There are a number of different investor avenues that can be explored and each of these would suit businesses with varying models. We have listed here some key routes that entrepreneurs can explore for their start-up or scale-up and growth opportunities.
- Personal savings
- Friends and Family
- Angel Investors
- Venture Capitalists (inc. Private Equity)
- Banks Loans
- Alternative Loan Providers
- Accelerators and Incubators
- Government Funds and Grants
- Crowd Funding
The number one aim of investors is to make money, or rather “Its money, stupid”. Business owners must seek to investors that align with their long term goals. Not all options may be appropriate and depending on the business some may be more than others. This blog will now explore these different options and provide some suggestions as to the types of businesses each investor type would be seeking most.
Meanwhile, borrowing money from friends and family could be an alternative. However, it is often the case that the friends and family are not in a position where they can risk losing large capital. This can therefore often make such a method more costly, with the potential of causing divisions between friends and family.
An angel investor is typically a wealthy individual who provides an agreed amount of capital to a start-up business, which is usually delivered with an exchange of convertible debt or an ownership stake in the underlying business. This ownership stake can often vary between 5% - 25%, but entirely depends on the level of investment the business requires, the business concept itself, alongside a number of performance metrics that would gauge the level of return the investor is expecting to receive. Angel investors are usually most suitable for businesses across a broad spectrum of industries and stages, but can be a great fit for entrepreneurs who need money early, but are not yet ready for (or do not want) venture capital.
Venture capital investors are mostly organisations focussed on harnessing the potential in businesses with capital investments in start-up ventures or small companies that wish to expand but lack access to equities markets. Most venture capitalists concentrate their financing efforts on later-stage business funding. However, some venture capitalists will consider financing a start-up. Statistics show that venture capitalists tend to invest in high-tech businesses, with around 50% of all investments currently being within this sector.
Typically venture capitalists invest in firms that provide an exit strategy that would be suited to an exit within a 5 year period. As a result they are looking to make money fast and consequently are looking for businesses that will be successful enough to go public or be purchased by a larger company. Ultimately they are seeking businesses that have the potential of making millions in revenue on an annual basis. Moreover, complex investments in more mature businesses can either transfer ownership or merge different organisations.
Accelerators, on the other hand, provide a service to those start-ups who have already been through the incubator stage and are now ready with a tangible product or technology/software. These are schemes that provide tailored mentorship and training programmes for seed and early stage businesses with aims of helping them scale their businesses. It is common that accelerators provide pre-seed or seed investment in return for an equity stake of the business. The level of equity is proportional to investment provided to the company, but as a general rule of thumb, accelerators tend to receive between 7%-10%. For example, Seedcamp, one of Europe’s and the UK’s best known accelerators, will lead with a first investment of £100,000 for a 7.5% equity.
Unlike incubators, accelerators tend to focus their services on a specific industry sector, making it important for business to find the right accelerator programme for them. Whereas, incubators tend to just offer a broad range of resources and business in any industry. Both of these routes are mostly beneficial because of their strong links to large firms and corporates looking to partner with start-ups.
- Is a diligent plan in place?
- What investment are you looking for and is this reflected in your plans? (Not too little, not too high)
- What are you prepared to return in favour of the investments? Is it good enough?
- Are you ready to work very hard?
- Have you identified your target investors?
For advice and assistance in relation to accessing any of the routes mentioned above or an ongoing investment/loan application; writing a business plan or information about starting or growing your business; please contact our team in London on 0203 637 6365 or via our enquiry form.