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The funding ecosystem explained

How to use venture capital and venture debt to scale up your business.

There are lots of funding options available for entrepreneurs, but how do start-ups build successful crowdfunding campaigns or attract an angel investor? We take a closer look.

An alternative funding journey

In 2006, Anthony Eskinazi founded JustPark, a platform that connects drivers who want a parking space with property owners who rent out their own parking spaces.

“I’ve been on an interesting funding journey,” says Anthony, who ran the business on his own as a side project for the first few years. In 2011, Anthony wanted to evolve his business, so he took on corporate venture capital.

By 2015, JustPark was ready to continue its growth, so it took on a complex fundraising campaign, involving a seed fund, venture capital and crowdfunding. This historic move became the most successful equity crowdfunding round in the UK, raising £3.7 million from around 2,700 investors.

“Many of the individuals who invested larger sums of money were people at the top of their professions with good networks – they’ve been invaluable in helping to develop the business”, says Anthony.

He believes a successful crowdfunding campaign involves two key things: excitement and momentum. However, before setting one up, he suggests testing the appetite for investment among the business’ own customers.

“We sent an email to 5% of our customer base, asking whether they’d be interested in crowdfunding and, if so, how much they would be willing to put in. We got a phenomenal response with £850,000 pledged. To prove it wasn’t a one-off, we did it again two weeks later with another 5% sample, this time pledging £1.2m”, says Anthony.

JustPark secured top-up funding at the end of 2017 – through a combination of crowdfunding, a seed fund and its venture capital firm. It’s now taking on venture debt. “We’ve got our economics, it’s all tried and tested and growing well. Venture debt is playing that perfect role,” he says.

Navigating your options

Whether you’re a start-up, or looking to scale a successful business, how can you gain traction, access the different types of funding, and what can we expect to see in the future?

Angel investing

Angel investors are private individuals who invest their own money into early stage businesses. Jenny Tooth, CEO of the UK Business Angels Association, the trade body for angel investing, explains that most angels are successful entrepreneurs themselves and have a wealth of business experience to offer alongside cash.

Most angels Jenny works with invest through a group or syndicate. She says the ideal syndicate typically invests between £100,000 and £1.5 million and is led by a strong main angel, who understands the sector and can help bring added value for both their fellow angels and the business.

“You aren’t just getting some early money into your business, you get fantastic access to skills, knowledge, strategic advice, links and contacts,” says Jenny.

Angels typically take between 15% and 20% equity in the businesses they invest in, because they “want to leave you with enough equity for when you’re ready to approach venture capital and plenty of incentive for you to grow your business”.

Jenny says it is important for entrepreneurs to bear in mind that angels aren’t investing for fun – they’re doing it to make a return. “They’re looking for businesses that have the ambition to really grow, scale and do it quickly. They’ll be patient and will often wait eight to ten years before exit, but they’ll expect the business to grow and deliver a good return.”

While a clear commercial proposition is key when approaching angels for funding, Jenny says a common mistake that entrepreneurs make is focusing too much on the mechanics of their company, and not enough on demonstrating how they have what it takes to be successful.

“They often forget that angels are looking at them as a person and the people around them. What experience does the entrepreneur have, what have they brought to this business and what capability do they have to make it work?”

Rarely investing in an idea on a page, Jenny says angels want to see evidence of market testing, how the product or service would function, and an understanding of how the business differentiates itself from competitors in the marketplace. “Think about how you’ll stand out from the crowd – are you faster, cheaper, better? Do you have first-mover advantage (FMA) or Intellectual Property (IP) that you can protect? If you can show that you understand the behaviour of your customers and how you’ll take a piece of the market, then angels will start to think you have an interesting business.”

Venture capital

Venture capital firms give funding to entrepreneurs in exchange for equity in their businesses – typically when they get to the end of the start-up period and are ready to scale up. Harry Thomas, Principal of Beringea, an Anglo-American venture capital firm, describes this as the point at which the business has built out its first generation product, found customers, taken the low-hanging fruit and needs capital to accelerate to the next stage of its development.

“We look for truly differentiated businesses with qualities such as first-mover advantage, a good hook, solid team and best-in-class offering,” says Harry. “Aside from growing the top line, the scale-up process is about growing and professionalising the business.”

“Growing your team is the most laborious part of growing your business, so you’ll need capital for it. We provide the ability to accelerate rapidly and the resources to do so. It’s about building a long-term sustainable business around the right Key Performance Indicators (KPIs). It’s not about jumping from one funding round to the next.”

