Yet there are more types of equity finance available than ever before and supply is getting stronger. So what is stopping entrepreneurs from entering this side of the funding environment?
The natural reluctance to lose total control of a business is nothing new, although it continues to be partly stoked by misconception. There is also a lack of clarity about the options available since the rise of alternative finance. As such it’s no wonder heading to the bank in search of a loan remains the more natural first option. However, while cheap debt can be a good answer for some situations, it isn’t – and cannot be – an answer for all. Particularly as repayment plans can create their own cash flow issues.
Supported by good tax breaks and a strong investment community, the UK has long had a great history of equity investment, while the popularity of new forms like crowdfunding has brought a fresh wave of investors to the table. The equity arena is hugely diverse, and can now cater as much for dentists as it can designers. Understanding the options available is key to making the best choice for each particular funding challenge.
Equity crowdfunding has emerged as one of the major channels of alternative finance in recent years, now representing 15.6 per cent of all UK seed funding according to a new report by Nesta and the University of Cambridge. It can raise a large amount of money in a short space of time, while simultaneously developing a web of new business contacts. As such, it may be a sensible choice for those who value insight and new business relationships as much as finance itself.
One major downside of crowdfunding is the need for an obviously attractive proposition or prototype product that will appeal to enough investors to complete the round of finance. Mass-marketing skills are needed to get enough investors interested. It also requires the business to publish details of products in the early stages, which may cause an issue for those who are particularly protective of their ideas.
Negatives aside, equity crowdfunding can be a useful way to raise capital by gaining access to a new and previously unreachable pool of potential investors.
Read more about equity investments:
- Top ten Crowdcube raises as goHenry sets new crowdfunded investment record
- Can private equity really help you grow your business?
- Businesses beware the pitfalls of sweat equity
Business angels and syndicates
The business angel model is perhaps what springs to mind when the term equity is mentioned, thanks to television shows like Dragons’ Den – which have popularised the format. But behind Duncan Bannatyne’s steely gaze there lies an effective funding method. Releasing equity to one of the UK’s 18,000 angels could be a sensible choice for those who require funding from anywhere between £10,000 and £750,000, alongside access to an experienced business operator.
Many entrepreneurs have concerns about relinquishing control of the business when giving up equity to angels, but under the EIS/SEIS scheme, an angel can’t acquire more than 30 per cent equity in one particular business. What’s more, as business experts, many angels understand the position that small businesses are in and can often be reasonable with the percentage they ask for, allowing room for future rounds of funding.
Alternatively, angels can work as part of a syndicate led by a single investor known as an archangel. Just as with finding a perfect match with an individual investor, picking the right syndicate is about finding one that fits the aims, strategy and timescale of your business.
Venture capital funds
Similar to angel investments, venture capital funds are made up of investments from various investors seeking opportunities in high-growth businesses. They can offer a colossal investment, along with structured access to consultants and business advisors.
Venture capitalists are sometimes prepared to invest a huge amount of money over a long-term period, which could mean the entrepreneur ends up as the minority shareholder. They often also take more of a hands-on role within the business than a typical angel would. The funding is excellent news for the business, but could cause problems with business owners who want to keep majority shares.
Venture capital funds are the other side of the coin to angel investment – the determining question is that as an entrepreneur, which do you value more: investment or control?
Of course, it could be that debt is the most beneficial way to fund a particular new investment. But rather than simply making a bee-line to the bank, there’s much to be gained from understanding everything that equity finance can offer. It may be about giving away a percentage – but everyone involved is truly invested in that business’s growth and success, in a way that simply doesn’t happen with a lender.
Bivek Sharma is head of KPMG Small Business Accounting.
If you’ve enjoyed what Bivek Sharma has had to say, find out how working at KPMG makes him feel like an “intrapreneur”.
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