Equity Finance

Equity finance is a way of raising share capital from external investors in return for handing over a share of the business. This may take many forms including a share of future profits, but is most frequently associated with sharing the ownership of the business to some degree.
The two main providers of equity finance for private businesses are Venture Capitalists and Business Angels.

Venture Capital

Venture capital provides long-term committed capital to businesses. Venture capitalists purchase shares in growing businesses on behalf of institutional investors. Venture capital investors are tied in to the long-term success of the business, obtaining their return by way of dividends but principally by selling their shares in the business in due course.
 
Venture capitalists seek businesses capable of growing rapidly within, for example within five years. These businesses must be able to demonstrate a competitive advantage in a chosen market and be managed by experienced and ambitious teams who are capable of turning their business plan into reality.
 
Venture capital is not suitable for 'life-style' businesses, where the main objective is to provide a standard of living and job satisfaction for the owners. These businesses are unlikely to provide the financial return to make them of interest to venture capitalists.
 
Venture capitalists do not usually get involved in the day-to-day management control of a business but will assist with longer-term strategy. The combination of capital and experienced input from venture capital executives can help businesses to achieve their growth plans and increase value to shareholders. Although the management team may own a smaller 'slice of the cake' this can be compensated by the growth in the overall value of the business.

Venture capital is also known as private equity finance. Unlike business angels, venture capitalists (VCs) look to invest large sums of money in return for some of your business' shares.

VCs typically invest in businesses with:

·A minimum investment need of around £2 million, though many smaller regional VC organisation may invest from £50,000 
·An ambitious but realistic business plan
·A product or service that provides a unique selling point or other competitive advantage
·Large earning potential and offering a high return on investment within a specific time frame, eg five years
·Sound management expertise - although VCs tend not to get involved in the day-to-day running of the business, they often help with a business' strategy
·A proven track record - for this reason start-ups are generally not considered by VCs for investment

The advantages of securing a VC are that they can provide large sums of equity finance and bring a wealth of expertise to your business. Also, if you successfully attract a VC to your business, you're likely to find it easier to secure further funding from other sources.

The disadvantage is that securing a deal with a VC can be a long and complex process. You'll be required to draw up a detailed business plan, including financial projections for which a business is likely to need professional help.  Also, if you get through to the deal negotiation stage, you'll have to pay legal and accounting fees whether or not you're successful in securing funds.

www.ipouk.com  Raising Capital in UK