Investor Venture Capital

Venture capital is most often appropriate for inventors who have made significant progress with their invention and are well on the way to turning it into a successful business. In this sense it should not be seen as a first option for funding your invention — you should have already put in your own money and that from ‘friends family or fools’, as the phrase goes, any grants that are applicable, and any ‘business angel’ investment.

How Venture Capital Works

Venture capitalists, or private equity financiers, are looking to make significant returns on the money they invest — which typically belongs to others, as part of a fund — and clearly want to maximise the upside of the risk while minimising the downside. They want to invest in a business — an enterprise rather than an idea — and will generally look to exit within around 3 – 5 years. They’ll question you in detail about every aspect of your invention, your business plan, your strategy, your competencies, and who is going to be managing the business. If you haven’t applied for a grant, they’ll want to know why. If you haven’t got watertight intellectual property protection, they’ll want to know why — and most likely will reject your proposal. On the other hand, these people are interested in new ideas, new opportunities, and new businesses, such as yours. Many come from a technology background and will be excited by innovations, and able to offer not only expertise, but valuable contacts and introductions to potential buyers and suppliers. They will be committed to helping the business succeed; they will have done this with other companies and while by no means infallible, will have developed substantial acumen.

What You’ll Need to Have Achieved

By the time you approach a venture capital firm, your invention will need already to have become a business, to some degree. Depending on the level of technology you’re developing, you will probably already have some sales, even if only in small quantities to test markets, and the injection of funds will need to be used to expand the business based on the lessons already learned: you need to have some track record of success and evidence of being able to run your business before thinking of applying.

Your product needs to offer a clear competitive advantage over rivals. The business plan will need to have been professionally compiled, probably with outside assistance, and the financial projections will have to include the venture capitalists’ exit and realistic estimates of the return they will receive.

Business Link suggests that mainstream venture capital funds will generally be looking to invest a minimum of £2 million into a business, but that smaller organisations may go down to around the £50,000 level. There are clearly no hard-and-fast rules, since every business is individual and has very different requirements and potential. The risk of investing in an ‘untried’ inventor and his or her products — even if there are already some sales — may be very different to that of investing in a proven team of experts who have yet to develop their idea and the ‘people’ aspect of the enterprise is probably as important as the ‘product’.

The Process in a Nutshell

Once funding has been agreed in principle, you and the venture capital fund may set up a jointly-owned new company, to which you will assign the intellectual property rights and the business of your existing company. You and your existing staff may then become contractors to, or employees of, the new company, along with the relevant people from the venture capital firm as advisors.

After the period of funding, the usual exit route is either a flotation (an initial public offering, or IPO), or a sale or merger with another company in the field, or even a sale to another venture capital firm or other investors specialising in the specific area of your product.