Venture Capital is a form of "risk capital". In other words, capital that is invested in a project (in
this case - a business) where there is a substantial element of risk relating to the future creation of
profits and cash flows. Risk capital is invested as shares (equity) rather than as a loan and the
investor requires a higher"rate of return" to compensate him for his risk.
The main sources of venture capital in the UK are venture capital firms and "business angels" -
private investors. Separate Tutor2u revision notes cover the operation of business angels. In
these notes, we principally focus on venture capital firms. However, it should be pointed out the
attributes that both venture capital firms and business angels look for in potential investments are
often very similar.
What is venture capital?
Venture capital provides long-term, committed share capital, to help unquoted companies grow
and succeed. If an entrepreneur is looking to start-up, expand, buy-into a business, buy-out a
business in which he works, turnaround or revitalise a company, venture capital could help do
this. Obtaining venture capital is substantially different from raising debt or a loan from a lender.
Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the
success or failure of a business . Venture capital is invested in exchange for an equity stake in the
business. As a shareholder, the venture capitalist's return is dependent on the growth and
profitability of the business. This return is generally earned when the venture capitalist "exits" by
selling its shareholding when the business is sold to another owner.