Laura Johnson looks at how smaller businesses can get their ideas off the ground with third party funding and the right investor
You’ve struck on something big. Your little company has attracted the attention of the leading names in your industry and offers to develop new products or expand your services are flooding in. It’s your moment.
The problem is your development team is one person working flat out in a garden shed, you’re terrified of getting your fingers burned by the big boys and your bank manager’s generosity won’t stretch to funding the extra resources you need. When the time comes to raise cash, the options can seem limited.
If searching every branch of your family tree doesn’t unearth a rich uncle or fairy godmother, you have three main investment routes – grants, loans and equity investment. Unless you’re fortunate enough to operate in an industry the government is backing (eg technology) then grants are scarce nowadays and loans from banks are virtually unobtainable for smaller companies unless you are willing and able to offer a property asset (eg your family home) as security. That leaves the scary prospect of equity investment.
Realistically, most businesses on the cusp of hitting the big time will struggle to pass the demanding criteria of professional venture capital investors. Angel investment could however be a more fruitful option. Despite the recessionary times, there are wealthy individuals prepared to invest in businesses with potential. In fact, a report by the UK Business Angels Association and Deloitte revealed the deal market for angels is actually getting ‘noisier’, with more capital being invested by this expanding group in 2012/13 than in previous years.
“There’s been a very significant rise of angel investment in the past four to five years,” says Stephen Bence, chairman of businessfunding.co.uk. This is largely down to Government backed initiatives such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). “The tax breaks offered by these schemes are very valuable and coupled with low interest from banks, this has driven lots of investment from individuals,” Bence explains. In addition, the emergence of crowdfunding (websites where individuals pool funds to support businesses embarking on new projects) gives newbie investors a lower-risk introduction to angel investing as well as making funding more accessible to entrepreneurs.
Whatever shape equity investment takes, the trade-off remains – you’re giving away some proportion of your business. For many business owners this presents an insurmountable stumbling block, as Helen Wooldridge and her business partner Polly Marsh found as they faced the infamous investors on the BBC television programme, Dragons’ Den. So tempting was the duo’s fledgling business, Cuddledry, that offers came in from Deborah Meaden, Duncan Bannatyne and James Caan. The hitch? Each proposal came with a request for between a 40 and 50 per cent stake in the business. “It was too much in a business already co-owned by two people,” says Wooldridge. “We weren’t prepared to give that much away.”
With both founders being first and foremost mums, having control over how the business is run is extremely important to them. “We are unable to work nine to five; we work flexible hours around our young families,” Wooldridge explains. “It doesn't mean we work less hours but we don't work in a standard way. Accepting investment from any of the dragons would have given them the right to place requirements on how we operate the business.”
However, going through the Dragons’ Den process convinced them of the need for extra funding. Faced with buying in stock to fulfil sales potential, the terrifying minimum order quantities demanded by manufacturers and the need to market their product, the Cuddledry duo continued pursuing funding.
They now have two investors on board, but at much lower percentages than the dragons were seeking. As they found, choosing an investor carefully is essential not only to prevent conflict but also to help mentally justify the dilution of shares. “It was made much easier by both of them wanting to have some level of involvement in the business,” says Wooldridge. “They were offering skills we needed.”
But before you run off to perfect your Dragons’ Den style pitch, curb your enthusiasm. “The vast majority of businesses looking for funding don't get it,” Bence warns. “Probably about one per cent get equity investment.” The reality is, despite the boom in the angel market, investors remain cautious. They want to see great management that they believe in, an enticing and believable business plan and most importantly they want to feel confident they will get their money back. Make that multiples of their money back.