Venture capital cash can aid growth

Feb 3 2010 by Peter McCusker, The Journal

AT a time when the banks are still not keen to lend to businesses or fund acquisitions, the availability of venture capital funding is more important than ever for any business looking to get off the ground or grow.

North East businesses should therefore welcome the recent launch of a new source of venture capital for the region, the £125m Finance for Business fund.

The Finance for Business money from One North East, the European Regional Development Fund and the European Investment Bank will be split into six funds, managed by five fund managers and available to businesses at different stages of growth and for different purposes.

In general, successful applicants will be North East based SMEs with a sound business proposition able to generate a return for the fund. This is excellent news for entrepreneurs and for the region.

In order to access these funds, understanding the typical requirements of a venture capitalist is essential. Compared to bank funding, a venture capitalist will consider and take on riskier propositions and provide funding for a wider variety of purposes, whether for starting a business or for organic growth.

In return for their investment, a venture capitalist will usually take shares in the investee, expect a higher return and take a hands-on role in the business, including the right to appoint a director to the board.

The business expertise that a venture capitalist and its network of experienced individuals will bring to your business can add real value.

The venture capitalist will also want some form of exit from its investment, whether by trade sale or flotation, within three to five years of its investment and so will be looking to fund management teams with high growth aspirations rather than individuals looking for a long-term “lifestyle” business.

Any applicant for venture capital funding will need to be prepared to answer legal, financial and commercial questions about the business. However, the key thing the venture capitalist will expect is a strong, commercially driven management team to deliver the proposition set out in a credible business plan. Some funders may expect to see managers or other shareholders invest funds alongside the venture capital fund.

In short, venture capital is a source of funding that all ambitious businesses at whatever stage of growth should consider. With the Finance for Business funds, businesses with strong management teams and a credible business plan have a fantastic opportunity to access finance when other funding can be hard to come by.

Duncan Reid is a corporate partner at Watson Burton law firm, Newcastle