Myths busted: investment finance, and whether it’s right for you

There’s nothing wrong with admitting that your sum total knowledge of how to attract outside investment comes from Dragon’s Den. In fact, taking a moment to focus on how TV portrays investment is useful for explaining what it actually involves. So here is an unfolding of the myths and realities TV sets up of investment finance, and how it really works.

 

Equity investment involves giving up a stake of my business: TRUE

 

Being required to give up a share of your business is the most important difference between this form of business funding, and traditional debt financing (e.g. bank loans). When someone invests in your business they are essentially buying stakes in it. Investors will expect a return if they sell their shares, or the business' assets are liquidated.    

 

Getting approved is all about delivering an impressive 15-minute pitch: FALSE

 

TV brushes over the paperwork involved in securing investment finance. To be successful, you will need a compelling idea and business proposition, a full business plan, accurate sales figures to date, and cash projections supported by evidence. Backers will be looking for all of this in your initial written proposal. Face-to-face meetings and pitches are important, but investors are more concerned about your business competence, and ensuring that you have a strong proposal.

 

Only a lucky handful will ever qualify for investment finance: FALSE

 

In Europe, the early stage investment market is valued at €7.5 billion, with the UK having the highest valued investment market value. There are many more entrepreneurs who, away from the glare of the cameras, take their businesses to the next level with the help of investment finance.

Dragons are most certainly not the only individuals who have the money and power to invest in new companies. Venture capital firms are another important source of investment finance for up-and-coming businesses. There are many potential sources of finance footfalls: here is some more detail on the types of investors you could approach, and what they can offer for you.  

 

Business angels

 

Innocent Smoothies, Pret A Manger, and Cobra Beer are just a few of the companies helped by  ‘business angels’. Angels are either private individuals or syndicates who invest in mostly early-stage businesses, in exchange for a percentage share in those businesses.

According to the UK Business Angel Association, angels usually expect to see a return on their investment within 3-8 years.

Angels generally offer mid-large investments between £10,000 and £500,000. Typically, this will be in exchange for equity up to 30% of the value of your business. This is the maximum stake angels are allowed to take for the investment to qualify for certain tax benefits under the government’s enterprise investment scheme (EIS). Angels not only buy in business, but often give strategic support and advice. Many angels are attracted to this form of investment not just for profit, but as a way of putting their expertise to work. This can be especially useful if you want help with making the most of new markets, or lack extensive business know-how. By contrast, if you’re simply looking for funding without any outside interference, this probably isn’t the right type of investment for you.    

 

Venture capital firms

 

These are specialist firms who invest their clients’ money in companies that they regard as having high growth potential.

The levels of capital invested by venture capital firms tend to be much higher than angel investments. Investments up to, and exceeding one million pounds are not uncommon. Additionally, there are some venture capital organisations that specialise in investing in very early stage businesses, where the amount invested can be as low as £20,000.

As venture capital firms generally invest more money, you must be sure that you can demonstrate your business has a unique selling point and a clear advantage over other companies. For instance, have you developed an entirely new product, and require a large injection of cash to get it off the ground? Additionally, you should have solid evidence that your business has high earning potential which you can back up with substantial evidence, and prove that it is likely to have a high return over a predictable time frame. Such large investments mean that companies will want a much larger stake in your business: venture capital firms generally look to take a stake of up to 50% in the companies they invest in. Being so well experienced, such companies can offer some useful business advice if you need it. If you welcome outside input, but don’t necessarily want someone to ‘hold your hand’, this could most certainly be a route for your business.

 

Moving forward…

 

To get a better feel for what investment finance providers are looking for, browse the early stage venture capital firms and angel groups listed in this directory.

If you are considering investment finance and you’re still operating as a sole trader or partnership, now might also be the right time to consider setting up a limited company. Giving up a stake of your business means handing over shares, and a company is the legal vehicle that allows this to take place.

 

Find out more about incorporation, and how small businesses can go about it in a pain-free way by visiting our help centre.  

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