Raising finance can mean different things to different people depending on the business that they have established, and indeed the size of their dreams and ambitions. The differences can mean anything from does ‘finance’ mean debt or equity, through to how much will the business need and will it need more in the future?
Debt finance can itself come in many different forms: overdraft; short term working capital or stock financing; leasing; invoice discounting; asset finance; term debt; property mortgage; and many more. This has the benefit of being quicker to obtain than raising equity but the drawback that it is only normally available to better established companies with a trading history. One other benefit is that the founders do not need to dilute their shareholding by selling part of the company, although there is an immediate impact on cash flow as the interest and principal of any loan facilities are repaid.
Equity finance can often be the only viable option for early stage businesses as they either require large funds in order to scale operations, or they are simply viewed as too risky and have too short a track record for the banks and other lenders to consider. The reality is, why should they take an equity type risk for a much lower return in the way of interest rates, rather than participating in the upside of the business?
How Do I Decide Where and How to Get Investment?
For those business owners that decide that they wish to obtain investment funding in order to scale their business, the inevitable first question is of course where to start? That question is followed by the supplementary one of ‘what are the fundamental differences between the different types of investor that I might get?’
Just as inmost situations, the best and most accurate answer will come from the best and most specific question. So what are the primary matters to consider before starting to formulate the question about where is it best to obtain investment? These should be on everyone’s list:
· What stage is my business? Concept /feasibility / pre or post revenue / profitable…
· What stage funding are you looking for? That is startup / seed / scale / A / B / C…
· What type of product or service does my company provide and who are the customers?
· How much investment am I looking for?
· What percentage of the business am I prepared to sell?
· What is the funding to be used for?
· What length runway will this give my business?
· Will I need subsequent rounds of funding in the future? If so, then what size and how soon?
· Do I want a financial or strategic investor, and do I want smart money?
· Do I have a good Advisory Board and am I prepared to allow an investor a seat on the board?
Your answers to the above questions, together with any others that are much more specific to your own business, will start to lead you to the best route to finance for your company.
Are There Any Simple Visual Guides?
It is important to go through the full and detailed question / answer decision making process, but some generalised guides can be summarised as shown below:
Whilst these guides are very over simplified, it starts to become very clear that each type of investor brings different sets of benefits and drawbacks, and like almost everything in life there is something of a trade-off.
By way of an example, looking at the above it is apparent that VCs are more likely to be the investor of choice if you are looking to raise larger amounts of funding, probably for a follow on round, for a more developed business, and the VC is best placed and most interested to invest in further rounds. In addition, they are looking to provide an active input to help the business to grow but that means a seat on the board and potentially more ‘interference’ than other investors. Potentially the biggest downside is that they will often negotiate harder and will want a larger percentage of the business, thus leading to a lower valuation.
Crowdfunding, business angels, and high net worth individuals are typically between friends and family and VCs on every one of the scales above but in varying orders. Friends and family are always at the boot strapping end of a company’s journey and fundraising activity and whilst they are quick and easy to deal with, and normally very undemanding, they are rarely ‘smart’ money and have very limited resources.
The Importance of the Right Investor
The questions above, and the answers to those questions, as well as the simplified guide above, are an indication to what type of investor is typically right for what type of company and at what stage. But that is only part of the story.
The ‘right’ investor is so much more than just the one that is prepared to pay the highest price for the best valuation, or even the smartest money. The right investor will make all the difference to how well and how quickly the business develops, as well as ultimately how large the business might grow.
Crowdfunding investors are typically the least directly and personally involved but business angels and VCs are normally much more likely to play a direct role, and as such it is crucial that the right type of investor is chosen. Different types of founders and different types of businesses are best suited to different types of investors. Make no mistake that an investor, especially one that plays a more active role, is a long term partner, and like every partnership, whether in our personal or business lives, your choice of partner will have a great impact on you and your business for many years to come. For that reason, it is imperative to find a route to the investor with the same ethos and aims for the business as your own.
It can be seen that there are many very good reasons why it is so important to choose your investors wisely.
in British English