Having a clear idea of where you want your business to go is a wonderful thing. The trouble is, can you see yourself getting there without a helping hand? If so, which way do you turn? Well, fear no more – let us introduce you to the idea of venture capital.
Investment seems to carry a stigma around it these days, what with soaring interest rates and financial crises left, right, and centre. Is it just for the Mark Zuckerbergs of this world, or is it something that the common-or-garden entrepreneur should consider?
Is venture capital for the likes of me?
If you want some inspiration…
Take a look at The Cambridge Satchel Company. With the help of her mother, Julie Deane started up the company in 2008 from her kitchen table with a kitty of just £600. Fast forward to 2014, and it was announced that the brightly-coloured satchel company had just bagged a £12.7m cash investment from Index Ventures – a venture capital firm whose list of previous investments includes Pret-A-Porter, BetFair, and ASOS.
The story of Julie and her satchels shows that venture capital isn’t just for businesses in highly specialist tech or science fields. E-commerce entrepreneurs should pay particular attention: with The Cambridge Satchel Company, a big part of the investment was earmarked for enhancing the company’s digital strategy, revamping its websites, and breaking into the Chinese market.
In a nutshell…
A great product or service with an encouraging early sales record, and plenty of potential for further exploitation could be enough to make a big investor sit up and listen.
Who, what, and when?
Welcome to the world of equity finance. This is where you raise cash from external investors in return for a percentage share of your business. You’ve probably heard of angel investors (think Dragon’s Den): those are individuals – or sometimes networks of individuals – who put up their own finance to fund new businesses. Think of venture capital firms as the next level ‘up’. Their money comes from a whole range of sources, including private investors, pension funds, local authorities, and charities, and they invest this money in businesses they have identified as having high growth potential.
It’s the multi-million-pound investments that tend to capture the headlines. Although the typical minimum investment such firms consider for early-stage companies is generally around the £250k mark. They are not to be confused with private equity firms. These tend to buy more established companies, normally at 100% of the company. They then streamline it to increase revenues. With the amount they can invest into a single company (into the millions), they will focus their efforts to making it a success. Venture capital firms, on the other hand, tend to buy 50% or less equity. They then spread their interests in a variety of industries to minimise risks.
The market shifts constantly, and if you’ve spotted an opportunity to exploit, simply waiting for your business to grow organically to get the funds together and make the most of it could mean that you miss the boat. This is where that ‘helping hand’ comes to the fore.
There is plenty of expertise you can tap into by getting involved with investment firms. Large firms tend not to get involved with the day-to-day management of your business compared to a business angel. However, the people within venture capital firms who liaise with individual companies (the general partners) usually have plenty of industry-specific experience you can draw from. Remember, from the point of view of the venture capital firm, it’s their clients’ money that’s at stake. This means that your success is in everyone’s best interests.
The cons (and points to bear in mind before signing up)
Getting involved with a venture capital firm is not just filling in a form and waiting for a cheque. Firstly, an initial application awaits, followed generally by several meetings. Finally, there’s a long-winded process of going over your business with a fine-toothed comb (‘due diligence’). Also, don’t expect to be given free rein with the venture capital firm’s cash. You’ll typically be required to provide regular progress reports. The firm may also insist on having a representative placed on your company board to actively step into the decision-making process. This is only if it’s perceived that things are going wrong.
Then there’s the payback…
This comes through what investors refer to as the all-important ‘exit plan’, and points to consider include the following:
- Is the stake a fair reflection of the level of investment?
- What does the investing firm require from your business in the way of interest and/or dividend payments during the lifetime of the investment?
- When will such payments first become due?
- What key events will trigger the exit plan – for instance, if the company reaches a certain level of profitability?
- What is the preferred exit plan – are you going to repurchase the investors’ shares? Is the entire business to be sold to another company? Are the shares going to be offered for sale to the public? Are you happy with the plan?
- You need to be certain that you’re not getting more or less than you bargained for here. This is why it’s so important to seek specialist legal and financial advice before you enter into any agreement.
Getting the ball rolling
Being able to show that your business is ripe for investment is the first step. This involves developing a compelling value proposition. It is demonstrating that yours is a product that promises to fill a void in the marketplace. For this, you’ll need to show that you’ve ‘got your house in order’. Also that you’re managing your existing assets responsibly. You’ll also require full, up-to-date sales figures and accurate projections. Oh, and a clear business plan along with evidence that you’ve researched your market inside out.
Thinking about it?
If you’re thinking about trying to secure investment, then check out this list of UK venture capital firms and browse the proposal forms for an idea of what’s precisely involved in the application process. The Government-owned British Business Bank is also worth visiting: aimed specifically at small businesses, it partners with venture capital funds, banks, and other institutions to unlock a range of finance options for smaller businesses.