7.05 – Raising Capital For Your Business
If your business is particularly risky, requires significant upfront finance, or involves new technology, selling a portion of your business’s shares to outside investors is often necessary. However, if your business plan doesn’t project profit returns in excess of 30 percent per annum for the next three to five years and you aren’t prepared to part with upwards of 15 percent of your business, equity finance might not be the right fit for you.
Several types of investors may be willing to provide funds if the returns are promising. The following sections explore these options in detail.
Benefiting From Business Angels
Business angels are private individuals with their own funds and possibly some knowledge of your industry, who are willing to invest in your company in exchange for a share in the business. These investors are highly speculative by nature, often getting involved when no one else is willing to take the risk. They typically have a personal interest in the venture and may want to play an active role in the company.
The UK has approximately 18,000 business angels who annually invest around £500 million. For more information, visit the UK Business Angels Association, which has over 650 members who have collectively invested around £2.3 billion in early-stage businesses.
Playing to The Crowd
Crowdfunding is a method of raising finance where large numbers of small investors contribute to a business. This approach allows entrepreneurs to present their proposition directly to individual investors and lenders. The process is quick, often taking less than 30 minutes to apply online, and the funds can be available in as little as three days.
Crowdfunding can raise capital in four main ways:
- Equity: Investors receive shares in the business.
- Loans: Funds are treated as a loan, with interest repayments.
- Reward-Based: Investors receive gifts or rewards based on their contribution.
- Invoice Financing: Businesses sell invoices on a trading platform, receiving funds upfront.
Examples of popular crowdfunding platforms include:
- Crowd Cube: The first UK-based crowdfunding website enabling the public to invest in and receive shares in UK-based companies.
- Indiegogo: A global platform that supports a wide range of projects from creative ideas to start-up businesses.
- Kickstarter: Primarily for creative projects, requiring full funding before any money is transferred.
Going for Venture Capital
Venture capital (VC) involves financing the start-up, development, expansion, or purchase of a company. In exchange for funding, venture capitalists acquire a share of the company. VC firms often invest other people’s money, usually from pension funds, and are interested in large sums for a significant stake in the company.
Venture capital is a medium- to long-term investment, often accompanied by time and effort from the investors. VC firms expect a return on investment within seven years. The process involves due diligence, where accountants and lawyers scrutinize the business and its management team. This process can be expensive, often costing six figures, and time-consuming, sometimes taking over six months.
For more information, visit the British Venture Capital Association, which represents private equity and venture capital firms in the UK.
Understanding Due Diligence
Due diligence is a thorough examination of both the business and its owner before finalizing a venture capital deal. The process includes reviewing financial records, contracts, leases, and other documents. Business owners are required to warrant that all information provided is true and complete, making them personally liable for any inaccuracies.
A due diligence checklist can include:
- Financial statements and reports
- Contracts, leases, and loan agreements
- Sales and marketing materials
- Employee records and organizational charts
- Legal issues such as pending litigation or tax audits
For an example of a due diligence questionnaire, visit Template Agreements.
