Funding your Business; considering an equity sale

So you’ve done the sums, looked at your credit card bills, and realised that you’re going to need to raise more money.  Hopefully you’ve done the cashflow exercise laid out in the previous article, and you have a pretty good idea of how much of a gap you need to fill.  Fundraising for a start-up business can be taxing and time consuming, so it’s generally better to do it less often and ask for more than it is to have to go through the process more often.  It may be helpful to decide a range – a minimum and maximum amount that you would like to raise to get your business to the next stage.

Sharing Your Ownership

The daunting part about raising finance through equity sale is often the prospect of giving up a portion of ownership of your business.  You’ve come up with the concept, established all the business relationships and given up all your free time, blood, sweat and tears to get it to this stage, so why should you give up a stake to someone else?   Whilst parting with some of the ownership can be unsettling, there are a few points to consider that hopefully will set your mind at ease in this respect:

• Rather than giving away your stake, another way to look at it is that the pie suddenly becomes much bigger, and you keep your piece the same size.
• Investors can bring much more value than simple cash. Having a group of seasoned, experienced people behind your business can pay huge dividends in business performance, and their stake should ensure they act in the best interests of the business.  You may find that by bringing in someone with the right skill set, it helps to fill a skills gap in the team, and their stake should ensure they act in the best interests of the business.

Sourcing Investment and Crowdfunding

It’s all very easy deciding that you’re willing to “accept” equity investment, but how do you go about locating someone with deep pockets and a shared enthusiasm for your business?  Many start-ups will appeal to friends and family, so consider your existing connections be they personal or professional.  People with experience in a similar industry are more likely to share your passion for the business.  However, before you start accepting investment consider incorporating keen investors in a crowdfunding campaign.  It’s so key with a crowdfunding platform to demonstrate momentum and show that “the crowd” are buying into what you’re doing, so if you can sign up individuals as lead investors, then it will help to make the campaign a success.

You can, of course, raise equity without using a crowdfunding platform, and people have done it since the beginning of time, but there’s plenty to gain by opening up the proposition to a wider market.  If you think you’ve lined up most or some of the funding you need, then listing the opportunity on a forum of investors may help to top up what you can raise.  Crowdfunding can also help to raise the profile of the business and turn investors into ambassadors.

Key Points for Raising Equity Funding

Start early – Don’t wait until the bank balance is about to run dry before you look at raising funds.  Besides taking longer than you expect, it leaves you with little room for negotiation when talking to investors.

Make sure they’re rewarded – Backers who don’t make a profit aren’t investors, they’re benefactors.  If you want to make your fundraise a success, you have to allow them to make a profit.

Consider the exit – investors realise their profits only when they can sell their stake.  They will likely want to know what avenues you may be exploring to create opportunities for them to realise their profits.  The most common options are floating on an exchange (Initial Public Offering, IPO), or a trade sale (sale to another bigger company), but there may be others for you to consider.  Dividends are not often a realistic option for compensating investors for early stage businesses, because dividends are a poor use of cash for growing, early stage businesses and can stifle growth.

Deciding on a valuation – in order to sell off pieces off the business you’ll need to have an idea what the business as a whole is worth.  This is about as subjective an exercise you will ever undertake and professionals make entire careers on trying to assess valuations.  Whatever figure you decide on, it’s worth avoiding being too aggressive, because a number that’s too aspirational will quickly put investors off, and could negate any possibility of investors turning a profit when they do sell up.