By Oliver Woolley, Envestors
In the UK Equity fundraising in the UK is an ever-shifting landscape. It can be difficult to get fully understand all the options and, importantly, to understand which are right for your business.
Envestors have helped over 200 companies raise more than £100m; we’ve prepared an overview of the types of equity investor so that you can home in on the one that’s right for you.
- Private investors
Sometimes referred to as business angels, private investors are high net worth individuals who invest their own capital.
Typically, they invest between £5,000 and £250,000 per deal, or in groups (‘syndicates’ or ‘networks’), where the deal size can be greater.
A big incentive for angel investors is the tax benefits afforded by the Seed and Enterprise Investment Schemes (S/EIS). If you want to appeal to this kind of investor, you’ll want to investigate your eligibility for the scheme(s).
Angel investors are ideal for businesses from seed to series A, raising from £100k to £5m. They typically offer a lot more than capital and can provide expertise, guidance and introductions to help accelerate your growth. The downside of private investors is that they can be more susceptible to external factors and market fluctuations and when the economic outlook is tough, they may decide to invest in another asset class.
According to research firm Beauhurst, the five most active angel investment networks are:
- (Seed) Enterprise Investment Scheme (S/EIS) Funds
Private investors can either invest directly into early-stage companies and get tax relief, or they can invest in one of a number of independently managed S/EIS funds which pool the funds and invest into selected early-stage companies.
SEIS funds focus upon start-ups seeking their first round of investment of up to £150,000 (as per SEIS conditions). EIS funds invest in EIS qualifying businesses although they are highly selective and invest in only 1% of the propositions they receive.
As well as S/EIS funds there are Venture Capital Trusts (VCTs) which are another tax-efficient vehicle for investors to invest into private companies. VCT managers tend to be highly risk-averse and focus upon investing into established profitable businesses rather than early-stage ventures.
S/EIS funds are a great option for businesses, but the market is highly competitive, and most will charge fees.
- Crowdfunding
Crowdfunding has grown since it was launched in 2012 and is now a mainstream potential source of investment.
Companies can source funding from a large number of individuals, usually customers or fans of the product who want to support the company, and who are not typically sophisticated investors. Crowdfunding platforms such as Crowdcube and Seedrs enable these individuals to invest as little as £10.
Crowdfunding is great for brand building, particularly for B2C brands, but with this option you may have to make a trade-off between ‘free marketing’ and attracting serious professional investors. It is also worth noting that you typically need to secure a significant percentage of the funds before you go live on a platform and if you fail to gain traction, your round may be unpublished.
- Corporate venturing
Corporate venturing is the concept of large corporations investing in start-up companies in order to develop innovative products or services. These corporates view it as a way of outsourcing research and development.
Typically, corporate venturing takes place within the core industry in which the corporation operates. For example, energy giant BP will look to back energy tech ventures via its corporate venturing unit, such as Chargemaster plc which was acquired by BP for £129m in 2018 having been a start-up in 2010 developing electric vehicle charging points.
Likewise, large pharmaceutical firm such as Merck or Pfizer will concentrate their venturing efforts in the pharma and healthcare sectors.
The advantage of corporate venturing is that you can benefit from investment, buying power and trade introductions as well as operational, strategic and marketing support. In some cases, the corporate venturer will take a majority stake in your business.
The disadvantage of corporate venturing is that it could limit the exit opportunities for you in terms of the number of organisations by which you could be acquired. The other concern is that, if things don’t work out, the corporate venturer could abandon you and focus its energies elsewhere.
Some view corporate venturing as a “pre-exit” in that the corporate venturer invests and supports the start-up, together with valuable incentives to its core team, to a point where it will acquire the business.
- Family Offices
Family Offices (FOs), sometimes referred to as Private Offices, manage the wealth of an Ultra High-Net-Worth individual (UHNW) or family.
Some FOs have a general investment strategy and invest £1m to £10m in profitable companies with a turnover of at least £2m from any sector. Most FOs look to invest in companies that are related to the core business on which the family wealth is built.
Single Family Offices (SFOs) usually look after one family, whereas multi-family offices (MFOs) pool the wealth of multiple families.
Family offices can be difficult to gain access to and, as with funds, the competition for their cash is high. If you do manage to win them over, expect them to ask for a larger or even controlling stake in the business.
- Government-supported funds (UK)
There are several initiatives supported directly and indirectly by the UK government via the British Business Bank. Some examples are provided below.
