How Community Development Finance Institutions could support your business

All businesses need to start somewhere, and many successful companies have benefited from access to equity funding at different stages of their growth.

Certain types of equity funding are often linked to a business’s various stages of growth – from just starting out to scaling a business into a large enterprise.

Equity funding is primarily used to fuel business growth, allowing business owners to invest in development, such as hiring staff, buying equipment and machinery, or increasing production.

According to data from Statistica, in the first quarter of 2022, £0.42bn of equity funds were raised at an early growth stage – known as the seed stage.

Around £2.2bn was raised at the venture stage, and £4.72bn was raised at the growth stage.

Each equity funding stage can attract a different form of equity investment, each of which can help to establish a solid foundation for growth to the next stage.

What is equity funding?

Equity funding is the process where companies raise money to grow their business by offering a share of the business to an investor in exchange for funding.

Investors become joint owners entitled to a share of profits and assets by taking a portion of business equity in exchange for funding.

In some cases, investors can have a say in the company’s key decisions.

At an early stage, equity funding can help aspiring entrepreneurs turn their ideas into successful business ventures, especially when a start-up business lacks sufficient assets or capital to secure other forms of financing.

Various stages of equity funding are tailored to different levels of a business’s growth – known as funding rounds – with each round as important as the next since the funds are usually invested to help move the company to its next growth stage.

You can think of each round as a pathway that enables a business to grow from an initial idea to a full-fledged enterprise.

Read our article on seven ways to prove value to investors.

There are different stages – or rounds – to equity investment.

It’s important to note that the characteristics of each funding round can vary depending on the type of company, industry, and market conditions.

Pre-seed funding is the earliest stage of equity funding.

It usually happens before a business has developed a minimum viable product (MVP) and requires funds to bring its business idea to fruition by conducting market research and establishing MVPs.

Pre-seed funds may usually be obtained from a business founder’s savings, friends, family, or through investments from angel investors.

The amount of money raised in pre-seed funding is often smaller than in later stages.

The primary objective of seed funding is to turn the business concept into a going concern.

Founders may use the money to conduct further market research, refine their product, build prototypes, and hire key team members.

Angel investors, early-stage venture capital firms, and incubators usually provide seed funding.

In some cases, equity crowdfunding can be used to raise funds.

An example is Monzo, a UK banking app that saw the quickest equity crowdfunding campaign in history after it raised £1 million in seconds, which helped it to gain further support in the next round of funding from venture capitalists and corporate investors.

The Series A stage typically occurs when a start-up has developed an MVP and gained sufficient market traction with a viable plan to obtain long-term profit.

The funds are typically acquired to scale the business, expand operations, invest in equipment and machinery, hire more employees, and increase its customer base.

Series A funding is usually obtained from venture capital firms, super angel investors, or institutional investors.

In general, Series A funding amounts are significantly higher than in the seed stage.

Series B funding is usually given to businesses with a high potential for growth, profit, and a healthy return on any investment.

It follows series A funding and is used to boost the business further in whichever area it requires, such as expanding infrastructure, adding product lines, entering new markets, and exporting overseas.

Investors that usually supply series B funds tend to be venture capitalists or private equity firms.

If a company accepts series C funding, it usually indicates the business is showing high potential and is looking to accelerate its growth into a large enterprise.

At this stage, the business will likely have established a robust business model and demonstrated notable revenue growth.

As with other funding rounds, series C funding supports the business wherever it needs more attention, such as expanding or acquiring other companies to strengthen its marketing position or expertise.

Venture capital firms, private equity firms, and sometimes corporate investors may provide Series C funding.

In this round, companies can generate much higher sums of money.

Initial Public Offering (IPO) relates to companies offering a portion of their shares to the public for the first time.

At this point, the business is established and can now go from being privately owned by a limited number of investors to having shares available for purchase by the general public and usually being listed on a stock exchange.

By choosing this method, the business can raise additional capital needed to fund its expansion plans, repay debts, and make acquisitions while enhancing its public image, which can help attract customers, partners, and potential employees.

With a successful IPO, the company’s shares are traded on a stock market, where its financial information is easily visible to the public.

The share price can determine a business’s ability to further raise significant financing.

An IPO allows existing shareholders, such as founders, employees, and early investors, to sell their shares, allowing shareholders to monetise their investments.

For a more detailed breakdown, read our article on what is equity financing.

Alternatives to equity funding

While equity funding may benefit businesses, it has potential drawbacks – the primary challenge being that business owners will need to sacrifice their sole ownership, including potentially complete control over the company’s key decisions.

If you want to retain full control and not swap equity for investment, there are other funding options, such as:

Companies can opt for debt financing, which refers to borrowing money from banks, financial institutions, or private lenders with the agreement that they repay the borrowed amount and interest over a specific time frame.

Government grants may offer sufficient financial support to businesses.

However, this method often comes with strict eligibility criteria and is only awarded for particular purposes such as research and development, environmental initiatives, or social causes.

Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.

Making business finance work for you

Our Making business finance work for you guide is designed to help you make an informed choice about accessing the right type of finance for you and your business.

Read the guide to making business finance work for you

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