Where should you look when you need equity investment for your business?

With the best will in the world it can be a challenge to understand all the options that are available when you want to raise equity funding for your business. It is also far from simple to decide which option is right for your particular business.

Envestors have helped over 200 companies raise more than £100m; we’ve prepared an overview of the types of equity investor so that you can focus in on the one that will work for you.

Private investors/Business Angels

Sometimes referred to as business angels, private investors are HNW (high net worth) individuals who invest their own capital.

Typically, they will invest between £5,000 and £250,000 per deal, or in groups (‘syndicates’ or ‘networks’), where the deal size can be greater.

A big incentive for angel investors is the tax benefits afforded by the Seed and Enterprise Investment Schemes (S/EIS). If you want to appeal to this kind of investor, you’ll want to investigate your eligibility for the scheme(s).

According to research firm Beauhurst, the five most active angel investment networks are:

(Seed) Enterprise Investment Scheme (S/EIS) Funds

Private investors can benefit from tax relief when investing directly into early-stage companies. Alternatively, they can invest in one of the many independently managed S/EIS funds. These pool the funds and invest into selected early-stage businesses.

As per SEIS conditions, SEIS funds focus upon start-ups looking for their first round of investment of up to £150,000. EIS funds invest in EIS qualifying businesses although they are highly selective and only 1% of the propositions they receive result in an investment.

Another tax-efficient vehicle for investors wishing to invest in private companies are

Venture Capital Trusts (VCTs). VCT managers tend to be very risk-averse and focus on investing into established profitable businesses rather than early-stage ventures.

S/EIS funds are a great option for businesses, but the market is highly competitive, and most will charge fees.

Corporate venturing

Corporate venturing is the concept of large corporations investing in start-up companies in order to develop innovative products or services. These corporates view it as a way of outsourcing research and development.

Typically, corporate venturing takes place within the core industry in which the corporation operates. For example, energy giant BP will look to back energy tech ventures via its corporate venturing unit, such as Chargemaster plc which was acquired by BP for £129m in 2018 having been a start-up in 2010 developing electric vehicle charging points.

Likewise, large pharmaceutical firm such as Merck or Pfizer will concentrate their venturing efforts in the pharma and healthcare sectors.

The advantage of corporate venturing is that you can benefit from investment, buying power and trade introductions as well as operational, strategic and marketing support. In some cases, the corporate venturer will take a majority stake in your business.

The disadvantage of corporate venturing is that it could limit the exit opportunities for you in terms of the number of organisations by which you could be acquired. The other concern is that, if things don’t work out, the corporate venturer could abandon you and focus its energies elsewhere.

Some view corporate venturing as a “pre-exit” in that the corporate venturer invests and supports the start-up, together with valuable incentives to its core team, to a point where it will acquire the business.

Crowdfunding

Crowdfunding has grown since it was launched in 2012 and has rapidly become a mainstream source of potential investment.

Companies can source funding from a large number of individuals, usually customers or fans of the product who want to support the company, and who are not typically sophisticated investors. Crowdfunding platforms such as Crowdcube and Seedrs enable these individuals to invest as little as £10.

Crowdfunding is great for brand building, particularly for B2C brands, but with this option you may have to make a trade-off between ‘free marketing’ and attracting serious professional investors. It is also worth noting that typically, you must have secured a significant percentage of the funds before you go live on a crowdfunding platform and if you fail to gain traction, your round may be unpublished.

University seed funds

Many universities have seed funds affiliated to their technology transfer programmes and focus on areas such as technology invention and innovation. Seed funds typically support innovations from academics within the university.

SETsquared, to take one example, is an enterprise partnership and collaboration between the universities of Bath, Bristol, Exeter, Southampton and Surrey, the five leading UK research-led universities. Ranked as the Global No.1 Business Incubator, it provides a wide range of support programmes and finance to businesses.

Family Offices (aka Private Offices)

Family Offices (FOs), sometimes referred to as Private Offices, manage the wealth of an Ultra High-Net-Worth family (UHNW) or individual.

Some FOs have a general investment strategy and invest £1m to £10m in profitable companies, from any sector, with a turnover of at least £2m from any sector. Most FOs look to invest in companies that are related to the core business on which the family wealth is built.

Single Family Offices (SFOs) usually look after one family, whereas multi-family offices (MFOs) pool the wealth of multiple families.

It can be difficult to gain access to Family Offices and, as with funds, the competition for their cash is fierce. If you do manage to win them over, expect them to ask for a larger or even controlling stake in the business.

Government-supported funds (UK)

There are a number of initiatives supported directly and indirectly by the UK government. This support is provided through the British Business Bank. Some examples are provided below.

The Angel CoFund

The Angel CoFund works with syndicates of angel investors to specifically support early-stage growth businesses. Syndicates can look to the CoFund to provide funding of between £100k and £1m in investment rounds from £200,000 upwards. Where the CoFund invests, a fee of 2.5% of the amount invested will be payable to the syndicate manager.

The Delta Fund

The Delta Fund, run by ACFInvestors, operates a fast-track process for commercially validated UK businesses. It invests alongside lead angels with deep sector knowledge who are making larger investments via equity or convertible loans.

Enterprise Capital Funds (ECFs)

There are over 20 government-supported ECFs operating in the UK. Each one has its own criteria, however, they usually invest £500,000 to £2m in established growth companies which are already profitable, or are near profit. ECFs offer investors the ability to leverage their investment with government debt.

Business Growth Fund (BFG)

The BGF is a funding scheme for medium-sized companies launched by the government and the British Bankers’ Association. The £2.5bn fund invests between £1m and £15m in firms in exchange for a share of the business ranging from 10% to 40%. Participating firms must have an annual turnover of £1m and in addition to capital you will receive access to a global network of business leaders and investors.

Please note, new initiatives are launched and existing initiatives terminated on a continual basis. For up-to-date information please visit the British Business Bank.

Unsurprisingly, the administration around government run programmes can be a challenge. Make sure it’s the best option for you before you dive into the application process and keep an eye on closing dates.

Enterprise funds

The European Union supports three regional funds with funding coming from the European Regional Development Fund. These are:

The Northern Powerhouse Investment Fund (NPIF),
The Cornwall & Isles of Scilly Investment Fund (CIOSIF),
The Midlands Engine Investment Fund (MEIF).

It is expected that the UK government will continue support via the British Business Bank when EU funding has ceased.

Regional Angels Programme

In addition to the three regional funds, British Business Investments, a commercial subsidiary of the British Business Bank, set up the Regional Angels Programme designed to address regional imbalances in access to early stage equity finance for smaller businesses across the UK. The funds are managed by established private sector funds and business angel groups. In 2021 the government committed £150m in funding for the programme over three years.

Funds

In addition to the S/EIS funds listed above, there are hundreds of fund managers who manage the funds of private investors.

Each fund manager is likely to manage several funds. Most funds, other than those listed above, tend to invest in established, profitable companies rather than early-stage ventures. The most active include Mercia Fund Managers, Par Equity, SFC Capital, Lloyds Development Capital and Maven Capital Partners.

It is worth noting that funds charge fees and while an offer from a fund might seem a blessing, you’ll need to read the fine print to understand the total cost of the capital injection before you sign on the dotted line.

When you are ready to expand your business you have options for places to go to find the capital you need. Given the complexities we always recommend working with an experienced professional advisor. They will help you through the arduous process.

ABOUT THE AUTHOR

Oliver Woolley is CEO and co-founder of Envestors. Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early stage investment in the UK.

Web: https://www.envestors.co.uk/

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January 1, 2022/0 Comments/by Nicola Moore