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Home Business How to decide if equity funding is the best route for your start-up
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How to decide if equity funding is the best route for your start-up

by Uma Rajagopal
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You’ve watched Dragon’s Den and seen the “dragons” grill startup founder after startup founder before deciding whether to back the business – and then you’ve watched as the founder “goes to the wall” to decide whether to accept the dragons request for more shares in the business in order to get the investment. 

Perhaps you’ve even wondered if Equity investment is right for your business.

Other Funding Options

In the early-days of a business startup, access to funds can be difficult, here’s why:

  • Bank Loans – before you have revenue (or start selling) many banks are not in a position to lend you cash as you don’t have a trading history and so represent too high a risk for a bank
  • Grant Funding- You might be able to access grant funding – but this takes time to apply for, often only certain types of businesses are eligible for grants and,even if you are eligible, the application process is competitive – so time taken to apply might come to nothing.

And yet, your business needs funds to grow, so what other options are there to access the crucial funding needed?.

Business Angels 

That’s where Business Angels – the real-world name for the “dragons” you see on TV – come in. Business Angels are high net worth individuals, people who have very often made their money by growing and then selling their own businesses.

They use their money to back early-stage startups and buy shares (or “equity”) in the business in exchange for the cash. They don’t back just any business, they will look for opportunities that focus on sizable, growing markets. They want to back startups that have the ability to grow big and will then – more than likely – be bought by another organisation, giving the Business Angel a chance to sell their shares at a higher price than that which they bought them for and make more money.

Backing early-stage businesses is risky (nine out of ten business fail in the first two years) so business angels will negotiate the amount of shares they want in your business based on their perception of the risk involved and the size of the opportunity. Despite the name “Angel”, investors are backing the business for philanthropic reasons, they will expect a return on their investment and will be calculating what that ROI needs to be.

Perhaps the reason they are sometimes called “Angels” is that Angel Investors bring more than just their cash. Often a business Angel will also bring skills and experience which include:

  • Business skills – this could be in a specific discipline such as marketing or sales experience, or more general experience, such as growing a scaling business
  • Sector experience – invaluable expertise within the sector that will ultimately have a positive impact on your business
  • Contacts and relationships – many Angel Investors are well connected and are happy to make introductions which can help your business grow faster than just cash would allow

Effectively, business Angels can act as mentors, offering you advice – as well as cash – to grow your business.

Is an Angel Investor right for your business?

Here are some important questions to ask yourself before making your decision:

  • Do you need investment to grow your business? Not all businesses need a large amount of investment in order to grow. It may be possible to grow your business organically (sometimes called “bootstrapping”) by launching the business, starting to sell, and investing the money made back into the business (perhaps instead of paying yourself a full salary)
  • Do you like to be your own boss? Equity investors will expect to have a say in how you run your business – afterall you are spending their money. Some investors will be more hands on than others – so select your investors wisely.
  • Are the terms right? You can expect an investor to negotiate with you over the terms of the deal. This will influence the percentage of shares you sell in your business and will also impact on the control you have in the business. Make sure you are happy with the terms – and that you understand what they mean

Before you embark on your investment journey to get your startup off the ground, my advice is to first do your homework – outline what exactly you need to grow the business, research the various investment options available to you and then spend time on finding the right type of investor that fits your company values and ultimate business goals.

About Hatty Fawcett :

Hatty has a strong track record raising equity investment for early-stage startups, raising over £5m for start-ups in the last 12 months. She believes start-up investment should be available to everyone and the process shouldn’t be over-complicated or unnecessarily time consuming. 

Hatty focuses on start-ups raising their first or second round of equity investment and works with start-up founders and small business owners to give them clarity on the information that investors will expect, and connecting them to investors and other like-minded entrepreneurs who are generous in sharing their experience and insights. Hatty encourages founders, giving them knowledge, tools and techniques they can use in their investor outreach so they grow in confidence and ability when presenting their investment opportunity. This confidence ensures founders attract a range of investors, allowing them to choose the right investor for their business and growth aspirations.

Hatty had more than 10 years of experience in getting startups funded and has seen investment from both sides of the fence, so is uniquely placed to understand the founder journey and what early-stage investors look for. Following a successful 15 year career in marketing, and a MBA from Imperial College, London, Hatty worked in two start-ups before launching her own start-up, for which she raised a quarter of a million pounds. She then looked after some of the investments Kelly Hoppen made when she was a Dragon on the TV show “Dragons Den”.

Hatty’s unique perspective on start-up funding, and the work she does to level the playing field when it comes to raising equity investment, has resulted in her being recognised as Enterprise Nation Adviser of the Year 22/23 for Finance and Funding.

 

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