When considering raising equity finance for your business, it’s essential to first decide whether you’re building a “lifestyle” or a “growth” business. This distinction will dictate the type of finance you should raise, with the two key options being equity and debt. Oliver Woolley notes that understanding your business type is essential in determining the right financing approach.
The objectives you set for your business will guide your financing decisions. If you’re aiming for growth and eventual sale, equity finance might be the way to go. However, if you’re not planning to sell, debt finance could be more suitable.
Raising equity finance involves selling shares in your company to investors. It’s a process that requires careful consideration of the right amount, timing, valuation, and source of funding. A mismatch in these factors can decrease your chances of successfully raising capital.
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There are various sources of early-stage equity fundraising, including business angel networks, seed funds, incubators, and enterprise capital funds. For early-stage companies, developing a network of industry contacts is vital, as these connections can lead to investment opportunities.
In the UK, businesses can take various forms, such as sole trader, partnership, or limited company. To raise equity finance, you need to set up a limited company registered at Companies House, which facilitates the buying and selling of shares.
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) offer tax relief to private investors who invest in UK limited companies.
Investors need to see the whole truth about your business, including the good, the bad, and the ugly. Disclosures on matters such as family member employment, insolvency, and conflicts of interest are essential when raising money from experienced investors and funds.
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A clear exit strategy should be part of your investment proposition, outlining how investors will get their money back, hopefully with a return. Common exit strategies include sale to other shareholders, management buy-outs, or sale to a third party.
Raising equity finance is a long-term process.
It can take six weeks to close investment, but typically, it takes six or more months.
As Oliver Woolley notes, remembering that raising equity finance is a marathon not a sprint is essential for success. They emphasize the importance of patience and persistence in securing investment.