A guide to venture capital for startups

Just getting started with a brand new business in the UK? One of the first things you’ll need is capital to cover those initial overheads.

Perhaps you’re at the concept stage and need financial support developing your ideas into a viable business. Or maybe you’re up and running, but need funding to help you take that next big step and scale up.

Whatever stage your startup has reached, you may be looking into funding options - and this may involve venture capital investment.

Venture capital (VC) funding is commonly used to nurture, launch and grow startups. Major brands ranging from tech giants Google and Facebook to popular UK businesses like Innocent Smoothies and Deliveroo owe much of their early growth to venture capital investment.¹

But what exactly is venture capital and how does it work? Read on for everything you need to know as a UK startup, including the pros and cons, and the steps to securing VC funding.

And while you’re exploring financial solutions for your business, make sure to check out the Wise Business account. It’s ideal for companies of all sizes, especially if you have big plans to go global.

What is venture capital funding and how does it work?

Venture capital funding is the process of investing money into a startup or small business, usually one with potential for rapid growth. It’s specifically targeted towards new or young businesses. This is different to other investment types like private equity, which tend to focus on established firms.

VC investment supports the development and hopefully, the future viability and profitability of the new company.

Investors, called venture capitalists, pool money from multiple investors to create a fund. They then use this to invest in startups which match their target profile, usually in return for an equity stake in the business. They’ll then make money by selling shares or receiving dividends when the company makes a profit.

VC funding is commonly associated with tech startups, including those that are in the very early pre-profit stages of development.

Along with financial investment, the recipients of venture capital funding may also benefit in other ways.

Venture capitalists may also help to steer the business with strategic advice and mentorship. This can help with things like launching or marketing products, entering a new market or expanding globally.

They may also place an experienced business professional on the company’s board, as part of the funding arrangement.

Venture capital funding typically works in cycles, or rounds of investment, which are usually around 5-7 years. At each stage (Series A, B and so on), more money may be invested or new investors come on board.

What’s the difference between venture capital and angel investment?

As a brand new company, you may well be weighing up different funding options. And alongside venture capital, you’re also likely to have come across angel investment.

The two are very similar, as both are focused on early-stage businesses. But there are a few key differences, such as the size of investment and equity stake, timing of involvement and source of funds.

Let’s take a closer look:

• Size of investment. Angel investors tend to invest smaller sums, anywhere from a few thousand to a few million pounds. Whereas venture capitalists may invest up to tens of millions.
• Size of equity stake. Venture capitalists may take up to a 50% stake in the business,¹ whereas for angel investors it’s usually much lower (i.e. around 10% to 30%). This means that the startup founder can retain more control of the business.
• Timing. Angel investors usually provide funding in the very earliest stages of a business, helping to turn a concept into a viable business. They often fill a gap between funding from friends, family and personal savings, and more significant investment. Venture capitalists tend to get involved later, when it’s time to start growing the business. Their focus is on scaling up the business quickly, and helping it to become profitable.
• Source of funds. Where venture capitalists pool funds from multiple investors, angel investors often use their own personal wealth.

Read more about venture capital vs. angel investment here.

Pros and cons of venture capital funding for startups

If you’re undecided about whether venture capital is right for your startup, it’s worth weighing up a few of the pros and cons.

Pros:

• Large cash injection at a critical stage in the development of your company
• Strategic guidance and mentorship from an experienced board member
• Valuable networking opportunities and business connections
• An opportunity to grow the business faster than you otherwise would be able to.

Cons:

• Loss of control or dilution of ownership
• High expectations for the success of the company (which can be hard to live up to)
• Tight timeframes to meet growth targets.

How startups can get venture capital funding

Now, how do you actually go about securing venture capital funding?

The first thing to do is check out the various routes for finding VC investment. Your options may include government schemes, equity platforms (which match investors and startups) or approaching venture capital firms directly.

The next steps may look like this:

1. Make sure your business is attractive to VC investors - with a solid business plan, financials, plan for growth and impressive management team
2. Research the market and identify target investors - start your search online, attend networking events or speak to other startups about their VC investors
3. Develop a winning pitch - this will include details of your product/service, projected financials, market size and opportunity, background on your team, research on market competition and specifics on what you’ll use the funding for.
4. Start approaching investors and negotiate an investment agreement - you may benefit from professional advice as you do this.

And that’s it - our essential guide to venture capital for startups, covering everything you need to know.

We’ve looked at how VC works, the pros and cons for startups, and the difference between it and angel investment.

And of course, how to take those crucial first steps to securing venture capital investment for your business. Good luck!

Sources used:

1. British Business Bank - Venture capital

Sources last checked on date: 06-Feb-2025

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