Raising finance for your tech company |
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| Technology | |
| Written by Steve Barnett at City law firm Fox Williams LLP | |
| Thursday, 25 February 2010 | |
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What are the options for early stage tech companies when it comes to financing? The UK’s tech sector continues to go from strength to strength. There are many reasons for this, including a growing spirit of entrepreneurship which is driving, even during the recession, a large number of start up and early-stage companies. Few of these companies will be lucky enough to establish themselves without seeking external funding. Despite well-publicised initiatives such as the Enterprise Finance Guarantee Scheme (which can guarantee up to 75% of the value of loans made to smaller companies), the bank manager’s door is frequently closed to companies of this nature; either they are too early-stage to attract bank finance or, even if they are revenue-generating, they do not have the assets against which bank finance can be secured. What, then, are the other options for finance for early-stage tech companies? Equity finance optionsThe majority of companies will look to raise equity finance i.e. issuing shares in return for cash. Sources include: Friends and family – friends and family may well be the first port of call for the initial funding requirement (and sometimes beyond). The terms of the funding are usually not particularly onerous and investor relations are generally easy-going. However, not all entrepreneurs have friends and family with spare cash to invest, meaning that one of the options below will often need to be pursued for that first financing round. Business angels – business angels are wealthy individuals (often entrepreneurs who have successfully exited from other businesses), who are prepared to make high-risk investments into start-up and early-stage companies. They will often invest as part of a syndicate, some of which are more formal than others. Many angels will make their business expertise available to the companies in which they invest. Angels have traditionally been approached for funding requirements of between £20,000 - £750,000 and have bridged the gap between friends and family funding and the first institutional rounds. However, some business angel syndicates are increasingly sophisticated and operate much like a venture capital firm, and can be approached for larger investments. If an entrepreneur concludes a deal with angel investors, he or she can expect their freedom to run the business to be curtailed (for example, investor consent may be required for key business decisions). Venture capital– for many companies, a venture capital investment will be their first experience of an institutional investor. This is an early stage private equity investment, usually unleveraged by debt, and targeted at companies with the potential for high growth. As a result, technology companies are prime candidates for venture capital investment and there are a number of specialist venture capital firms which focus solely on technology investments. Venture capital investment can take a number of forms. Some funds will make seed / early stage investments (often of less than £1 million). However, the reality in the current economic climate is that many VCs require evidence that a business has long-term potential, often in the form of a growing revenue stream or customer base. Government supported Enterprise Capital Funds are active in this area – these are funds comprising both public and private money which can invest up to £2 million in a company. Many early stage venture capital investments are now made on a “co-investment” basis with business angels rather than following an angel round. As a business develops, further venture capital funding (often of many millions of pounds) can be obtained. These funding rounds are commonly referred to as Series A / Series B rounds (and so on). Most venture capital investors take a much more activist approach to their investments as they are managing other people’s money, and you can expect to find extensive restrictions on the ability of businesses to take key decisions without investor consent, as well as preferential terms to ensure that the investor receives its projected return in priority to the founders. Within this sector, another option can be corporate venturing – venture capital investments made by corporate investors, such as large trading companies. The UK’s corporate venturing scheme offers tax incentives to companies for venture investments made by them. Other possible sources of financeWhilst most early-stage companies will seek equity finance, other financing options are available which it is easy to overlook. These include grants and start-up loans, which are often made available on a regional, and sometimes local, basis. The Department for Business Innovation and Skills website (www.berr.gov.uk) is a useful starting point for tracking down other funding options. Unsurprisingly, obtaining funding at the present time can be a difficult and time-consuming process, and investors will drive a hard bargain on valuations. However, funding is available for those businesses with compelling business plans. It is important to explore all possible avenues and to set yourself apart from the crowd. Steve Barnett is a partner in the corporate team at City law firm Fox Williams LLP (www.foxwilliams.com). He can be contacted at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it Comments (0)
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