What is Venture Capital?
28th November 2025
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Venture capital is a method of capital raising wherein a business receives an injection of cash from a third-party individual or company in exchange for a share of the company.
Businesses that need to generate capital can do so by issuing equity, or selling shares in the company. Venture capitalists buy these shares, making an investment that is then used to fund business activity and drive growth.
What are venture capitalists?
A venture capitalist is an individual or firm that looks for investment opportunities, offering sums of money for a share in a business with the end goal of making a return on their initial investment.
A simple example would be the dragons on the BBC show Dragons’ Den – the dragons offer investment in exchange for a share of the business that can ultimately be sold when the business has sufficiently increased in size.
Like the dragons, venture capital firms also typically utilise their connections and industry experience to drive growth for the business they’ve invested in.
How does venture capital work?
Venture capital funding typically works in a series of rounds, with increasing buy-in prices. Because venture capitalists typically look to get involved as early as possible in a company, they often invest in businesses that are not yet turning a profit – and in some cases do not even exist.
The very early initial fundraising rounds are called pre-seed and seed funding, which are for businesses that might have an exciting concept or idea, but no way of bringing it to life. Pre-seed investors don’t invest in exchange for equity, meaning that seed funding is the first official stage of equity funding.
If more funding is required (sometimes firms only require seed funding and become profitable soon after), then the business will issue equity in a series of rounds, usually Series A, Series B and Series C.
VC equity can be purchased for a fixed amount of time or an ongoing period; there are often terms and conditions whereby the venture capitalist is guaranteed a specific return on their investment.
The VC investment cycle typically ends in the investor exiting the business. This can be a range of methods, such as an acquisition, IPO or sale to another investor/firm.
Advantages of venture capital – and who can benefit
Any company can benefit from venture capital. In most cases, however, it is start-up companies or companies that have yet to establish themselves as major players in the market that venture capitalists will look to invest in.
Typically, these are businesses with high-growth potential in emerging markets, businesses with cutting-edge technology or a stand-out USP which will disrupt the market.
For this reason, a specific subset of sectors tend to be favoured by venture capitalists, including consumer tech, fintech and AI – as well as sectors such as life sciences.
Drawbacks of venture capital
For business owners, however, there are several drawbacks to the VC method of capital raising, including:
Dilution of control and equity
Selling a share of the business means a smaller slice of the pie for the business’s founder.
Addition of external KPIs and targets set by VCs
Venture capital investment often comes with strings attached, such as new, stricter growth targets and KPIs. This can be challenging for new businesses and is accompanied by increased pressure to grow.
Lengthy due diligence
VC firms typically have a long due diligence process before committing to invest in a business, which can hold things up. If capital raising is not your business’ primary goal at this stage, ask yourself if committing to this process is worthwhile.
Risk of under-leveraging
Becoming overly reliant on VC funding means your company is under-leveraged – i.e. not taking advantage of healthy debt. A high proportion of financially healthy businesses use a combination of commercial or asset finance debt and equity funding to reduce dilution of financial control.
Venture capital FAQs
Venture capital and private equity are similar in the sense that capital is exchanged for equity. However, venture capital is more geared towards emerging companies rather than established players in the market.
Furthermore, venture capitalists are typically involved with the company for a smaller period of time, having purchased a smaller share of the company. Meanwhile, PE firms that typically look for majority shares in a company are often involved for a longer period of time.
Head over to our Private Equity blog to find out more.
Typically, venture capitalists will get ROI due to receiving a share of their profits. However, most of their return is realised via their exit strategy, which involves selling their share in the company for a profit following a period of growth where their share in the company has increased in value.
Absolutely! Venture capitalists can provide resources, funds, expertise and contacts to accelerate growth. However, most VC firms are looking for smaller, less-established businesses.
So, it might be worth exploring different finance options to raise capital for your business. We offer a range of funding options varying from short-term loans like invoice and bridging finance to longer-term, tailored agreements like commercial mortgages and more.
If you wish to finance a specific asset, like machinery, office supplies or something sector-specific, why not take advantage of our dedicated asset finance offering, comprising hire purchase, leasing agreements and more.
Take control of your financial future
Unsure whether VC investment is the best method for you? Keen to retain creative and operative control over your business? Options are available.
To find out more about the best way to raise capital for your business – and find out whether VC investment is right for you – contact our team of expert advisors today.
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