Guide to equity finance.
Private equity provides businesses with finance in exchange for a proportion of the business, most often in the form of shares. It is a popular method of financing because private investors often provide support and guidance in addition to capital.
What is equity finance?
Equity finance involves handing over part of your business, typically shares, in exchange for investment. This investment is not subject to repayment unless agreed upon in advance, and differs from bank loans in that the investor shares much of the risk with you. If the business fails, they will lose their investment. Typically, equity investors provide more than just finance and make their own skills and experience available to business owners. The ability to form a working relationship is often important to investors, making your attitude as important as your business plan in attracting investment.
Should I use equity finance?
Equity finance is a medium to long-term investment solution and as such is not suitable for all situations. It can work well where bank finance is untenable; if you need an influx of capital to finance various business areas rather than an individual project, you may find it hard to convince a bank to lend to you. If your business is in its infancy and can’t afford monthly repayments – or you’re not prepared to risk your property – equity finance may suit your situation. However, if you’re not prepared to hand over a part of your company – and potentially a say in the decision-making process – then equity finance may not be for you.
Angel investors
Angel investors invest personal wealth into high-potential businesses in exchange for an ownership share, either alone or part of a network. Angel investors are so called because they often provide additional expertise and contacts to the business in order to help it succeed. Angel investors offer a faster turnaround time than many forms of finance, making them a good choice for businesses that require finance quickly. However, their advantages mean they are in short supply, and only invest in the best opportunities. Please read our full guide to angel investors for more information.
Venture capitalists
Venture capitalists deal in significant sums and will typically not invest less than £2million in a new business, with a focus on high-potential companies that have the potential to dominate a sector. This investment is made in return for a equity share of the business, which can be considerable depending on the type of business and the aggressiveness of the investor. Venture capitalists typically work with experienced businesspeople with a track record of success, although it’s not unheard of for them to invest in particularly exciting start-ups.
Equity gap
Business angels and venture capitalists tend to operate at different ends of the investment spectrum, offering smaller and larger amounts respectively. Unfortunately many businesses require investments that fall in the middle; this is known as the equity gap. There are number of solutions to this problem:
- Private equity firms – these firms operate a wide portfolio of investments and can provide varying levels of finance to businesses
- Enterprise Capital Funds (ECFs) – these Government-sponsored initiatives invest up to £2m in smaller businesses with high potential
- Equity finance initiatives – Scottish businesses can apply for investments from a number of Government-sponsored funds including the Scottish Venture Fund and the Scottish Seed Fund
Tips to secure investment
Professionalism will go a long way to helping you secure investment; equity investors need to have confidence in your business acumen. A great business plan will also help your case, as investors are in effect taking a risk investing in your company. Convince them that, of all the businesses starting up, yours has a good chance of succeeding. You should also bear in mind that investors may want some form of control over the company, so it’s best to acknowledge this at the start and remember it throughout your negotiations.
