Private equity backed businesses are among the fastest growing small businesses in the UK. That was the finding of a recent report by investment firm YFM Equity Partners. The research revealed that while most businesses took longer than originally expected to secure investment, once they received the funding, revenues grew at a much faster rate than the economy as a whole.
But what is the key to securing equity finance in today’s turbulent funding climate. Just how can you make sure your business succeeds where others fail? As part of the report, CEOs of some of Britain’s fastest growing small companies offered their top 10 tips on the secret to raising equity finance:
1. Get professional help. “Bringing in expert advice” was one of the top responses for how CEOs would approach fundraising differently in future. Many said not using advisers was a false economy.
2. Consider equity as a first port of call... This is especially important for early-stage businesses. “If you can get an equity investment in your business to make it cash positive, it will be easier to attract bank finance,” said one company boss.
3. ...But not always as the only form of finance. The report suggested equity and debt had different roles to play in expansion strategies. As one respondent commented: “The more channels of finance you have in your business, the better.”
4. Research the market. Talk to a number of funders to ensure you get the best fit for your company. “Always choose a proactive investor and if they are an early-stage backer, make sure they have an adventurous spirit.” That was the message from Robin Karkeek, executive director of Happy Days Nurseries.
5. Focus on the future. Raising more than you need and taking a longer term view were in the top three responses when CEOs were asked how they would approach fundraising differently in the future. Think of raising finance as a way of building your company for tomorrow, not as a way of fixing today’s problems. “Ensure that you prepare to ask for follow-on funding and mention that upfront,” said John Nicholson, CEO of Gentronix.
6. Consider the whole package... especially if you need more than just finance. “An equity funder can help you with strategy, contacts and new markets, while a bank is concerned with figures on past performance and projections,” said Aled Morris, CEO of Harris Hill.
7. ...But ensure funders have strong capital bases. “Make sure the investor has the ability to do follow-on rounds,” advised Derek Hill, CEO of Ixico. “You need this as well as people who can listen and make a difference to the business.”
8. Use others’ experience. Many respondents advised taking references on potential backers and getting recommendations from your own network or other CEOs. “It is very important that you find an investor that understands you and the business and can put in the time — you need an investor you can trust to last the distance,” said Marsha Parker, CEO, eflowglobal.
9. Keep an eye on the exit. As one executive director noted: “Ensure that potential exit opportunities are flagged up and looked at as they arise and not in three years’ time.”
10. Expect delays. Raising finance took a lot longer and was more costly than most respondents anticipated, so factor in extra time.
So there you have it. Some definite food for thought if you’re considering equity finance as a way of funding your start-up.