Find Business Angels and Venture Capitalists

Introduction
 
Equity finance is a way of raising share capital from external investors in return for handing over a share of the business. This may take many forms including a share of future profits, but is most frequently associated with sharing the ownership of the business to some degree.

The two main providers of equity finance for private businesses are venture capitalists and business angels.

This guide explains what equity finance is, examines the benefits and drawbacks and gives advice on when it might be the best option for your business. It also explains how to obtain equity finance and where to get more information.

What is equity finance and is it right for your business?

Equity finance is share capital invested in a business for the medium to long term in return for a share of the ownership and, sometimes, an element of control of the business.

Unlike lenders, equity finance investors don't normally have rights to interest or to be repaid at a particular date. Their return is usually paid in dividend payments and depends on the growth and profitability of the business.

Because equity investors share the risks your business faces, equity finance is often referred to as risk capital.

Is it right for your business?
Different forms of equity finance suit different business situations. For example, venture capital is most often used for high growth businesses destined for flotation on the stock market - with shares available to the general public - or sale. See our guide on floating on a stock market - your options.

Business angels can offer investment, particularly in the early or growth stages of development, in return for equity.

Because of the risk to their funds, investors expect a higher potential return than for safer, more secure investments. Equity finance is likely to be most suitable where:

• the nature of a project deters debt providers, eg banks
• the business will not have enough cash to pay loan interest because it is needed for core activities or funding growth

Questions to ask yourself include:

• Are you prepared to give up a share in your business and some control? Investors expect to monitor progress and many seek involvement in significant decisions.
• Are you and your key people confident in the business' product/service? Does it have a unique selling point that singles it out?
• Do you have the drive to grow the business?
• What industry experience and knowledge does your management team have? Is there a variety of skills?
  After considering the above, seek advice from a professional, eg your accountant, business adviser or local Business Link.
  

Business angels

Business angels (BAs) are wealthy individuals who invest in high-growth business in return for equity. Some BAs invest on their own, whereas others do so as part of a network, syndicate or investment club. In addition to money, BAs often make their own skills, experience and contacts available to the company.

BAs typically invest in businesses with:

• an investment need of between £10,000 and £250,000 - most initial investments are less than £75,000
• the potential for high return - BAs are not averse to high risk
• good early stage development or expansion
• a presence in a particular sector

The advantage of using a business angel is that they often make an investment decision quickly, without complex assessments. However, you will still need to draw up a professional and tailored business plan.

Most business angels can bring valuable first-hand experience of either working in a small business or running their own business venture. They're also likely to have local knowledge, as they tend to focus their investments within a small geographical area.

Some BAs may be eligible to have their investment funds matched by the government under its Enterprise Capital Funds (ECFs) scheme. ECFs targeted at SMEs are under development and will only win government approval if they clearly show how they are targeting SMEs. In effect, ECFs are commercial funds, investing a combination of private and public money against a share of equity in small high-growth businesses seeking up to £2 million of equity finance.

The disadvantage of business angels is that they don't make investments very regularly and may not be actively looking for an opportunity, so they may be difficult to find. While you may decide to approach an agency to help you with this, business angels will place a lot of emphasis on your relationship and how well you can work together directly. Tracking down the right investor may take longer than expected and can typically take several months.

Venture capital

Venture capital is also known as private equity finance. Unlike business angels, venture capitalists (VCs) look to invest large sums of money in return for some of your business' shares.

VCs typically invest in businesses with:

• a minimum investment need of around £2 million, though many smaller regional VC organisations may invest from £50,000 
• an ambitious but realistic business plan
• a product or service that provides a unique selling point or other competitive advantage
• large earning potential and offering a high return on investment within a specific time frame, eg five years
• sound management expertise - although VCs tend not to get involved in the day-to-day running of the business, they often help with a business' strategy
• a proven track record - for this reason start-ups are generally not considered by VCs for investment

The advantages of securing a VC are that they can provide large sums of equity finance and bring a wealth of expertise to your business. Also, if you successfully attract a VC to your business, you're likely to find it easier to secure further funding from other sources.

The disadvantage is that securing a deal with a VC can be a long and complex process. You'll be required to draw up a detailed business plan, including financial projections for which you're likely to need professional help. Support from your local Business Link may be available for this. Also, if you get through to the deal negotiation stage, you'll have to pay legal and accounting fees whether or not you're successful in securing funds.

The equity gap

Some businesses require much larger funding than that which can be provided by business angels, but do not need the levels of funding venture capitalists would consider. The gap between these two finance situations is known as the equity gap.

Businesses in this situation may wish to approach private equity firms for help. These are organisations that invest and manage investments and they tend to focus on management buy-outs and buy-ins.

In July 2005, the government launched a multi-million pound equity finance scheme to close the equity gap. Up to £200 million will be made available through Enterprise Capital Funds (ECFs) to match private funding from venture capitalists or business angels. Small and medium-sized enterprises (SMEs) with high-growth potential will be able to apply for up to £2 million of equity finance from the SME-approved ECFs as soon as these are announced.

