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.
Firstly, personal savings is clearly the easiest way of establishing a business. This would reduce the need for the lengthy processes prior to the investment that would include pitching, meetings etc. Furthermore, nobody understands your business better than yourself. However, businesses do typically consume large sums of capital in short periods of time. But business owners that have sufficient funds or are able to find a solution to this issue can benefit greatly. A business without a third party investor would have negotiation leverage, due to 100% ownership.
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.
Banks Loans are the most commonly sought after route by business starters. It is the case that businesses seeking investment through banks would need to prove collateral before being successful in achieving funding. This is because banks usually require a low risk strategy resulting in significantly lower returns. Bank financing would need to be paid back with interest, regardless of whether the business takes off or not.
Alternative Loan Providers work for growing businesses looking to cover invoice delay, large orders, new products or mostly temporary needs. As a growing sector they are an alternative to the traditional bank model. These loans can be specifically tailored to the unique business needs or sector. Typically, they help smooth out the glitches that hinder the smooth running of a small business and are more flexible taking into account the new development in technology for businesses and financing. The Government's British Business Bank initiative has improved this route by injecting around £300m into alternative loan companies.
Accelerators and Incubators cater for two types of businesses in different stages of their lifecycle. Incubators typically provide desk space and mentoring for member businesses that are in the idea stage of their process for a small monthly fee. Most incubators do not provide funding for the start-ups and therefore have no equity stake in them. However, there are select few incubator programmes that do provide seed funding for some businesses that they invite onto their schemes. An example of an incubator that would provide such a service for a minority stake would include Entrepreneur First.
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.
Additionally, there are a number of official government schemes put in place for the purpose of funding small businesses in the UK that should be explored. They are usually disbursed at a regional, local or community level. Local enterprise partnerships (LEPs) are in charge of disbursing these funds through business hubs. Through the non-asset backed Government Start-up Loan, small businesses can get up to £25,000 to get started. Figures show that since 1994, EIS and its sister initiative the Seed Enterprise Investment Scheme have provided about £15bn in funding to 30,000 businesses. Other regional support for businesses covering advisory, equity, grants, loans etc can be found found on this portal.
Investment via crowd funding is a way to source money for a company by asking a large number of backers to each invest a relatively small amount in it. In return, the business should ideally give some form of discounts, freebies, equity or whatever has been mutually agreed. There are a number of ways of achieving this, but the most frequently used method is through a online crowd funding platforms. Resulting from the reduced risk, smaller investments attract a large backing.
Recently, there have been several examples of how crowd funding has worked well, but this form of investment may not be amenable to every business. In order to decide if you should opt for this, check:
- 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?
There are many more factors associated with crowd funding that may seriously affect the success of a business campaign, and these should be thoroughly explored and considered before identifying crowd funding as the source of investment.
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.
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.