Finance From Outside Investors
An increasing number of businesses are looking to outside investors, obtaining finance in return for giving away a share of their business (sometimes known as equity finance).
There are two common types of investors; business angels and venture capitalists.
Business Angels
Business angels are wealthy individuals who put their own money into businesses with a high growth potential, in return for a share of the business. Sometimes business angels act as part of a group or investment club.
They tend to make their skills and contacts available to the business to help ensure they get a good return on their investment. They usually invest from £10,000 to £750,000 depending on the wealth of the individual or group.
For example, the investors in the TV show Dragons’ Den are acting as business angels.
Advantages and Disadvantages
Business angels are more inclined to take on high risk ventures; providing they see potential for profit.
Business angels will have valuable experience (possibly even in your market/area) that they can bring to your business.
As the money is their own, most business angels will put effort into helping you succeed to ensure they get a good return.
As they invest their own money, most business angels only take on investments irregularly. This may mean that finding the right investor could be a lengthy process.
To ensure their investment is secure, business angels may ask for a large percentage of your business, particularly where the risk involved is high.
Venture Capitalists
Venture capitalists invest large amounts of money into businesses in exchange for shares; they will rarely invest figures below £1million (apart from smaller local venture capital organisations).
Businesses need to have a proven track record, reliable management, a sensible but ambitious business plan which offers the investor a good potential return within a few years (normally 3-5), and a product or service with some sort of competitive advantage.
Advantages and Disadvantages
Venture capitalists can invest much larger sums than most business angels.
If you successfully attract venture capital funding it will make your business much more attractive to other investors, as well as banks and other lenders.
Dealing with a venture capitalist is a much more complicated process than other forms of lending, and significantly more so than business angels.
Venture capitalists are rarely as hands on as business angels, even though they will also have significant experience. They mostly look for your ability to run the company rather than their ability to make it work; though they will almost certainly provide advice and contacts.
Where to Find Out More
Two good places to start for outside funding information are the British Business Angels Association and the British Private Equity and Venture Capital Association.
