Leadership & Productivity
Giving up equity – is it right for your business?
5 min read
15 December 2017
When a business needs a cash injection to take it to the next level, sometimes equity investment seems the only option. Is it worth giving up equity and a stake in your business?
Alternative finance is often held up as the answer to all small and medium-sized business owners’ scale-up problems. Getting turned down for a bank loan doesn’t have to mean the dream is over, turn to invoice finance, crowdfunding, pension-led funding and so on.
To some extent this is true – there is often a way for a small business to raise finance it digs around and considers the range of providers out there.
However, there is a drawback. If a business is looking to fund the next stage of growth and a large amount of money is needed, it might need to consider giving up some equity in return for the loan.
This can be off-putting for many business owners, for a couple of reasons. According to recent research from Innovate UK, of the business leaders not attempting to source equity funding, 43 per cent said it was because they didn’t want to give up control of the business.
In addition, 18 per cent said they did not know how to find investors with the right cultural fit, eight per cent said they did not know how to find potential investors, and four per cent said they did not know how the process works/how to pitch.
It’s certainly not right for every business, and can seem quite daunting. Yet for some businesses, the benefits outweigh the cons.
Geeta Sidhu-Robb founded Nosh Detox, a home detoxification and weight-loss delivery service, back in 2008. The business chose to go down the route of equity crowdfunding when it was time to scale – the business has set a goal of opening a shop and needed money for a deposit and fit out.
“I chose crowd funding because it is a really fast and effective way to fund a business. You can crowd source publicly on one of the many platforms out there or you can also do it privately to your own clients and existing database as we have done,” Sidhu-Robb explained.
“Our campaign was only four weeks long and very successful. Away from the financial aspect, crowd sourcing is a great tool for early feedback on any innovations your business might have – after all, if your company is getting plenty of backing from peers and onlookers, you’re clearly on the right track with your product.”
Many of the company’s investors are also clients, and at the point of crowdfunding the business had a fair number of returning customers. Nosh Detox pitched for equity crowdfunding with the aim of attaining commitment from existing key clients.
“By offering equity and a customer first approach, it greatly helped us forge bonds with clients in the longer term.”
It’s not without risk
Nosh Detox set up its own crowdfunding platform, and that came with its own hurdles. In addition, Sidhu-Robb pointed out the risk of having an idea stolen when it goes public.
Her advice is to maximise your chances of success from the outset, and invest time and money in making your pitch attractive.
“Create attractive incentives, compelling videos and pitch pages. Spend time and effort checking other winning pitches and analysing them before you start building your own,” she said.
“The biggest secret to success with crowd sourcing is to secure around ten per cent – 15 per cent of your finances before you start. We all like to follow a crowd.”