How does a venture capital firm invest?

How does a venture capital firm invest? Venture Capital funding – listed below are some commonly asked questions regarding the topic.

What is the role of venture capital?
Venture capital provides a source of funds through investment, usually in companies or projects that are start-up or at a very early stage of product development. These projects and organisations usually would not attract sources of finance such as loans and could not raise money in the major public stock markets (such as the London Stock Exchange). Limited equity capital is available to some early companies via AIM or Ofex markets.

Who are the venture capital companies?
Venture capital is an international activity but the UK does have a well-established venture capital sector (the British Venture Capital Association) that is one of the most active in Europe, particularly in biotechnology and healthcare. Major firms involved in the biomedical sector include Merlin Bioscience, 3i, Abingworth, Advent, Schroder Ventures and Apax.

How does a venture capital firm invest in a project?
The usual mechanism for venture investment is through the formation of a new company. The company will own rights to the intellectual property (patents etc.) that stem from earlier research activities and will probably employ or have consultancy contracts with the scientists behind the research work. The venture capital firm buys a shareholding in the new company, thereby providing the company with money for development work. Frequently, more than one venture capital firm may invest in a company, even at an early stage in its development.

Venture capital firms are often instrumental in ‘assisting’ the founders to develop their business. This may involve a range of activities including:
Strengthening and broadening the management team by recruiting individuals with specific expertise,
Working with the management team to raise further finance from other investors or by listing on a stock exchange,
Combining specific technologies or projects to expand the company’s portfolio.