Between $450,000 and $90m
Until exit (typically 5 years)
A minority stake in your business
Up to 6 months
High-growth businesses destined for sale or public listing (IPO)
Venture capital is financing given to start-ups and early-stage businesses. Venture capital funds look to invest larger sums of money than business angels – typically more than $450,000 – in return for an equity stake. Venture capital is most suited to high-growth businesses with long-term growth potential, i.e. those destined for sale or public listing (IPO).
Let’s say you’re a start-up – or a new business with a limited operating history (i.e. under two years) – and you need capital. Maybe you need it to expand, to fund a management buyout or buy-in, or to develop a new product. Venture capital (VC) funding might be your best or only option. A VC fund, also known as a Limited Partnership, usually partners with institutional investors (e.g. pension funds, insurance companies and family offices) to provide finance to companies with high growth potential, in return for an equity stake.
As with all equity finance, the appeal (in contrast to a loan or any debt financing) is that you won’t have to pay interest – nor will you have to repay any capital. The downside is that you give away equity to your investors, who also get a say in company decisions.
The VC mindset is similar to that of business angels (private investors) – both are interested in businesses with high growth potential. Investors who are impressed enough by an entrepreneur’s idea or company to give them a VC investment expect to receive a high percentage return if the business succeeds.
You can think of venture capital is a subset of private equity. VC firms tend to invest in promising start-ups that need growth capital and business expertise to take them to the next level, whereas PE firms prefer to invest in established businesses that require a cash injection or a new strategy to move them forwards.
Both VC and PE firms share the same aim: to improve the companies in which they invest before selling them on at a profit (typically to a strategic buyer or by IPO), generating good investment returns for their own institutional investors.
The Australian Government has a range of venture capital programs designed to attract domestic and foreign investment. This investment is vital to help innovative Australian businesses commercialise technologies and turn research into new products.
As well as access to capital, these programs give Australian businesses access to skills and experienced people, improving their chances of success.
There are strategies businesses can use to increase their likelihood of obtaining venture capital, whether from the Australian government or the private sector.
Domestic and foreign investors can take advantage of a number of tax benefits, depending on the program they choose. Tax incentives for fund managers are also available.