Funding for Entrepreneurs

As my children are now at the latter stages of their education, and both are focussed on business, it interests me to compare their outlook with my own at a similar age. And they’re poles apart!

One of the most striking contrasts is the much greater emphasis on entrepreneurship. Perhaps born out of societal changes, a more connected world and certainly born out of higher levels of confidence, the can-do attitude from younger people (am I allowed to say that…) is very refreshing and so necessary.

Which is really great, given an economy where we need growth, ambition and the positivity it brings. This next generation have this by the bucket load – but they do need to “get a start”.

Start Ups and Financing

Money is an important contributor to that start – whether we like it or not. Hence, I thought it would be useful to introduce some of the methods of funding for young businesses. And that is the subject of this latest newsletter.

So let’s say our aspiring entrepreneur has a great idea, the drive to make it a reality, a market that looks promising and they are committed to gaining the skills to bring it to market.

All good so far.

But to get there, they will need to invest in the product, the marketing (to get the product fit right), have the means to sell it and operationally fulfil the demand.

To do that, they will need to acquire some funding, and ideally a partner who can help steer them on their journey. And introductions to grease the wheels would be nice too.

Seed Funding

Businesses typically start with seed funding. And may use personal finances to get started, perhaps supported by friend and family. In the case of friends and family, it is certainly advisable to have terms clear and legally documented. Funding can be in the form of a loan, share equity or debt that will convert to equity in the future.

Angel Investors

And then we get a bit Dragon’s Den. The Angel investors. These can be very attractive to aspiring entrepreneurs. Bringing capital, in exchange for a “healthy” share of equity, or convertible debt (debt that will convert to equity in the future).

And what is particularly great about them is the advice, mentorship and network they bring. The right Angel with the right entrepreneur can be a formidable combination.

Crowdfunding

The examples above tend to concentrate investment amongst a relatively small number of partner/investors.

An alternative may to go to a larger number of small investors, each investing a relatively modest amount in exchange for equity in the business.

There are a number of online platforms that facilitate this form of financing, which can be positively regarded by our entrepreneur given they don’t dilute their influence over day to day or strategic development of the business.

Business Incubators and Accelerators

And then we have the incubators – which can help in the early stages, but will usually be looking for an equity stake in return.

All of the above would be considered “Seed Capital”.

Series A

When the business is becoming more established, perhaps the proof of concept has been proven, the growth is ramping up and the business is now needing additional investment to accelerate and grow substantial market share.

This growth stage requires higher levels of investment, typically from Venture Capitalists or Private Equity.

Venture Capital

The Venture Capital firms are always on the look out for great ideas where 20%+ top-line growth is a reasonable expectation.

They will typically invest £xm to £ym in exchange for a % of the equity. They are particularly attracted to investments that satisfy the UK’s EIS criteria, with their own investors benefitting from the favourable tax treatments afforded.

The right VC partners provide introductions, help the business set its strategy, monitor the business performance and importantly positively support the entrepreneurs.

Their investment cycles are typically up to 5 years before they would expect to exit.

And they would join the board and want influence and consultation rights in relation to the major decisions. For them, careful cashflow management is essential, so robust financial management along with a credible financial plan is important for them to invest. And note, the VC may negotiate preferential equity rights to protect their investment.

And Private Equity

Private Equity is similar to Venture Capital in many ways, although they would typically be attracted to businesses that are a little further along the journey. They may invest more capital than the VC’s and perhaps be involved for a longer time period.

They also partner closely, provide introductions, take seats on the board and have regular information requirements. They typically introduce both debt and equity into the new group structure and may introduce new classes of equity including preference shares.

The right PE backers will enter on comparable terms to the founders, in terms of equity rights, such that the major investors are aligned in terms of their goals and future returns.

Both private equity and VCs will have their future exit in mind and will leave the door open in terms of the form of that future exit – trade sale, secondary private equity or an IPO are some future options.

What Matters Most?

This is where the Entrepreneur has to think very carefully, and take advice. Ideally from parties who have successfully delivered a similar journey.

Key points to bear in mind are:

• It’s your business – and you may not want to cede control over the day to day and the strategy.
• Equally ownership – how much equity you cede and when is a key question. This brings in valuation.
• Capital requirement – to make the business really fly requires capital – and whatever you forecast, it will probably be at least that much. This ties to the pace required to execute the opportunity. One bigger raise, or a series of smaller ones.
• The right partner – this is so important. Personal recommendations, references, drawing on a trusted friend’s network all helps. As does that genuine collective belief in your vision. And your gut instinct!
• Projections must be credible and realistic – take advice, perhaps engage a partner who is experienced in fund raising and the process leading up to it.

Wrapping Up

In conclusion, then, there are different sources of capital, all with distinct criteria and benefits. Pace, control and trust would be the 3 factors I would focus on the most.

And a little bit of good fortune as well!

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When to bring in your first Non-Executive Director (NED)?

This is a common question, and one we do hear from clients and contacts.

And the Answer…

Well – perhaps frustratingly – is it depends on the circumstances, where the business is in its journey and what its stakeholders require. Amongst other factors.

And it is subjective, so the best I can offer is to set out some opinions in this post.

Does it align with the Strategy?

I tend to look at most business decisions with a simple approach – what will it deliver to advance the strategy and is it worth the investment?

And this is also the case when it comes to adding strength and credibility to the Board – it is an investment, to be weighed against the benefits.

But starting with the strategy – this can give us a good clue. If a business is striving to grow, enter new markets, create and launch new products, seek out new relationships or raise new sources of finance to accelerate, then it may be a good time to bring in a NED.

Does the Business have all the skills and relationships it needs?

This is another good indicator, and it often influences the role specification. When a board lacks specific skills (financial, marketing, technology), industry knowledge and relationships, or leadership experience, then another director can be very valuable. Far outweighing their cost, while helping the Board mature.

And often they can act as a mentor to the Executives as well. Helping them navigate the inevitable growth challenges. Someone with expertise in high growth environments, professionalising businesses to enable them to take the next growth step-change.

Is the Business able to identify all the opportunities and avoid group-think?

NEDs are by their nature independent of the business – and hired to identify the blind spots and challenge the board’s conventional thinking.

They also provide balance in decision-making – helping the board make well-thought through decisions, being a sounding board for the CEO while offering objective advice.

And will stakeholders benefit from a NED?

As a business grows, there will be an expectation of high governance standards. A NED with corporate governance expertise can really help the board perform – think great processes, risk management and expert financial oversight. And in doing so ensure the business has a sound strategy, ethical standards and the resourcing to execute it well.

So overall is now the time?

If you are an ambitious business and feel a fresh perspective would be beneficial to you and your stakeholders, then bringing in a director with a wealth of experience could make a lot of sense.

If you think your business would benefit from a NED, let’s discuss.