The Angel CoFund
The Angel CoFund works with syndicates of angel investors to support early-stage growth businesses. Syndicates can look to the CoFund to provide funding of between £100k and £1m in investment rounds from £200,000 upwards. Where the CoFund invests, a fee of 2.5% of the amount invested will be payable to the syndicate manager.
The Delta Fund
The Delta Fund, run by ACFInvestors, operates a fast-track process for commercially validated UK businesses. It invests alongside lead angels with deep sector knowledge who are making larger investments via equity or convertible loans.
Business Growth Fund (BFG)
The BGF is a funding scheme for medium-sized companies launched by the government and the British Bankers’ Association. The £2.5bn fund invests between £1m and £15m in firms in exchange for a share of the business ranging from 10% to 40%. Participating firms must have an annual turnover of £1m and in addition to capital you will receive access to a global network of business leaders and investors.
Enterprise Capital Funds (ECFs)
There are 20+ government-supported ECFs operating in the UK. Each has its own criteria but usually invest £500,000 to £2m in established growth companies which are profitable, or near profit. ECFs offer investors the ability to leverage their investment with government debt.
The Future Fund: Breakthrough
The Future Fund: Breakthrough is a £375m programme to encourage private investors to co-invest with the government in R&D-intensive, growth businesses. The minimum investment round is £30m, and applications must be led by an established venture capital investor.
Please note, new initiatives are launched and existing initiatives terminated on a continual basis. For up-to-date information please visit the British Business Bank.
Unsurprisingly, the administration around government run programmes can be a challenge. Make sure it’s the best option for you before you dive into the application process and keep an eye on closing dates. The government regularly updates and changes its programmes, so one you decided was right for you six months ago may have closed as you readied your application.
- Enterprise funds
There are three regional funds supported by the European Union using funding from the European Regional Development Fund (ERDF). It is expected these will continue to be supported by the UK government via the British Business Bank once EU funding has ceased.
The Northern Powerhouse
The Northern Powerhouse Investment Fund (NPIF), launched in 2017, aims to reduce the north-south divide. NPIF provides funding to fund managers who offer microfinance (£25,000 – £100,000), business loans (£100,000 – £750,000) and equity finance (£50k – £2m).
The Midlands Engine Investment Fund (MEIF)
The MEIF is a collaboration between the British Business Bank and Local Enterprise Partnerships (LEPs) in Midlands. It aims to transform the finance landscape for smaller businesses in the Midlands and to realise the region’s potential to achieve economic growth through enterprise. The MEIF provides over £250m of investment through small business loans, debt finance, proof of concept and equity finance funds.
The Cornwall & Isles of Scilly Investment Fund (CIOSIF)
The CIOSIF provides finance through a debt and equity fund. It aims to transform the finance landscape for SMEs in the area and to realise the region’s potential to achieve economic growth through enterprise.
Regional Angels Programme
In addition to the three regional funds, British Business Investments, a commercial subsidiary of the British Business Bank, launched the Regional Angels Programme designed to help reduce regional imbalances in access to early stage equity finance for smaller businesses across the UK. The funds are managed by established private sector funds and business angel groups. In 2021 the government committed £150m in funding for the programme over three years.
- University seed funds
Many universities have seed funds affiliated to their technology transfer programmes and focus on areas such as technology invention and innovation. Seed funds typically support innovations from academics within the university.
As an example, SETsquared is an enterprise partnership and collaboration between the five leading research-led UK universities of Bath, Bristol, Exeter, Southampton and Surrey. It is ranked as the Global No.1 Business Incubator and provides a wide range of support programmes and finance to businesses.
- Funds
As well as the S/EIS funds listed above, there are hundreds of fund managers managing the funds of private investors.
Each fund manager is likely to manage several funds. Most funds, other than those listed above, tend to invest in established, profitable companies rather than early-stage ventures. There are hundreds of funds in the UK, the most active include Mercia Fund Managers, Par Equity, SFC Capital, Lloyds Development Capital and Maven Capital Partners.
It is worth noting that funds charge fees and while an offer from a fund might seem a blessing, you’ll need to read the fine print to understand the total cost of the capital injection before you sign on the dotted line.
When your business gets to the point where it needs a capital injection to grow, there plenty of options, though securing the investment is a long process. To give yourself the best chance of success, we always recommend working with a professional advisor experienced in equity investment and can provide the shortest equity duration as much as possible.
ABOUT THE AUTHOR
Oliver Woolley is CEO and co-founder of Envestors. Envestors’ digital
investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early stage investment in the UK.
Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks.
Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club.
Envestors is authorised and regulated by the Financial Conduct Authority.
Web: https://www.envestors.co.uk/
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