2017 was a record year for equity investment, as a staggering £8.27bn was invested in UK companiesLink opens in a new window.
That figure proves that British entrepreneurs are creating businesses that investors want to back. 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 Business Growth Fund (BGF)Link opens in a new window, explains: “There’s a lot of money out there right now, but businesses should look for the right partner. That person should be about more than money – they should show an interest in the success of the business, and passion too.”
It stands to reason that with equity investments, entrepreneurs are expected to give up a share of their company. And that means inviting someone else in to the business, in varying capacities.
The personal connection
With earlier-stage investments, like Angel InvestmentLink opens in a new windowLink opens in a new window, businesses are buying in to 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)Link opens in a new windowLink opens in a new window, 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.”
Plugging the expertise gap
Many investors are former entrepreneurs or experienced businesspeople in their own right. If you’re an entrepreneur looking for a funding partner, you can capitalise upon these experts’ knowledge to help grow your business.
Sector experience might be important to you. Perhaps you’re looking for an investment partner who understands the market and its challenges, or who can open doors with networks and contacts.
Or maybe it’s more generic business knowledge you seek. You may be missing an entrepreneurial skillset like finance, or want a partner who can help you address a sector-neutral business ambition – such as expanding into international markets.
Whichever route you identify, you should match it to the skills you’re missing inside your business.
The benefit of invested investors
As with any good relationship, there should be an element of trust between you and your investor. Yet it might be that you’re wary of equity investment because it involves surrendering a portion of your business.
But the hope is that by giving investors a meaningful share of your business, you’re motivating them to award you the benefit of their time, experience and contacts.
Tim Hames, Director General of the British Private Equity and Venture Capital Association (BVCA)Link opens in a new windowLink opens in a new window, explains: “Investors have every incentive to cheerlead. They don’t want to lose their investment, so they have no reason 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.”
“It’s not about taking up whoever offers you cash. Look for someone whose interests align with yours – who shares growth expectations, understands the challenges, acknowledges your finance needs as you progress.”
A relationship that continues to pay
When seeking funding, it can be all too easy to focus on your immediate needs. But a little bit of foresight can go a long way – for you and your investors.
“Forward planning is so important,” says Jenny Tooth, an Angel Investor. “You need to keep that relationship strong and keep the 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 your 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 Venture Capitalists (VCs)Link opens in a new windowLink opens in a new window to cross-refer businesses and have strong working relationships. They can provide warm introductions and credibility.
Doing the work upfront
So to get the most out of equity investment, rather than be dazzled by a number on a cheque, consider the person sitting opposite you.
“You need to make sure your personalities match and you can get on with this person,” says James Bedford, Head of Investor Partnerships at Tech NationLink opens in a new windowLink opens in a new window. “You need to be able to have a board meeting – which might be difficult – and then go for a beer after.”
Don’t underestimate the importance of a personal connection in equity investment. After all, investors will reward businesses that value those measures with expertise, knowledge and contacts. All arguably far more valuable than money.