More than money: how equity finance can transform your business
2017 was a record year for equity investment, as a staggering £8.27bn was invested in UK companies last year.
That figure not only proves that British entrepreneurs are creating the kinds of businesses that investors want to back, but it also shows that there’s a lot of capital available for British businesses looking to take their next funding step. But finance is only part of the picture.
Alistair Brew, Investor at BGF explains, “there’s a lot of money out there right now, but a business should look for the right partner. That person should be about more than money – they should show an interest and passion in the success of the business too.”
It stands to reason. With equity investments, entrepreneurs will be expected to give up a share of their business. And that means inviting someone else in to the business, in varying degrees.
The personal connection
With earlier stage investments, like Angel, businesses are buying into a personal relationship with a partner. Angels like to get hands-on with a business and help shape its day-to-day processes.
Jenny Tooth, CEO of the UK Business Angels Association (UKBAA), says, “you’ve got to want to have people around your business. Angels identify with you and your challenges on a daily basis.”
And it’s that daily involvement and regular connection that businesses need to be comfortable with. Because when they are, wonderful things can happen.
Angels often function as mentors to early stage businesses. They spend time within the business, act as a sounding board for ideas and often sit as a non-executive director on the board.
“The benefits of having a supportive and knowledgeable investor base cannot be overstated.”
|Alexander Schey CEO @ Vantage Power|
Plugging the expertise gap
Many investors are former entrepreneurs or experienced business people in their own right and entrepreneurs looking for a funding partner can capitalise upon their knowledge and experience to help them grow.
For some, sector experience is relevant. They are looking for an investment partner who understands the market and challenges, or who can open doors with networks and contacts.
Other businesses may seek out more generic business knowledge. They may be missing an entrepreneurial skillset like finance, or they may be looking for a partner who can help them address a sector-neutral business ambition – like expanding into international markets.
Whichever route the entrepreneur identifies should be matched to the skills they’re missing in the business.
The benefit of invested investors
As with any good relationship, there should be an element of trust between investor and entrepreneur. Yet businesses can be wary of equity investment – partly because it involves giving away a portion of your business.
But the hope is that by giving investors a meaningful share of your business, you are motivating them to give you the benefit of their time, experience and contacts.
Tim Hames, Director General of the BVCA, explains, “investors have every incentive to cheerlead. They don’t want to lose their investment, so they also have every reason not to pull the plug. Providing you know what you’re doing and what you’re getting in return, dilution is actually a very sensible strategy for fast-growing businesses.”
A relationship that continues to pay
It can be all too easy when seeking a funding round for the business owner to focus on their immediate needs. But a little bit of foresight can go a long way – for business owners and for their investors.
“Forward planning is so important,’ Jenny Tooth, who is an Angel investor herself, says. “You need to keep that relationship strong. You need to keep that investor happy, especially if you want to get more money out of them.”
Equity investment is rarely a one-off. In fact, most businesses who grow substantially off the back of their first investment will create new targets and seek further financing. And a good relationship with an investor can help the business secure further rounds of funding.
Even if an investor has reached their investment limit, they may be able to facilitate introductions to the rest of the equity ecosystem. It’s not uncommon for Angels and VCs to cross-refer businesses and have strong working relationships. They can provide warm introductions and credibility.
Doing the work up front
So rather than getting blindsided by a number on a cheque, businesses need to consider the person sitting opposite them if they want to get the most out of equity investment.
“You need to make sure your personalities match and you can get on with this person,” James Bedford, Head of Investor Partnerships at Tech Nation explains, “you need to be able to have a board meeting – which might be difficult – and then be able to go for a beer after.”
Businesses shouldn’t underestimate the importance of personal connection in equity investment. After all, investors will reward businesses who value those measures with expertise, knowledge and contacts. All arguably far more valuable than money.
Top tips for businesses looking for their first investment
“It’s not about taking up whoever offers you cash. You should be looking for alignment of interests - your growth expectations are shared; the challenges are understood and your finance needs as you progress are acknowledged.” Rod Beer, Strategic Relations Director @ UKBAA