25/06/2013

By Simon Beavis, Corporate Finance Manager at Smith & Williamson

The private equity world comprises a myriad of investors and funds that make equity investments directly into privately owned businesses.

Venture capital (VC) is a subset of private equity. It is normally provided to early stage businesses with high growth potential, typically after the establishment of the business but before it has achieved scale. Venture capital investment, whether by business angels or funds, therefore carries high risks and offers the potential for extremely high rewards.

Private equity investors, on the other hand, tend to invest in more mature, established businesses, sometimes taking control of the business or sometimes providing growth capital in exchange for a minority interest. Private equity is often used for expansion, including ‘roll-out’ and ‘buy-and-build’ strategies.

At the lower or early stage end of the market, business angels tend to dominate the scene, as venture capital and private equity firms don’t want to spend their time and resources assessing smaller investments. This is often where the so-called ‘equity gap’ comes in, with angel investors typically investing from £10,000 at the lower end to £500,000 at the upper end and smaller venture capital and private equity firms often not wishing to make investments of less than £1-£2m.

So should you opt for a business angel or a venture capital firm?

If you’re lucky enough to have the choice, your intended pace of growth is likely to sway your decision. If you’re looking to grow fast and boldly and need a very significant cash injection, a VC is likely to be most beneficial. If you’re looking to grow in your own time with less pressure and less investment, a private investor may be preferable. In some cases, too much money can bring unwanted stresses and strains, so make sure you’re ready for the challenge.

The new kids on the block

Advances in technology and the emergence of social media have created new ways for businesses to raise finance. There are now a number of crowdfunding sites emerging in the UK. These enable investors to spread their risk across a range of companies and activities in exchange for rewards, debt and equity interests.

To find out more about raising finance for your business, contact Simon Beavis on 020 7131 4006, or email simon.beavis@smith.williamson.co.uk

Disclaimer

By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.

Smith & Williamson Corporate Finance Limited

Authorised and regulated by the Financial Conduct Authority, a member of the London Stock Exchange. A member of M&A International.

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