Raising Capital for Growth
The next in our current series of blogs looks at what has always been a key issue for small businesses in particular, that is raising capital for growing SME’S.
There will always come a time, particularly for a successful business, that generated capital available to continue to grow the business becomes lower and insufficient to meet the business needs. Sometimes this can be solved through mainstream borrowing through a bank or similar funding institution, but increasingly, especially for long term growth, an owner will look for a potential investor to provide the necessary capital.
Increasingly in the modern world that investment is increasingly replacing traditional bank lending as a source of such funds. Such investors are often referred to as “business angels”
An angel investor is usually an affluent individual or group of individuals who provide capital for a business start-up or an early stage growing business, usually in exchange for convertible debt or ownership equity.
Angel investing is one of the most significant sources of investment, and whilst the market is difficult to calculate since many business angels are investing privately, an estimated £1.5bn per annum is invested by angels annually in the UK.
Angel investment differs from venture capital finance, which invests in businesses through managed funds raised with private or public money. The venture capitalist manager invests the money on behalf of the fund which has to be profitable and make a return for the fund’s investors. Due to high costs of administration and the need to be very selective to ensure a return on the fund, VC funds are more risk averse and thus make fewer small investments in smaller growing businesses, hence the growth in business angels.
In general, individual business angels will invest anywhere between £10,000 and £500,000 in a single venture, depending on the business and the growth needs. Often Angels will also invest as part of a syndicate, pooling their experience and time to add more value and bring more capital to their investment. This means that larger amounts of funding can be raised if required.
Angels usually invest under formal regulated EIS/SEIS schemes in order to achieve maximum tax relief on their expected investment returns, and under those rules they cannot take more than 30% equity in your business. Crucially however you need to be motivated to grow your business and increase returns for both you and the Angel Investor.
How Angel Investors look at a business and assess its suitability for investment is a huge subject which needs to be covered in a separate blog. Generally, the key initial aspect is the people involved in the business, their experience, skills, drive, and how they present themselves that is most important for Angel Investors. They will then of course look in great depth at the business itself and the business plan.
There are now an increasing number of types of Angel Investor. Some are entrepreneurial, others corporate with a different vision of growth, some focus on specific sectors such as high–tech, while others still are professional Angels, often professionally employed as lawyers, accountants or advisers, who may build groups of businesses and have numerous investments.
To these can also be added the most recent phenomenon, Crowdfunding, which has been the subject of a separate blog. For you as business owner, it’s clearly important to choose the best Angel Investor to suit your own circumstances, for which as always, some expert professional guidance will be invaluable.
20 June 2018