Funding a technology business
Article Date: Mar 07 2010
Raising growth finance can be hard
A guide to raising finance for early-stage technology companies from Steve Barnett, a partner in the corporate team at law firm Fox Williams.
The UK’s tech sector continues to go from strength to strength, with an increasingly active start up and early-stage scene, but raising capital for these companies can be challenging. The bank manager’s door is frequently closed: the company may be too early-stage or without the assets against which a loan can be secured. So what are the other financing options?
Equity finance
The majority of companies will look to raise equity finance i.e. issuing shares in return for cash. Sources include:
Friends and family – commonly the first port of call for the initial funding requirement. The terms of the funding are not usually onerous and investor relations are generally easy-going. However, not all entrepreneurs have friends and family with spare cash to invest.
Business angels – these are wealthy individuals, often entrepreneurs who have successfully exited other businesses, who are prepared to make high-risk investments, traditionally up to £750,000 into start-up and early-stage companies. They will often invest as part of a syndicate, some of which are now increasingly sophisticated and run much like a venture capital firm. If an entrepreneur concludes a deal with angel investors, she can expect her freedom to run the business to be curtailed (for example, investor consent may be required for key business decisions). Read more about business angels
Venture capital – for many companies, a venture capital (VC) 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 high growth companies. Technology companies are therefore prime candidates.
Some VC funds will make seed or early-stage investments (often of less than £1 million), and many early-stage VC investments are now made on a “co-investment” basis with business angels. However, the reality in the current economic climate is that VCs often require evidence of a business's long-term potential, such as a growing revenue stream or customer base.
A VC will usually take a much more activist approach to an investment, and you can expect to require investor consent before taking key business decisions, as well as being subject to preferential terms ensuring that the VC receives its projected return in priority to the founders. Read more about venture capital
Government funding – whether in the form of equity or debt, this plays a significant role in early-stage finance. 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. The government is also establishing the UK Innovation Investment Fund, which should see a further £325 million of VC funding (again comprising public and private money) become available. Read more about government venture capital
Other sources of finance
Whilst most early-stage companies will seek equity finance, other financing options are available. 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 finding other funding options. For very early-stage companies, business incubators can also be an option, providing access to expert advice, shared resources and small amounts of seed funding.
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, money 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.
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