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Wednesday, 12 February, 2003, 19:03 GMT
What do venture capitalists do?
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Some companies can't raise cash on the markets
Venture capitalists often get a bad press.

When working on controversial buy-outs, they have been accused of asset-stripping and looking to make a fast back without caring about the future of employees.

And when jobs are at risk, emotions inevitably run high.

In practice, there are many venture capitalists who will protest the assertion that all they want is to make a quick buck.

They say that it's all about making a firm into a going concern, and cite the many companies who have prospered since they first shook hands with a venture capitalist.

So what do they actually do?

The confusion starts when people talk of asset stripping in the same breath as of venture capitalism.

Venture capital firms are pools of capital, usually organised as a limited partnership. The money comes from private investors or institutions like banks and pension funds.

Venture capitalists typically put this money in small, fast-growing companies who cannot raise funds on the stock market.

They can invest in companies at any stage of the business cycle.

In return for this medium or long-term financing - usually for five or seven years - the investors receive a share of the company's equity.

Management role

The venture backer may also seek a non-executive board position and attend monthly Board meetings.

They provide far more than a cheque, stepping in with experience, contacts and advice when required.

About 50% of venture capital financing are for expansion, specifically to help existing businesses to grow and compete, the British Venture Capital Association said.

For some companies, that cocktail of cash and advice was just what they needed.

Some well known UK companies were built with venture capital, for example, National Express Group, Trafficmaster and Whittards of Chelsea.

In the US, companies such as Apple, Federal Express, Compaq, Sun Microsystems, Intel and Microsoft are famous examples of companies that received venture capital early in their development.

In other cases, pride has come before a fall.

In the 1980s, management buyout funds competed to gain control of Magnet, a supplier of kitchens and bathrooms. The winning bidder had no more success managing the company than the old management.

UK statistics

Almost three million people in the UK are employed by companies backed by venture capital, according to the British Venture Capital Association.

Many of these companies - and the jobs they provide - might not be in existence without the injection of cash and guidance venture capitalists provide, the BVCA said.

Venture capital is usually concentrated in the newer fast growing sectors of the economy, such as the internet, and over half of all funds invested in the UK were in hi-tech firms.

These fast growth sectors often have few other alternatives to make their business plans a reality.

The UK venture capital industry has invested almost 50bn in up to 23,000 companies since 1983.

And it is still growing, with the total funds invested by UK venture capitalists in 2001 rising to 12bn, up 36% from the previous year.

See also:

16 Mar 00 | Business
16 Mar 00 | Business
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