Choosing the best funding route for your business
For today’s business looking for investment finance, there is a myriad of funding routes open to them.
There are the more traditional Venture Capitalists and Angel investors, as well as newer crowdfunding options, and, if you don’t mind paying interest, funding from high street banks or peer to peer lending can be a route to take.
Of course, with each funding provider comes a unique set of benefits, so it’s critical businesses choose wisely. With that in mind, here’s an overview of each of the options available and their key benefits to help you come to an informed decision.
The first question to ask yourself, before even assessing the different funding routes open to you, is ‘where do you want to go with your business?’
Investors are ultimately looking for a return on their investment so it’s important to consider this from the outset. Do you plan to exit the business for example? Once you’ve decided this, you’ll know if the business is right for raising equity finance.
You also need to look honestly at your current business position and ask whether you are actually in a position to raise equity finance— look at your traction, revenue, path to profitability and valuation. These are the things investors will interrogate and you need to be able to provide robust answers.
Once you’ve done this, here are the most popular and most likely funding routes to consider…
Friends, family & your own contacts
This may sound like a strange place to start, but it is often a sensible first step if you have never raised investment before.
# 1 | Honest opinions from those you trust: Those closest to you are likely to give you some truly honest opinions about your business and its potential trajectory. This honesty will be sharpened further if you are approaching them for money! If you are successful, it is a good sign that your business is investable.
# 2 | A training ground: Approaching friends and family is a great training ground for your later approach to professional investors. They may not be business gurus, but they are likely to ask some of the questions investors will also be interested in. Use it to hone what sort of information you have at the tip of your fingers or the areas you should focus on to make your business even more investable.
Crowdfunding is the newest form of equity raising for businesses. It has democratized the process of investment by allowing members of the general public and investors to invest their money into businesses on a very public platform.
There are a number of crowdfunding platforms that businesses can use, the most well-known being Crowdcube and Seedrs in the UK.
# 1 | If your business is consumer-facing, crowdfunding is a great way to gather future loyal customers: Consumers who invest in a business feel far more engaged in its success and are more likely to choose your products or services over a competitor. If you have an existing community it also means they can be mobilized.
# 2 | Allowing the public to invest directly in your business helps humanize your brand: This is particularly beneficial to already successful, large organizations and it is something that has been capitalized on by businesses such as Mr & Mrs. Smith. This ethos of “we’re in it together” is also very much in line with the consumer zeitgeist. Consumers expect businesses of today to be transparent and to give something back.
# 3 | It is good PR, especially if you exceed your raise target or achieve it in record time: This communicates to key stakeholders the relevance and value of your business offer. Your very public success will also have a hugely positive knock-on effect for the business internally.
Angel investors are usually wealthy individuals who provide equity to start-ups and entrepreneurs in exchange for a share of ownership in the fledgling company.
# 1 | They consider more risky propositions: Angel investors are willing to take a punt on riskier business models as their start-up investments typically account for only 10 percent of their investment portfolio. This means they are not put off by organizations with riskier business models or operating in more volatile sectors.
# 2 | Return is not their sole focus: Angel investors are generally more interested in the entrepreneur and involving themselves in helping to drive the early stages of a business.
# 3 | Great personal connections: Angel investors often have great connections with other angels with a lot of angel investors following each other’s investments. We have seen this lead to multiple angels being brought into a round, matching the initial amount invested by a first angel.
Venture Capitalists are focused on investing in businesses which have the potential to grow rapidly and can earn them and their clients’ big returns. They are more institutional than angel investors and are usually investing on behalf of others.
# 1 | VCs carry a lot of weight: They are often looked up to by angel investors. Having a VC back your company can encourage other investors to come in on your round as they will have conducted in-depth due diligence on your business, ensuring what you have pitched to them is actually true. This means angels can come in on the round with confidence that the legal structures within the business have been reviewed and they have one less risk they have to worry about when parting with their cash.
# 2 | They have networks: A lot of VCs have large networks they can call upon to support the growth of your business, from talent pools of people you could hire, to making strategic introductions to other businesses they have backed to mutually benefit the growth and development of both businesses within their portfolio.
Debt finance can provide a significant and quick cash injection for your business, if you have a good financial record, in the form of a loan. It is important to review the interest associated with this form of raising as it could be significant when compared to an equity raise.
However, with the rise of peer to peer lending, debt financing your business could get you in a position to raise your first round of equity finance. Achieving initial finance puts you in a very strong position as you will have the traction and revenue to command a valuation that won’t dilute your shareholding by too much, protecting you for future equity rounds.
# 1 | Speed: If your financial records are generally positive, and you can show the bank your repayments will be affordable, receiving debt finance is a relatively speedy way to secure a cash injection for your business.
# 2 | Boost your valuation: You should consider if a loan cash injection will enable you to hit some quick growth metrics, help prove your traction and the need for your business in the market. This could increase your company valuation as a result.
Some other insights to consider…
- If you have raised investment before you need to be thinking about whether you have achieved what you said you would achieve in your previous rounds. Did you hit the revenue forecasts? Have you entered the new markets you said you would? This will help you establish whether debt finance or equity finance is the best option. If you’ve not hit your targets it’s more likely that you’ll be looking at a ‘down round’ (where your valuation is less than in your previous round.)
- Be open to all types of investment. When you raise, it’s likely that your round will be made up of multiple sources eg: an angel network, angels or VC – if you have a lot of investors and a large customer base you could combine these using a crowdfunding platform.
- You could be eligible for match funding. This depends on where you are located in the UK. For example in Scotland, the Scottish Investment Bank often match funds businesses who meet certain criteria.
This article was contributed by Duncan Di Biase, Co-founder of investment consultancy Raising Partners.