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A VC’s period of maximum influence

Mark Bower-Easton, Business Development Manager, Oxford Capital

When an entrepreneur launches a new business, two things are essential – a good idea, and enough capital to bring that idea to fruition.

In the initial stages, most of the money will come from their own savings, family members and friends. However, they will arrive at a point very swiftly where they need to seek further funding in order to turn their great idea in to a profitable business. So, where do they turn?

The main options are banks, who will likely provide funds, charge interest, and offer nothing further. Venture debt companies, who will offer the same, but will be more flexible with when and how repayments are made but provide very little else.

The main reason why so many early-stage businesses seek to team up with VCs is very simple – they have been there, done it, and can provide significant experience and benefits over and above a simple financial injection.

There are a lot of founders out there with great ideas. However, a founder can’t cover off every role within a business, they need support to build it. A VC looks beyond the initial idea. They look at strategy, the team, the potential route for exit, and provide valuable insight along the way.

Typically, a VC can add the most value from the point at which they initially invest (seed stage) right up to series B. These stages represent the highest potential for significant growth, but also the highest potential for failure. It is imperative that a founder is supported by an experienced and knowledgeable VC, not just financially, but emotionally too, so they can understand the rollercoaster that is taking an idea and turning it in to a profitable business.

When a company starts to gain traction and begins to see revenues rise it is very easy for the founder to get carried away, to expand into new territories and to launch new product lines. It can be a very risky time, and this is when it is important to have an experienced, calm head sitting around the boardroom table, and this is when a VC brings invaluable input to the discussion.   A VC will help to shape the business and make the right introductions to the next round of investors.  Shaping the capital base of the firm is a key success factor in driving value and reducing risk in the longer term.

Capturing the global market won’t happen overnight – it takes time and patience, and any sort of expansion needs to be done strategically, and only when the rewards outweigh the risks. There are countless examples of successful UK businesses expanding into mainland Europe or the US, only to stumble because their planned expansion failed, and they spent so much time and effort focusing on the expansion that they took their eye off the ball and neglected the market that made them successful in the first place. VCs have their own “skin in the game”, and as such, along with the founders, partners, employees and other investors, they do not want any business venture to fail.

So, what does this mean for investors looking to buy shares in early-stage tech companies via an EIS fund? It means that the VC and private investors motives are aligned, and that’s the key – it is a shared goal for everyone connected with the company for the business to succeed. However, having influence doesn’t guarantee success. It also doesn’t mean that EIS and VC deals are no longer high-risk strategies. All it means is that each early-stage business is given the absolute best chance to succeed.

Visit our EIS Investment page for more information on investing in eis schemes.

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