Thanks to Bishop Fleming for this guest blog on distinguishing which investment is right for your business as part of Investment Month here at TechSPARK.

Whether you’re a start-up business or an established enterprise looking to take your business to the next level, it is likely that at some point you will need investment to fulfil your business’ goals. There are various options when it comes to raising finance and seeking investment, so choosing the best for your business can be difficult. 

Equity fundraising is one of the most common ways for start-ups and scale-ups to attract investment. The business may not yet have a track record of profit generation, meaning banks and traditional lenders will not have the certainty that their debt will be paid back. Instead, the business will offer a percentage of ownership to the investor whose goal is to make a profit when they sell their shares in the business.

The most common form of Equity investors are:

  • Angel investors. These are High Net Worth individuals investing their own money in early-stage businesses, while potentially also mentoring the management team who may be new to scaling a business. Angel investors are typically very flexible in their approach, both in how quickly the investment can be put in place and in their day-to-day involvement with the business. However, the sums involved will typically be small and there may be low chance of follow-on funding meaning you may need new investors if further funding rounds are needed.
  • Venture Capital and Private Equity. These are established firms who have raised a pool of capital from individuals, corporations and institutional investors and typically make larger investments than Angel investors. VCs and Private Equity will typically get involved once the business has achieved proof of concept and there is demonstrated demand for the product or service. These investment rounds will typically take longer than angel investors, but these firms will bring with them years of experience in building businesses, and may also have networking opportunities that could open doors never accessible if growing organically. VCs and Private Equity firms will want a closer involvement in the management of the business, taking a seat on the Board and often wanting to put in place an independent Chairman. Also bear in mind that these firms will want to know how they will make their return before they make the investment – this is typically through a trade sale, reinvestment (where another firm replaces then) or through a listing on a stock exchange within 3-5 years of investment (although this does vary between firms).
  • Crowdfunding. This is the process of raising investment from a large group of investors each contributing a relatively small amount, with each of them receiving a small percentage of equity. The process of attracting investment in this way is typically run through an online platform, where the ‘investors’ are members of the public. This approach can have many positives, as it can be a relatively quick way of raising finance while also acting as ‘free’ market research and advertising. However, be aware that you won’t have the opportunity to negotiate the valuation and if you don’t reach your funding target the whole investment will likely be returned to the investors – if you set the valuation too high, this will turn off investors and you may never reach your target. You will also be missing out on the industry experience and commercial opportunities that taking on professional investors could provide.

It is important to have a clear Business Plan at the outset before thinking about what investment is needed. This must clearly set out what your funding needs are and why, demonstrating how the proceeds will be spent.  You should also consider not just what investment you need now, but also what will the investor be like to work with, what opportunities and support will the investor provide beyond just their cash and what impact will the investor wanting to exit have on the business. Take the time during the investment process to understand these points and ask questions of the investor – a partnership with the right investor will offer more than just cash, it can provide a platform of experience and sector-specific networks which can substantially accelerate growth. 

Author:

Jamie Pelmear, Corporate Finance Manager at Bishop Fleming

Jamie is a Corporate Finance Manager and part of Bishop Fleming’s Technology, Innovation and Growth sector team. His wide-ranging experience acting as lead advisor includes: fundraising for scale-up businesses, financial modelling and forecasting, Management Buy Outs, Due Diligence work, acquisitions and disposals and exit planning.