The most emotive of the ‘funding arsenal’ available to business is equity.   In a way that is what makes “Dragons Den” such good TV; remembering however that participants are playing to the cameras.  Factually and at the most simplistic level, equity investment involves the current shareholder(s) of Company A selling a percentage of Company A for injection of fresh capital to Investor(s). 

Over the past few decades the governments have on occasion sought to stimulate either directly or indirectly the availability to the Owner/Manager of the SME through various initiatives and in 2012 we could see a perfect storm brewing that sees more and more SMEs raise funds for their expansion through equity.  On the investor side we have low interest rates on deposits, a subdued property market and a raft of government initiatives aimed at de-risking (personal) investment in SMEs creating an increased supply of equity funds.  On the company side whatever the true position of bank lending appetite (is it reluctance to lend or companies’ reluctance to take on debt?) one thing we are finding by and large to be fact is “banks are not interested in equity propositions” anymore, i.e. those which are maybe pre-revenue and/or lack asset security and/or are simply considered “too risky”.  However, recent transactions show there is a deal to be done with Venture Capital (maybe historically considered the domain of businesses north of Bristol) into local business if there is a ‘fit’ in aspirations.

So what are the key considerations of Owner/Managers of SMEs in considering whether equity is right for them/their company and who should be approached?  We see five key factors, all of which are underpinned by the Owner/Manager having a clear strategy for developing their business:

1. Will your business grow significantly as a result of increased capital (so that dilution of your shareholding is outweighed by the growth of the enhanced business)?
2. Do you have a clear idea of how the investor may get their desired return on investment? 
3. Do you have a clear, persuasive and robust concept of company value?
4. Are you prepared for some external scrutiny?
5. Do you have a clear requirement for additional skills that can be met by the Investor?

If yes, to the above then it is a case of researching the market of providers which includes ‘family and friends’, Business Angels (sometimes accessed through networks such as South West Angels Investment Network), Venture Capital firms, government schemes such as Business Growth Fund and cash rich Companies.  In addition you/your advisors should be versed in:

1. The criteria of Enterprise Investment Scheme (EIS) and its sibling Seed EIS so that, if applicable, the Investor can benefit from significant tax breaks from investing in your company – tax breaks that could effectively reduce the cost to them of investing to £22 in every £100. 
2. The potential for government or regional schemes to complement the Investors equity investment with for example further equity (Angel Co-Investment Fund) or ‘soft loans’ (South West Cleantech Co-Investment Fund).

Fully armed you can engage with potential Investors knowing what you want and they want and being “Investor Ready”.  With the equity secured it may then be back to the bank to get that additional facility now that you have ‘de-risked’ the project from their perspective.

Equity will be covered in a breakfast seminar at Francis Clark’s Truro office on 14 March and as part of Finance in Cornwall on 15 May 2012.  For details of either event please contact Amy Smith.