At some stage in the development of any business that wishes to really grow and prosper, the founders, shareholders or senior management of the business will decide that they need to raise external funding in order to achieve their ambitions. The problem, however, is that many know what they want to achieve but they are not so sure how to achieve it. In this article, Kevin R Smith, the CEO at BOOM & Partners is an entrepreneur and a business and finance consultant with over 35 years’ experience in helping entrepreneurs and directors to grow their businesses, will share his expertise. He is a Mentor at the UKs largest Entrepreneur Accelerator and has broad experience in all sectors, but has particular strengths in Women in Business and Fintech, and partners business owners on their journeys.
The essence of raising equity finance is simple – you sell part of your company in exchange for an investment into the company. Remember though that to attract any investor you will need a real business and not just dreams, and that that business must have a real and supportable valuation. Your business plan and investment deck must be clear, compelling, and detailed but concise, and you must be able to demonstrate that you or your team know all aspects of the business and can defend the assumptions that you have made.
It is of course imperative that you think long and hard whether you really do need to raise external finance or not, and that will depend on many factors including what type of business you have and what are the risks to not scaling quickly. Having decided that you want to raise external funds, what are the different options for raising equity investment?:
- An Individual or HNW. This can be the easiest but only of course if you know some wealthy people or can get some warm introductions! Maybe your Mentor or other contacts can help. If an individual already knows the sector or can instantly see the potential of your product or service then they will often make a quicker decision than obtaining funding in other ways. Having just one investor that is not a professional investor though can easily lead to a lot of wasted time and effort in answering too many questions from a potentially ill-informed, large minority, shareholder. The very big benefit though can be if this is ‘smart money’ – that is an investor that knows the sector and brings much more than just money.
- Angel Network. This is typically a group of small serial investors that look to invest directly into early stage businesses. Often, each individual would invest between £10,000 and, say, £50,000 and the network would secure the whole funding round in a syndicate. The network provides the opportunity for a group of separate companies to do ‘Dragon’s Den’ style pitches to investors at an event and would charge a fee in the region of 7% of monies raised although this can vary considerably depending on the total amount raised and the level of services offered. The benefits of this option is that you are put in front of a range of serious individual investors but the downside is that you will end up with a number of small investors that you must then manage going forward and this might actually be even more time consuming than dealing with one larger investor.
- Crowdfunding. This type of funding is relatively new but now represents a large part of the market for early stage fundraising. In theory this can be for either debt or equity but to raise debt often requires three years’ worth of trading accounts and clearly, to be successful, these should show a good business and not one that is still loss making. This type of funding is what is known as peer to peer funding and anybody can invest as little or as much in any project that they wish to, having looked at your presentation on the crowdfunding platform. The presentation will consist of a short video, business explanation / plan, projected accounts, and of course the amount that you seek to raise and on what terms. You may end up with a small number or really quite a large number of shareholders and this has the potential to be complicated and time consuming for your business so I would suggest that you use one that acts as a single nominee for all the shareholders as this would seem to be by far the best structure. Typically, amounts raised are up to £1m but can be higher, and before they are launched on the public sites the platform provider will want to see about one third sold to your existing contacts and wider network. Preparation can take between one and two months and it would be normal to allow one month to obtain the target investment – if the target is not achieved then normally the fundraiser gets nothing. Fees are again broadly 7% of monies raised and only on success. The benefits are that this is quite quick and easy and uses the power of the internet to reach a wide audience without you having to do individual pitches. All the legals are also typically provided by the crowdfunding platform. Depending upon your product or service it can also act as a very good marketing tool as investors would also become buyers.
- Venture Capital Firm. This is a professional firm of investors that will do detailed analysis and due diligence and will often push much harder for a bigger percentage of the company. They are more typically seen in the second or third round funding or larger amounts although some do specialise at the smaller end of the market (although would normally then charge higher fees). The process can be much longer and more painful for a start up due to the level of information required but once a VC is on board the fact that they are professionals means that they can be a very good business partner and would often look to invest in subsequent, larger rounds.
Raising finance can be a complex business and how it is done, and exactly what structure is used, can greatly affect both your own tax and that of the investors so all of this must also be taken into consideration. Again, seek advice and guidance and work with somebody that you trust.
Remember that the earlier in your venture that you raise funding the more expensive it will be – that is the value of the company will be lower so for each £ raised the greater the percentage of the company you will need to give away. Later rounds would sell a lower percentage of the business and raise larger amounts of investment.
Which of the above is right for you and your company will clearly depend on many things and I would always suggest that you speak with someone that can help you decide what is best for you and your business.