Equity is a business finance option that involves selling shares or partial ownership to people or an organisation in return for money, who can share in your profits or losses.
Equity finance options can help you raise large amounts without building up debt, and your investors will have a personal stake in helping your business succeed.
Equity crowdfunding is a way for small businesses to raise money from a broad group of people who believe in their project or business idea.
Angel Investors are typically wealthy individuals who invest their own money into promising start-ups in exchange for a share in the ownership of the business.
Venture capitalists are professional firms or groups that typically invest larger amounts of money in more established businesses. However, they’re also likely to invest in significantly scalable businesses.
Equity investment from the Northern Powerhouse Investment Fund (NPIF) enables your business to access capital funding in exchange for a negotiated stake in it.
The valuation of early-stage companies is not an exact science, but nevertheless, it brings its challenges. There is usually little or no financial history or track record available, and so by definition, it is much more difficult to use predictive methods based on financial data. Often, any proof of concept has not been developed yet, whilst cash flow is at least initially, in decline. Therefore, other factors need to be taken into consideration.
These factors might include the respective strength of the idea or concept, the quality and experience of the management team, the stage of product or process development and how close it is to commercialisation, the market opportunity and first revenue generation.
Opinions on valuation methodology are subjective, and there is no right or wrong method to use. A2F clients seeking a guide valuation on their business can utilise our Early-Stage Valuation Model (ESVM). This uses a scoring system based on a range of criteria, weighted to reflect their importance. Clients find this a useful tool to use prior to entering into talks with potential investors.
The negotiation of terms with investors is of course always possible, but many of the investment funds specialising in early-stage proposals tend to work on ‘tight’ investment criteria, with little scope for flexibility. With a view to keeping costs down, documentation used by the investor is often in a standard template format with terms that are non-negotiable. ‘Opportunity cost’ must always be a consideration by the business seeking investment, as often they can get to a point where there is only one investor option left in the process.
As with early-stage valuation methods, pitch deck style and content are very subjective.
When choosing the right investors to approach, you should consider:
Do Your Research
The 3 P’s
When conducting your pitch, you should bear in mind the following tips:
As part of our investment readiness service, we can constructively review client pitch decks to see if we feel they can be improved before going out to potential investors.
Whilst other sectors are by no means not overlooked (for the right opportunity), the main appetite for investors for early-stage opportunities is in predominantly technology sectors with high growth potential, such as:
Other popular sectors include Finance and Financial Services, Healthcare, Fast Moving Consumer Goods (FMCG) and the Food Sector. Interestingly, as a result of the difficult economic climate, even when investors are considering early-stage investment, they are increasingly seeking companies that can demonstrate some element of ‘traction’. Examples of this include revenue generation, the clear identification of routes to market and quick access to them and in the case of R&D led opportunities, companies that have projects closer to commercialisation that would have perhaps been the case historically.
Investors adopt a rigorous approach concerning due diligence prior to making the decision to invest. Typically, only around 10% of proposals a fund receives will go on to be seriously reviewed, and perhaps one or two of these will receive investment. The process will usually involve the following:
Screening Due Diligence: Initially, an investor will undertake a screening process to ensure that the opportunity meets the fund’s basic mandate and investment criteria. This will cover such areas as the industry sector the business operates in, the stage of development of the business, the level of investment sought and its location. Some investors prefer to receive proposals only from professional intermediaries and sources they know, although that having been said, more and more investors are welcoming proposals coming directly from the businesses themselves, increasingly through the investor’s website.
Business Due Diligence: This involves a review and investigation to determine the viability of the deal. For example, this might include research into (where applicable) the product, service or technology, considering the following factors: - How significant is the problem it would solve, what needs it would meet and how disruptive would it be coming into the market?
Financial Due Diligence: Financial due diligence for an investor into an early-stage company will usually focus on the analysis and validation of all the financial assumptions being made in the company’s financial projections. For example:
Legal Due Diligence: At the point when an investor is moving towards a favourable decision, usually after a term sheet has been issued and signed, their lawyer will complete a legal review. This will include all legal and organisational documentation associated with your company, such as articles of incorporation, partnership agreements, employment contracts and service agreements, background checks on founders, board members and key personnel and legal protections for IP, including patents and licenses to ensure IP rights are adequately protected. Where relevant, vendor contracts and agreements will be reviewed to ensure they do not contain high-risk, ‘black hole’ elements that could be damaging to the company and any lawsuits, either past or present should be revealed as part of full disclosure. You will almost certainly need to engage your own legal advisor in this process.
Your Due Diligence: Don’t feel you shouldn’t be able to do your own due diligence. Look at the profile of the investor and establish with them how active they are in the market and the specific companies they have invested in. Should you wish to, you shouldn’t find investors reluctant to let you speak to companies about their experiences in working with them. Post-investment, you are likely to experience both good and bad times, and events might not unfold as planned. You need to know that your investor will work with you through such times and become a long-term partner. Similarly, if you are unsure about the choice of advisors, do your research to find the most suitable options. The advisors you choose can reflect favourably on you, and you could always ask for references from investors to determine which firms they respect and perhaps use themselves.
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