Equity finance is the next funding source.
This is where an investor or a group of investors take a share of the business in return for an investment.
We will look at three types of Equity Funding:
- Business Angels
- Crowd Funding
- Venture Capital
A business angel can be an acquaintance, a former employer or someone you’ve found through a Business Angle’s network.
A useful Website is https://www.ukbusinessangelsassociation.org.uk/
Angels are wealthy individuals who invest in start-up and growing businesses. The investment can involve time as well as money, depending upon the investor.
Research by the British Business Angels Association estimates roughly £800m is invested every year. They reviewed 1,080 angel investments and found:
- Angels lost money in 56% of deals
- 9% of the deals generated more than 10 times the capital invested
- The average rate of return for successful deals was 22%
Angels typically invest between £10,000 and £750,000. On average, business angels in the UK invest £42,000, and each investor makes around six investments.
As well as cash, business angels can offer years of experience in the business world, not to mention useful contacts to help you grow your business, which can add real value to your business.
Depending on the business it can be best to have many investors. An example could be a restaurant. This is because the investors become customers and promoters for the business.
Schemes have been set-up by the Government to encourage investment into start-up and small businesses. An example is the Seed Enterprise Investment Scheme.
Investors get tax relief of 50% of investments of up to £100,000 per annum plus gains are not taxed.
The pros of a Business Angle are:
- Angel investors can often make quick decisions
- Good for early stage investment
- Business angles can bring knowledge and contacts to the business
The cons of Equity Funding are:
- You will need to give up a share of the business
- The Angel may want to be involved in the business and have strong personalities
Next is Crowd funding.
This is where a group of people come together to fund a business, each investing a small amount.
Examples of crowd funding sites are as Kickstarter.com and Crowdcube.com
The pros of Crowd Funding are:
- The investors do not get directly involved running of the business.
- You gain a large audience to begin with. It could be that you have 10,000 customers when launching. Investors in your venture are also fans of your business and will help evangelize your start-up adding ‘word of mouth’ marketing as an added benefit.
The cons of Crowd Funding are:
- Not suitable for very large capital intensive funding requirements beyond £1million or so and also for start-ups looking towards expanding in the growth stage through capital injection.
- You need to sell your idea and convince more than one investor in order to reach your target funding amount and it’s not a matter of getting one person to sign a check so campaigning is important in the process.
Next we will consider Venture Capital.
You’ll be hard pressed to find a venture capital or private equity company willing to invest if you’re pre-revenue or very early stage these days. They’re also not really interested in small amounts of cash – you’ve got to be looking for several million before they start to take notice.
Private equity backed businesses are among the fastest growing small businesses in the UK.
Research revealed that while most businesses took longer than originally expected to secure investment, once they received the funding, revenues grew at a much faster rate than the economy as a whole.
The most effective way of raising venture capital is to select just a few firms to target with your business proposition. The stage your company is in, the industry sector in which your business operates, the amount of finance needed and the geographical location of your business all factor in the mix.
To find the right investor a good place to start is British Venture Capital Association (BVCA) from across the UK.
For companies that are beyond the product development stage and want to initiate early stage commercial manufacturing and sales, or expand a business, a substantially larger investment may be needed.
Early-stage financing can be around £500,000; expansion financing around £1 million and management buy-outs and buy-ins around £5 million.
The process for investment whether the amount sought is £500,000 or £10 million is the same. A similar amount of time and effort is required by the venture capital firms appraising the business proposal prior to investment.
For this reason, medium-sized to larger investments are more attractive for venture capital investment, as the total size of the return, rather than the percentage, is likely to be greater than with smaller investments.
The pros of Venture Capital finance are:
- This is more suitable for larger amounts of capital.
- Venture Capital firms will take a more active involvement with the management of the business playing a pivotal role in setting targets, milestones as well as advice on how to get there since returns on their investment is a primary lookout for them.
The cons of Venture Capital finance are:
- Not likely to entertain smaller investments
- The business aims can be severely influenced by Venture Capital investors who can look for short-term wins.
- There is a major loss of control
So, that brings me to the end of the posts on business funding.
We have covered the 12 key strategies for raising money for your business.
The chances are what will be right for you will be a mixture of different sources of finance.
We hope you found this presentation useful and you now know more about funding options.
Just remember; do research before you invest your money or anyone else’s. And, test small before you bet the business!