Venture capital can help prepare the business for exit, which could be through an initial public offering (IPO), sale to a private equity player, or through a merger. Harry advises those looking for venture capital funding to get to know their customers inside out, and have a polished and perfect elevator pitch.

He also emphasises the importance of speaking with different firms to get the most out of what they can offer. “It’s vital to choose the right venture capital for your current and future needs. Consider the region you’re expanding to, whether you need a sector specialist or a generalist, and think about the amount of money you want to raise. It’s essential to do your own referencing to avoid picking a ‘vulture capitalist’, who look for opportunities to make money by buying companies who’re struggling. There’s plenty of support for entrepreneurs to help with this process, including incubators, accelerators and banks.”

Venture debt

Venture debt is a loan investment rather than an investment in exchange for equity. It complements equity financing and provides growth capital which can help companies to achieve milestones while avoiding equity dilution, which can then create more funding options in the future. Popular in the dot.com era, venture debt fell out of favour before undergoing a resurgence in recent years.

Juliet Rogan, Head of High Growth & Entrepreneurs at Barclays, says: “Debt funding is particularly useful around working capital, if you’ve got the business fundamentals set up, with visibility of your revenue stream and sight of your runway. If you’re still proving your customer proposition and tech, you should go for equity debt.”

“Ultimately, we want to get repaid, so we need to know how the business would pay us back if growth slows down. We look for commercially sustainable business models, but we’ll lend to loss-making businesses if they have a compelling business model and can demonstrate how they’ll repay us.”

“There are lots of venture debt providers, who will have different ways of doing things. They may have hidden clauses and repayment terms, so do your research and don’t ever take money without doing your own referencing.”

Funding trends

Since the government introduced tax breaks for investors like the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), Jenny says the funding world has seen an influx of angel investors. She says popular television programmes and pitching competitions have also been great for changing people’s perspectives around entrepreneurship.

“I’d like to see more women entrepreneurs coming forward in the angel population as this is a massive untapped pool of money,” says Jenny. “I also want to see more women entrepreneurs as there is a real shortage of them looking for equity funding.”

Juliet says the calibre of people pitching has improved considerably in the past few years, partly thanks to the growth of fin-tech accelerators, and entrepreneurial initiatives. Incubators like Barclays Eagle Labs continue to help many entrepreneurs nurture and grow their businesses by providing cash, services and an ecosystem to tap into.

Harry says capital providers are becoming more patient, with some investors willing to wait between five and eight years for a return, which is crucial for companies looking to scale. He says venture capital trusts – providing upfront tax relief to investors – are growing. Looking ahead, Harry believes we’ll start to see a lot more venture capital firms moving around the UK, away from their traditional hubs such as London.

Anthony talks about the excitement of giant IPOs bringing more angels to the UK: “We’re yet to see any monumental exits, but once that happens these people with really smart capital will flood the market – this could be a real game changer for the UK.”

Tips for fast-growth businesses looking for funding

  1. Do your homework on prospective funders and get references before taking any investment
  2. Pick investors who can meet your current and future needs, taking into account their expertise in your sector, the region they operate in and how much you need to raise
  3. Find out if there’s an appetite to invest in your business among your customer base and whether you can build momentum for a crowdfunding campaign
  4. Make the most of the expertise and support available from incubators, accelerators and banks
  5. Don’t forget that funders will focus on the people behind your business as well as examining the business itself

Jargon buster

Not sure what some funding terms mean? Our jargon-buster explains the mostly commonly used words.

Crowdfunding
A way to fund a project or venture by raising small amounts of money from a large number of people, usually online.

Seed fund
A group of investors willing to back a company at its earliest stage (usually the idea stage), or before any revenue has been raised. Backers swap their capital for a stake in the company.

Venture capital
Money given to a small, early-stage company to help it expand or develop into new markets in exchange for a share of equity. Venture capital investments usually happen after a round of seed funding.

Venture debt
A specialist loan to help a small, fast-growing company flourish – it’s often a company that’s between traditional rounds of equity raising. Using a loan means existing investors’ equity doesn’t have to be diluted.

Angel investor
A private investor who puts their own money into a fledgling business, usually in return for equity. Many angel investors are already successful entrepreneurs who offer both cash and commercial experience to help the company grow.

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