private investors tax
incentives in return for a five-year investment commitment. The first were launched in Autumn
1995 and are mainly managed by UK venture capital firms. If funds are obtained from a VCT,
there may be some restrictions regarding the company's future development within the first few
What is involved in the investment process?
The investment process, from reviewing the business plan to actually investing in a proposition,
can take a venture capitalist anything from one month to one year but typically it takes between 3
and 6 months. There are always exceptions to the rule and deals can be done in extremely short
time frames. Much depends on the quality of information provided and made available.
The key stage of the investment process is the initial evaluation of a business plan. Most
approaches to venture capitalists are rejected at this stage. In considering the business plan, the
venture capitalist will consider several principal aspects:
- Is the product or service commercially viable?
- Does the company have potential for sustained growth?
- Does management have the