What should entrepreneurs consider when taking on investment?
Raising growth finance can be a minefield even for established entrepreneurs. What funding route should you take? VC or angel investor? Debt or equity?
For most fast-growth firms raising finance is a necessity for business development and expansion but when it comes to procuring investment and identifying which funding route to take, the path isn’t always as easy to choose.
From pursuing debt or equity finance to taking funding from a venture capital (VC) firm or angel investors, there are several questions which will arise – what can a VC offer you that a bank can’t? How do you know if you’re ready to raise equity finance? What will an investor look for?
These questions were central to our first Young Guns Barometer where we, in conjunction with award-winning accountancy firm haysmacintyre, interviewed around 70 successful entrepreneurs from our Young Guns alumni to find out how they had approached it and what their attitudes towards growth finance are today.
Speaking at the launch of the Young Guns Barometer report, which you can 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 advice on what fast-growth firms and entrepreneurs need to bear in mind when taking on growth finance.
Here’s what they said:
“Consider how much, what you are hoping to achieve with investment, and how you are going to achieve it. If it’s literally just a cash requirement then maybe equity isn’t the route to go down but often it’s more than that.
“In sole founder businesses it’s a lonely road and an entrepreneur gets to the stage where they could really do with some guidance and that can come with an equity investor. It might be a little black book of contacts or if you’re expanding into a new market, they might have the ability to open you up in that market – those are the types of factors you need to consider – it’s more than just cash.
“I would say in the early stages of funding, the entrepreneur is as important as the business. They’re [the investor] investing in the entrepreneur as much as the business idea. So it’s all about building credibility and them being able to trust that you’re going to deliver what you say you’re going to deliver. And that goes with having your house in order – including forecasts. Being able to confidently forecast – and [show] that the money you’re asking for and the story you’re telling all stacks up with those forecasts.
“Investors need to clearly see what your cash burn rate is, how quickly are you going to go through the money. It’s all about milestones – what you’ve achieved without funding, and the milestones that you’re setting out to achieve with the funding.”
If you’re in a position where you have a business that can raise debt finance, of the sort of bank loan variety, that’s because you’re buying an asset with it, you’ve got something you can mortgage or use for security, you’re generating cash off the thing you’ve bought. You’ve bought a new machine so you can make more widgets – great.
“If you’re in the early stages of a high-growth business where actually it’s venture-funded – where there is risk and a whole different pattern to it – and you need a growth partner – that’s VC, you can’t get debt. There are different things for different types of businesses. It’s not per se a choice. They have different functions.
“In the last 18 months a lot of angel investors have wanted to start offering convertible loan elements alongside their investment in a way that only more sophisticated and commercial investors used to want to do. That’s much harder for angel investors who benefit predominately from tax relief such as SEIS which you can’t get on the loan portion of what you do.”