By Anthony Blaiklock
Raising equity is an attractive option for a business that wants to grow without increasing borrowing. Potential investors include venture capitalist (VC) firms and business angels, both of which will provide unsecured financing in return for shares in the business. However, equity is one of the most expensive forms of finance so consider the implications very carefully. In return for taking a higher risk than banks, both VCs and business angels will usually expect high returns.
There is no shortage of potential investors looking to invest in growing companies, but you need to decide which is best suited to your needs. The most appropriate funding package will depend on what the money is needed for, the type of business and the market it operates in, plus future plans and ambitions.
Companies that need a lot of money may struggle to find several smaller investors, so a VC may be more appropriate. However, because it will need approval from a board of members, VC funding will probably take longer to secure.
If you do choose this route, it’s important to find a VC that understands your business. If you operate in a specialist field, target specialist investors who are sympathetic to the business’s needs and with whom you feel you can develop a relationship. You never know when you might need further investment!
I would always recommend:
a) Consulting a number of VCs before selecting one.
b) Preparing yourself for negotiations, rather than agreeing to the VC’s terms.
VCs want to make money. If the growth prospects aren’t great, they’ll look at other factors, such as how reliable your business is to provide a regular income, so prepare this information in advance. Make sure it’s a competitive process for the VCs though, and position yourself as a buyer not a seller — you are providing an opportunity to make a lot of money!
I’d also suggest having someone on your team with financial expertise. If you have no one within the business, part-time finance directors can prepare your approach and negotiate on your behalf.
ANTHONY’S TOP TIPS
Before meeting potential investors, you should:
1. Prepare a business plan
2. Check the investor’s agenda and expectations
3. Research the investor
4. Prepare financial forecasts to demonstrate profitability
There are a number of questions the management team should then consider before agreeing to sell a percentage of the business:
1. Is the investor asking for too much?
2. Do you get on with the investor?
3. Does the investor require Board representation?
4. Will the investor add value other than providing cash?
5. Will the investor provide further funding?
6. How will the investor exit the business?
Anthony Blaiklock is an associate of FDUK, which provides experienced part-time finance directors to fast-growing businesses across the UK.