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Guide to Venture Capital in the UK

Venture capital provides long-term committed capital to businesses. Venture capitalists purchase shares in growing businesses on behalf of institutional investors. Venture capital investors are tied in to the long-term success of the business, obtaining their return by way of dividends but principally by selling their shares in the business in due course.

Venture capitalists seek businesses capable of growing rapidly within, for example within five years. These businesses must be able to demonstrate a competitive advantage in a chosen market and be managed by experienced and ambitious teams who are capable of turning their business plan into reality.

Venture capital is not suitable for 'life-style' businesses, where the main objective is to provide a standard of living and job satisfaction for the owners. These businesses are unlikely to provide the financial return to make them of interest to venture capitalists.



Venture capitalists do not usually get involved in the day-to-day management control of a business but will assist with longer-term strategy. The combination of capital and experienced input from venture capital executives can help businesses to achieve their growth plans and increase value to shareholders. Although the management team may own a smaller 'slice of the cake' this can be compensated by the growth in the overall value of the business.

The British Venture Capital Association provides a detailed guide to the venture capital process, from targeting the appropriate investor to exit choices. This includes advice on preparing a business plan and venture capital terms. Their website includes a number of free publications.

Prospects are looking satisfactory for venture capitalists right now with over three quarters of them expecting no adverse of them predicting a steady business climate ahead. John Mackie of the BVCA said in a recent interview with Bloomberg "People aren't expecting a dramatic improvement over the next six months but the large majority are saying that conditions will either improve marginally or stay the same". The quarterly survey was carried out by research company YouGov and covered 147 venture capitalists at 94 companies.

Read the Budget 2006 changes to Venture Capital Trusts

In an attempt to dampen the feverish activity in the venture capital industry, the chancellor has cut upfront income tax relief on VCTs from 40 to 30% from April 6 this year. Venture Capital Trusts are funds that invest in smaller and unquoted companies.

Additionally, in an attempt to encourage long-term investment, the minimum holding period in order to claim tax relief has been lengthened from three to five years.

There is general consensus in the industry that changes were not unexpected and in fact could have been worse. The effect of the tax reduction will be to dampen demand to a manageable level as there is already a shortage of quality investment opportunities on offer for the billion or so pounds raised in the last two years. The holding period extension is not regarded as onerous as many VCTs tend to exit around five years down the track anyway.

There was some dismay, however, at the chancellor's decision to restrict investment by the size of the company. To be eligible to receive VCT funding, a company's gross asset value must be no more than £7m (formerly £15m).


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