Role of the Banks in Venture Capital

Although Merchant banks in the 19th century would sometimes invest in new projects and companies, today most Venture capital is provided through independent companies and individuals.

Venture Capital began in the 18th century, when entrepreneurs found wealthy individuals to back their projects. However, it was not until the 1970s and early 1980s that a number of venture capital firms were founded and the industry became a formal one.

There are now more than 100 venture capital firms in the UK; they invest a combined total of several billion pounds each year, mostly to UK companies.

There are a few investment banks that have venture capital companies associated with them. When banks are involved in venture investments to companies, they are usually to more established companies or those more likely to subsequently raise loans or require other services in the future.

Some Venture Capital firms rely on investment bankers to source deals for them. Because of the very large number of businesses seeking venture capital, investment bankers will screen deals to find those with the most potential for investment in return for a fee.

This can be a valuable service as Venture Capital Companies need to invest in the most promising companies. This is because they have to compete for their finance from external sources, mainly institutional investors, such as pension funds and insurance companies, and to obtain investment they must demonstrate that the returns they can provide are better than investments in other types of securities.

When Venture Capital Companies invest in more established companies with very high potential growth rates, venture capital investments are often accompanied by additional debt financing at the point of investment. This can include overdrafts from commercial banks or the provision of short to medium term loans.

Where a relationship exists, Commercial and Investment Banks can also be extremely helpful in reviewing and commenting on Business Plans that help a firm to acquire Venture Capital Funding.