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Early Stage Fundraising: Private Equity for Start-ups

Dec 3, 2016

Modern day entrepreneurship is being encouraged and there is a wealth of funding available to new and small businesses in the UK. Whether you are looking for funding to start a new business, grow your existing business, develop an idea or to take your start-up to the next stage, the options available for early stage fundraising can be numerous and the impact varied. The more traditional forms of raising cash such as a bank loan, loans from friends and family or invoice financing, to name a few, may have been exhausted or may not be viable options for you and your start-up business. These forms of funding can be out of reach for many start-ups. A lack of trading history, a novel and unproven business model or a lack of tangible assets can all be reasons why start-up business owners decide that their best option is to raise funds they need by giving away equity.

With deal numbers dropping, whilst the average deal value increases, it appears that investors are committing larger sums in more established businesses; what private equity funding options are available for start-ups? Below is a short summary of the private equity options for early stage start-ups.

Public-backed Private Equity Funding

Funds from public-backed governmental and supra governmental sources are available to businesses. The public’s commitment to investment in small businesses helps mitigate some of the risk undertaken by the private investor. This in turn encourages investment.

The European Angels Fund (“EAF”) has a current value of €280million and works with business angels to co-invest and increase their investment to companies in the seed, early or growth stage. The EAF is currently limited to funding businesses in certain European countries but it plans to expand its reach to many more European countries.

The Angel CoFund established in November 2011 and currently in its 6th year, is a £100million fund set up by the UK government to provide seed funding to small businesses. The fund works alongside business angels and co-invests in businesses and also provides support. With investment from the British Business Bank the fund, together with business angels, has provided £169million of investment.

Seed and Venture Capital Funding

Venture Capital, Seed Capital, pre-profit and early stage funding are overarching terms used in the UK to describe equity investment into companies at a particular stage in their growth. All involve the investment in companies in exchange for an equity stake.

Seed Funding, very early stage investment from friends and family to HNWI (high net worth individuals) or business angels who would like to invest personally, not via a fund, in your start-up.

Angel Investment, think Dragon’s Den, is a form of seed funding where private individuals with disposable income chose to invest their personal capital funds in start-ups. Often the start-ups they decide to invest in get the benefit of the expertise, contacts and advice of the business angels as well as their financial investment. The UK Business Angels, the voice and national trade association for the angel investment community, differentiates angel funding from venture capital stating that angel investment tends to provide smaller amounts of funding and is not carried out or managed by way of a fund. It is not always the case but the business angels tend to have more direct control of the investment decisions made.

Crowdfunding is an increasingly popular form of raising early stage funding. Usually via online platforms such as well-known CrowdCube, KickStarter and Seedrs. Individuals, local community projects and businesses can get funding from a wide source of investors. Not all companies are successful at crowd funding. It is important to understand whether your business is one that would benefit from such a public campaign and if it is the correct means of fundraising for you. When discussing the type of businesses that prosper by crowdfunding, Seedrs described crowdfunding as “heart to head” investing. This method of fundraising can be advantageous if your campaign is emotive and gains good traction with the local community or has a message that can easily gain traction with the public. 

Venture Capital funds, usually provide investment via a fund which equates to a pool of money provided by various sources (from pension funds and insurance companies to UHNWI) and invest in companies with the potential for high returns/growth. Venture capital funds to invest larger sums of money that, for example, angel investors but they are similar in the sense that they are long-term investors and can provide support to the business especially at board level.

As well as the possibility of great returns and growth, the opportunity to get partial tax relief on and returns by way of government approved EIS and/or SEIS schemes act an incentive and encourage individuals to make investments in start-up trading companies. As a business owner looking to raise early stage funding, ensuring that your business does all it can to ensure that any potential investors can claim the benefit of EIs or SEIS tax reliefs will act as a great incentive to investors.

What to do and When

Once you have deciphered which funding option is best for you and you have managed to secure an offer for investment in your company, the next step is to make sure you are in the strongest position possible to negotiate the terms upon which the investment will be made. From due diligence, pre-contract documentation, investment agreements, articles of association, shareholders’ agreements and post-completion matters, we have the knowledge to assist you secure the funding and on terms that are agreeable to you.

Waterfront solicitors understand the challenges faced by businesses of all sizes but with a focus on start-ups and a speciality in the tech sector. Our focus on technology, start-ups and entrepreneurs means we have the knowledge and expertise to help you consider your options, make decisions and put together the documents need to securing the finance.

Here at Waterfront, we offer very competitive fee rates as well as fixed/capped fees and flexible and/or contingent fee structures to help start-ups.

Click here to see some of the private equity transactions Waterfront has been involved in.

Would you like to talk to someone about putting the funding paperwork in place? Call and speak with someone in the corporate team on 0207 234 0200 or email contact@waterfrontsolicitors.com.

Okachi Kejeh

Specialises in Corporate Law

Okachi has experience in advising business owners and business managers on non- contentious corporate matters with special attention on Mergers and Acquisitions, Shareholders’ matters, joint venture agreement and partnerships, with and without limited liability. Read more...