Should you raise investment or not?

If you’re in the first few years of running your start-up, you’re probably thinking about how to finance the growth of your company. Investment is something you may be considering. But is it right for you?

What is investment?

Investment, often also known as 'equity finance' is where you sell shares in your company in return for a cash investment. This investment usually comes from angel investors / high net worth individuals (HNWIs), venture capital firms (VCs), corporate venturing arms, or via private equity firms (PE). Equity Crowdfunding platforms are also increasingly used to bring together these types of investors on a deal.

When might equity finance be the right funding choice for you?

1. When you’ve got traction - Investment is best suited for those businesses that are already proving traction in their market and are ready to scale, which is the point at which seed venture investors are most likely to be interested in backing you.

2. When you want senior level support - Typically, those people who invest will have voting rights, so you need to be comfortable knowing you’re giving up some control when you take on investors (although you can negotiate how much). The benefit of bringing on the right investors means that there are others who are sharing your risk, and others who also have a vested interest in helping you grow the company. If you bring on investors with valuable skills and experience, this can be very helpful.

3. When you’re ready to scale towards exit - Investors will also look for return on the money they’ve invested, typically within 5-10 years. So that means once you take on equity investment, you’re effectively on a route to exit. If this is in alignment with your own goals, and one day you plan to sell your business and realise the value that you’ve created, then equity finance could be a great route for you.

4. When you need significant investment to get to your next milestone – Raising equity investment can be an involved process, so if you’re raising less than £50k, there are other routes to consider. But if you’re raising £100k+, then equity funding can enable you to secure finance to that level or way beyond.

When might investment be the wrong route to take?

1. If you’re still at idea stage, or in early development – At this very early point in your business journey, you’ve not yet validated the market. This makes the venture much riskier and therefore more challenging to secure investment for.

2. If you’re building a ‘lifestyle’ business – If you have no plans to scale your business into being something much bigger, then investors won’t be interested as they simply won’t get a return

3. If you’ve no plans to sell your business down the line – If you plan to keep your company as an income generator for you and your family for years to come, that’s fine. But in this scenario, investors won’t be able to get their capital out, so the opportunity won’t interest them.

What are the other options on finance you might consider?

1. Boot-strapping – At the beginning of your business growth journey, back yourself as far as possible, and beg, borrow and steal (not that I'm actually recommending theft!) the cash you need to get you out of the blocks. Look to your savings, credit cards and Friends, Family and Fools (FFF) to help you on your way.

2. Rewards-based Crowdfunding – This can be a great way to launch a new product, because you’re effectively pre-selling it to the market to raise the funds you need to produce it. That means that you get market validation and finance for development. However, you may need to invest some money in marketing your campaign, in the same way you would to sell any product; you've got to drive people to your crowdfunding page, and make sure your page effectively markets the product. Check out Indigogo, Kickstarter or Crowdfunder.co.uk

3. Debt – A great option for early stage businesses is the government-backed Start-up Loan, where you can get up to £25k on a personal loan basis; try Virgin Start-up, who can help you with the loan plus plug you into their start-up network. You may also want to try your business bank, or you could even crowdsource your loan through a service like Funding Circle. Don't forget, you will probably need to personally underwrite any loan you take out, or secure it against your assets.

4. Grants – This can be a good route if you’re developing a technology based business, or one that will have significant impact in scientific or social developments. Speak to Grant Tree who may be able to help you on your way, or search for industry-specific government or quasi-government grants.

5. R&D Tax credits – If your business requires research and development investment in the early days, then check out the tax relief you can get from the government on this.

6. Invoice Financing – If you have large confirmed orders from clients who have lengthy payment terms, you can look to secure invoice financing so that you get the cash now for a fee, instead of waiting for that invoice to be paid 30, 60 or 90 days down the line.

In conclusion, for businesses with good signs of traction, strong potential for growth, and ambitions for exit over the next 5-10 years, then equity finance can be an excellent way to unlock significant amounts of funding for entrepreneurs. If you're not at this point yet, then there are other options to pursue to get you on your way.