Equity funding: Is it worth it?
Reluctant to give away a stake in your business? Worried about how you would manage shareholder expectations? Tim Barnes and Natasha Frangos offer up their advice…
For entrepreneurs who have grown their businesses organically and bootstrapped their way to success, the thought of raising external finance from investors can be a daunting one.
Equity funding entails pitching your business for investment, navigating months of meetings, contract signings and ultimately giving away a percentage equity stake in your company. Not to mention keeping your investors happy once they’re on board.
As your business grows, in most cases so will the equity stake the investor holds which could eventually become a controlling stake in your company – hardly surprising then that equity funding can instigate a feeling of fear and reluctance among entrepreneurs.
But could this reluctance to raise equity finance actually be holding your business back from reaching its full potential?
For our first Young Guns barometer report, produced in partnership with haysmacintyre, we interviewed 70 successful entrepreneurs – members of our Young Guns alumni – about equity funding, the finance paths they’ve chosen to follow, and how they manage shareholder expectations.
At the launch of the Young Guns barometer, available to download here, Tim Barnes, UCL’s director of enterprise operations and UCL Advances, and haysmacintyre’s head of creative, media and technology, Natasha Frangos, shared their views on equity funding and the misconceptions that often come with it.
Here’s what they said:
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“I think it’s entirely natural to not want to give up a significant or controlling stake in your business but the idea that you’re going to be able to hang on to everything and grow a significant business is really only about how you can shoot yourself in the foot.
“If you have an ambitious company that has the ability to do something really interesting in terms of its growth, growing year on year, basically through retained earnings, it’s not realistic to take you to the place that you want to be. If you have a million pound business and you take on a million pound investment, you now own half of a two million pound business – which is still worth a million pound to you and hopefully it’s going to grow faster than the million pound business you’d have had before.
“You need allies, investment, partners, networks and that means it’s not just about you. You are either fundamentally a fish or fundamentally a tiger – you are either suited to going down the road where you can raise debt funding or you are early-stage and risky and suitable for an early-stage investment partner. You are what you are. It’s to do with fundamentally where you’re at and what you want the money for.
“If you’re trying to go through some explosive period of growth and you don’t know quite how that’s going to work out then venture capital is the way to go, but that’s just not the same thing as being in the position where you need to take on increased debt to maybe fund your cashflow or take trade finance.”
“Two out of five of the businesses we surveyed in the barometer report said that it was not difficult managing shareholder expectations and from what I see with clients it’s definitely not like that. I see a real psychological shift in the way they think. They worry they’re now accountable, they have to give a monthly pack, financials, some commentary – they can’t just go off and do something, they need to speak to the board and make a strategic decision.
“And I think that’s generally something entrepreneurs would find difficult to adapt to, however, it’s great that our Young Gun alumni seem to be taking it in their stride (or lying).
“It’s critical to focus on the amount of money that is needed to achieve a step-change in the amount of risk the business is experiencing. If you’re able to do it in a way that says, ‘I told you we were going to do this after this many months’ and that’s what you actually achieved, you’re lowering the level of risk in the mind of the investor. It’s about being able to balance the level of risk with milestones against the amount of money you need to actually execute your plan.
“Saying that, if you raise a million and then run out and say ‘damn I needed another million to make that work’, that’s the worst scenario. It’s all about balance.”