Guy Rigby looks at where (and when) to go to get funding for your business.
Businesses will normally have access to a variety of funding options. The trick is learning to combine these to create financial stability and to maximise shareholder returns. Some entrepreneurs are reluctant to give away equity in their business – fearing loss of control and preferring to hold onto as much of their shareholding as possible. Many realise, however, that giving away equity in exchange for both investment and expertise can make good business sense – after all, 30% of something is better than 100% of nothing! If you're looking for growth funding, here are some potential financing options worth considering.
Friends and family
Many businesses start with funding from the '3Fs' – also known as friends, family or 'fools'. The latter may sound a bit harsh but might include the less sophisticated investor willing to take a risk on a new business idea. The 3Fs will almost always be the cheapest and easiest route to gaining early stage funding, with easy equity terms or loans made on a low interest or even interest-free basis.
Accelerators and incubators
Accelerators and incubators, as the names suggest, are focused on helping start-ups grow their business quickly. As well as shared office space, these organisations will normally offer strategic business advice and mentoring services. The slight distinction between them is usually when it comes to funding. Accelerators will typically take growth businesses from concept to product, providing them with early stage funding and mentoring in return for equity. Incubators, on the other hand, will provide guidance on accessing financing but rarely fund you directly.
Angel investors tend to dominate the lower or early stage end of the private equity market – usually investing from £10,000 to £100,000 of their own money, but sometimes much more. In return for their investment – and often their professional know-how and expertise – they'll almost certainly be looking for shares in the business. Business angels will often demand less formal terms than institutional investors and can be incentivised through beneficial tax reliefs. The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) schemes are making this type of investment increasingly popular.
Angel networks and investor clubs
There is a plethora of angel networks and investor clubs. These typically bring together groups of business angels, with varying degrees of formality.
Venture capital is normally provided to early stage businesses with high-growth potential – usually after the business has been established but before it has achieved scale. Venture capital investments are therefore high risk, but carry the potential for high rewards. If you're looking to grow fast and boldly, and need a significant cash injection – smaller venture capital firms will rarely want to invest less than £500,000 – this might be the way to go, although smaller investments are increasingly being made in the technology area.
Private equity is focused on more mature, established businesses, with private equity investors sometimes taking control of the business or providing growth capital in exchange for a minority interest. Private equity is often used for expansion, including 'rollout' and 'buy-and-build' strategies.
Corporate venturing involves a larger company providing finance and resources to a smaller business in return for equity. This route can make growing businesses appear more robust and scalable, giving them instant credibility. It can also offer the flexibility of a small business combined with the resources and connections of a larger organisation. This concept of 'David' collaborating with 'Goliath' is gaining increasing traction.
In today's environment, this article wouldn't be complete without mentioning crowdfunding, a new phenomenon enabled by the internet and social media. Crowdfunding can enable businesses to raise money from the general public, who can invest small sums by way of equity, or loan, or in exchange for benefits in the form of goods and services.
We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2014. code 14/414 exp: 31/10/14