Equity Financing Sources: Which is Right for You?
Scroll down if you know this bit. Equity financing is the process of raising capital for your business by selling ownership shares. Other forms of funding include borrowing money (debt) or receiving some form of governmental support such as a grant, that takes no ownership or requires no repayment.
Given the risk profile of most early-stage tech startups, equity is the best (and in many cases only) option. Debt requires strong revenues and previous track record, and grants are for specific projects and require jumping through lots of hoops. Given the risk profile of most early-stage tech startups, equity is the best (and in many cases only) option. Debt requires strong revenues and previous track record, and grants are for specific projects and require jumping through lots of hoops.
However, equity financing comes in lots of shapes and sizes. Depending on sector, stage of growth and size of fundraise, some are better suited for companies than others. To learn which might be right for you, read on! However, equity financing comes in lots of shapes and sizes. Depending on sector, stage of growth and size of fundraise, some are better suited for companies than others. To learn which might be right for you, read on!
Raising capital is difficult before you’ve got to product/market fit, especially in competitive areas like mobile apps. Accelerators/incubators are often a good resource as they can not only provide some seed funding and office space, but resource and guidance as well. You will also co-locate with other entrepreneurs in a similar sector or stage of development.
£10k - £100k
Generally operate as cohorts over anywhere from 3 months to a year or more, with application deadlines for each cohort.
- Often provide seed funding and office space, as well as hands on support and mentorship
- Access to their network
- Some offer better mentorship than others
- Long programme with just a little funding
- Sometimes charge rent and other fees
Friends and Family
When you are at the idea stage, or looking to develop a product, professional equity financing might be a bit out of your grasp, unless you are a seasoned entrepreneur who can raise capital on their background alone. Your options are a bit limited, which is an unfortunate chicken and egg problem. This means your choices are really down to bootstrapping (getting by on little besides your own investment) or raising from friends and family. You have to be creative at this stage to prove the concept on little budget and resource. However, if you can make it out of the 'valley of death' on a shoestring with some traction and market validation then you are setting yourself up well for later stage investment.
Depends on how rich your friends and family are -- generally up to about £100k.
As quickly as you can convince your friends or family to part with some startup capital!
Family, former colleagues, key partners. Crowdfunding sites such as Seedrs (see below) can enable the transaction and share issues in a private fundraising round to make things easier and quicker.
- Investing in startups is really about investing in people you believe in, and you can get some early validation as to whether your friends and family believe in you.
- Borrowing or raising equity with friends and family can lead to trouble down the line if you aren't successful -- make sure they know that there is a very real and likely chance they will not see a return on their investment.
The definition is in the name -- this is where businesses raise investment from the 'crowd', i.e. investors on platforms such as Seedrs and Crowdcube. In order to do an equity financing via the crowd, you have to apply to one of these platforms, and if a good fit for their users/investor base they will open you up to investment.
Companies we know who have tried raising through crowdfunding have had mixed results for various reasons. Generally consumer-facing business are more successful. You should also not expect too much from the crowd. You will need to market the campaign, and ideally have some of it committed from friends and family. The crowd usually comes in later-stage when the round is starting to fill up.
£50 - £500k
1-2 months depending on how much you already have committed.
- Seedrs - They have a track record of funding similar apps.
- Crowdcube - Roughly the same model as Seedrs.
- Angels Den - Have a hybrid syndicate and crowd-funding platform. They can connect startups they like to a lead angel so don’t necessarily need a lead investor like the others.
- Syndicate Room - A platform for allowing the crowd/angels to syndicate on to deals that are 25% funded already - this requires you to have a lead investor(s).
- Relatively quick
- Transaction administration and investor relations handled by crowdfunder
- Extra exposure to the ‘crowd’ meaning you don’t have to drum up all your own support
- Generally get a favourable valuation
- The crowd only invests the last ~40% - meaning you need to have about 60% committed outside the platform (i.e. you need a lead angel), and they still take their fees for your investors to invest
- Relatively high fees - for Seedrs, a £250k fundraise will incur £15k in fees
- That favourable valuation can hurt you in further rounds
Angels/High Net Worths
Angel investors are wealthy people who invest their own money into exciting new companies. Their criteria is as diverse as they are. Some will go in early stage before product or even proof of concept. More often than not they will require some traction or validation (or revenue). This is particularly true with businesses where barriers to entry are low and there is a lot of competition.
£50k - £500k
1-6 months, including due diligence and term sheet negotiation.
- Individual high net worths - There is no one database to find them all -- yet. That is what we at Capital Pilot intend to build.
- Independent financial advisers - Clients will be high net worth, and often they will pass them deal flow.
- Low fees
- Can provide full fundraise without a marketing effort
- Often will be able to provide hands-on support and guidance
- Difficult to access them
- May want varying levels of control over the business.
Angel syndicates are organisations that manage deal flow, due diligence and transactions on behalf of their angel investor membership. They bring deals to their members, who then decide if they will invest their own money in the companies. Some operate their own funds to invest alongside their angels as well. They often utilise live pitching sessions or monthly/quarterly events to connect startups with investors. Some will have specific sector or geographic focus.
£150k - £1m
1- 6 months, including due diligence and term sheet negotiation.
- Newable (formerly London Business Angels)
- Cambridge Angels
- HNW members
- They handle the transaction and due diligence
- Often help with your pitch
- High fees (5-10% of the fundraise size)
- Often only connect you to angels at monthly or quarterly pitching events
- Often make you jump through lots of hoops
Seed Stage Venture Capital
Venture capital (VC) firms are organisations that make equity investments money on behalf of their limited partners. Most VCs look later stage, though there are a few who exclusively make investments into SEIS/EIS eligible startups.
1 - 6 months, including due diligence and term sheet negotiation.
- Index Ventures
- Passion Capital
- Can provide follow-on funding down the line
- Often have good network and ability to support your growth
- Often take fees
- Difficult to get a meeting with if you don't get a warm intro