In England there are other options available if your financing needs fall into the equity gap. The Regional Venture Capital Fund (RVCF) programme is aimed at providing risk capital finance of up to £500,000 for SMEs that have good growth prospects. Funding is supplied by the government - through the SBS - and the European Investment Fund. The remainder - typically 50 per cent - comes from private sector investors.

Advantages and disadvantages of equity finance

Equity finance can sometimes be more appropriate than other sources of finance, eg bank loans, but it can place different demands on you and your business.

The main advantages of equity finance are:

• The funding is committed to your business and your intended projects. Investors only realise their investment if the business is doing well, eg through flotation or a sale to new investors.
• Resources for your business. The right business angels and venture capitalists can bring valuable skills, contacts and experience to your business and can assist with strategy and key decision-making.
• In common with you, investors have a vested interest in the business' success, ie its growth, profitability and increase in value.
• Investors are often prepared to provide follow-up funding as the business grows.

The principal disadvantages of equity finance are:

• Raising equity finance is demanding, costly and time-consuming. Your business may suffer as you devote time to the deal. Potential investors will seek background information on you and your business, they will closely scrutinise past results and forecasts and will probe the management team. However, many businesses find this discipline useful regardless of any funding.
• Depending on the investor, you will be subject to varying degrees of influence over the management of your business and making of major decisions.
• You will have to invest management time to provide regular information for the investor to monitor.
• Your share in the business will be diluted. However, your share may be of a much larger business because of the funding.
• There can be legal and regulatory issues to comply with when raising finance, eg to do with promoting investments.
  

Securing equity finance: preparation

Once you've decided to seek equity finance, you'll need a comprehensive business plan incorporating a detailed marketing plan and realistic financial projections.

You may find it helpful to hold initial discussions with your business adviser or local Business Link adviser and to research potential investors.

Consider the following issues:

• how much funding you need and for what
• how much control you're hoping to retain and the skills the business needs
• how long you need the funds for

Any potential investor will be looking for a number of core issues in your business plan:

• What are your funding needs?
• Are your plans for the business realistic?
• Is your venture appropriate for external investment?

Your business plan should seek to address these issues, and you should tailor the information you provide according to the investor you're approaching. The plan should include a series of detailed financial forecasts, what you intend to do with the funding, how you'll repay the investor, your management's level of expertise and what the investor can expect in return.
Approach short-listed investors directly through an introduction or contact, or their association or network. Remember that many private investors are interested in specific industry sectors or geographical regions, so make sure your shortlist only includes suitable candidates.

Networking is an important way of finding investors, and it may be a good idea to find suitable candidates through recommendations from your specific industry or their associated network. Go to events organised by your local Business Link and Chamber of Commerce in order to introduce yourself to people and get your business known to potential investors.

Securing equity finance: pitch

Pitching your plan or proposal to potential investors is important. Try to anticipate the concerns the investors may have and show the benefits of their involvement, placing emphasis on:

• the investment required
• the terms you're proposing - eg share of control, skills, timescale of investment
• the ability of the management team to proceed with the plan

You need to decide who will undertake the actual presentation and whether, for example, you want to involve the whole management team. You can help to create a professional pitch by dressing smartly and ensuring that basic business etiquette is kept, eg punctuality. Deciding the style and length of the presentation is also important. Keeping it short, catchy and appropriate to your audience may impress more than a long-winded, complex presentation.

If the potential investor is interested in collaborating with you, you can start negotiating key issues in detail, eg respective responsibilities, growth targets, the investor's exit strategy, service contracts, warranties and indemnities. You should also specify how the investment relationship will be managed and what involvement they'll have in the company.

Provide detailed, credible and professionally presented information, such as historical and forecast financial information, business policies and procedures and customer and supplier details, for the investor to scrutinise.

Enlist the help of a specialist accountant and legal adviser to negotiate investment terms.

If your pitch is successful you'll need to draw up a plan of how the investor will fit into the way you manage your business. Some investors may be more of a "sleeping partner" in your business, while others may want to be actively involved in the management of your business. You won't have to give up day-to-day control of your business, but you'll need to negotiate with your investors at what level they get involved. Remember that most investors may not just be offering cash to your business, but also their expertise.

Are there alternatives to equity finance?

Equity finance may not suit your business. For example, you may not feel happy about losing a degree of control, or the intended project may be too small to be an attractive investment opportunity.

Consider the following alternatives:

• Loans - there are many options available, from commercial mortgages secured against your business assets to short-term borrowing for periods of between three and five years.  It's probably best to approach your own bank first, but do not overlook other lenders. 
• Overdrafts - overdrafts can be expensive but are a flexible form of borrowing. They're not especially suitable for long-term finance as they are repayable on demand.
• Loans from family and friends - these can be a sound method of raising finance, but beware of potential damage to relationships if the money isn't repaid on time. 
• Additional funds - from you or your fellow partners/directors.
• Government support - your local Business Link is a good starting point for information on the range of support available. .
• Joint ventures - these can take many different forms. The term normally applies to the co-operation of two or more individuals or businesses in a specific enterprise rather than in a continuing relationship. 
• Credit cards - these are a relatively expensive but quick way of raising finance. They are a flexible form of borrowing but are not suitable for long-term finance. 

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