In this blog, Kirsty in the Chiene + Tait Entrepreneurial Tax Team outlines the different types of investment available to entrepreneurs and how to access funds.
What is investment?
Investment is a two-way funding street – an investor will fund a business idea in order to help an entrepreneur on their journey in the hope that there is a return on their investment. An entrepreneur looks for investment to receive a cash injection to take their idea to the next level. Different companies have different requirements in order to develop an idea or scale up, and investors have varying appetites and interests.
It’s important to remember that giving or receiving an investment is a financial transaction and therefore there are rules, but also helpful reliefs (see our useful links below) available to make the most of funds.
The main types of investment we come across at Chiene + Tait are:
- Equity – an investor provides funding for the company in exchange for equity in that company.
- Debt – an investor loans money to a company, generating a return through interest on the loan alongside repayment.
- Convertible debt – is simply a loan that can be turned into equity (share ownership), generally upon the occurrence of future financing.
Entrepreneurs can be easily bamboozled by different investment types and what they need to do after receiving funds – keep in mind that very little is given philanthropically i.e. for free, and you will need to give something in return.
Availability of funding?
More often than not the entrepreneurs I speak to see cash flow as one of the biggest barriers to growth, accessing funds to grow is an essential component of any start up or scale up. Apart from individual investors, there are other sources of investment funding available to start ups:
- Incubators – this is a ready to go to space that has support and infrastructure available for start ups. Entrepreneurs should keep in mind that the incubator is itself an entrepreneurial venture; investors often pool funds to secure a large building and outfit the space with its own support team and everything needed for dozens of start-ups to engage in business. The incubator generates revenue by charging monthly rental-access fees to the tenant companies.
- Angel Syndicates – this is where a number of investors pool their investment resources in order to have a greater pot available to invest in entrepreneurs. In order to access funds from syndicates, entrepreneurs usually have to attend syndicate board meetings and pitch for funds.
- Scottish Investment Bank (SIB) – this bank was specifically created to increase the supply of finance to SMEs in Scotland. Grants and funding are available via SIB and Scottish Enterprise to support growth. The new Scottish National Investment Bank (SNIB), which will be completely distinct from SIB, was announced by the Scottish Government in September 2017 and will also provide new sources of funding for SMEs. The SNIB is currently the subject of a public consultation with further detail expected in the coming months.
- Venture Capitalist (VC) – is a corporate investor who provides funds to, usually, later stage startups or scale ups.
The process for getting funding varies, depending on the source of funding. A typical investment deal will go something like this:
- Writing a business plan to use as a tool to outline your idea and demonstrate to investors how their funds will be used,
- Pitching your company or business idea in order to get investors on board,
- An initial offer is made using a term sheet, setting out expectations and valuation,
- An investment agreement is drafted by the lawyers which may be subject to some negotiation,
- The agreement reaches completion and the funds are transferred.
So, you’ve got a plan of action and a set objective to achieve growth. But what tips can I give you from my experience to help you on this journey?
- Practice your pitch – don’t go into a meeting with an investor without having a thorough understanding of your plan, the investment you are looking for and your exit strategy.
- Assess the correct funding for your company – understand what investment type suits your current and future needs.
- Sector specific investment – assess whether there is an investor or syndicate that specialise in your field, rather than approach a bank or general funder who may not be able to provide additional mentoring and key expertise.
- Plan your timings – don’t think that everyone will want to throw money at your brilliant idea. At any one time there are hundreds of other brilliant ideas that investors are looking at. It takes a lot of time to fundraise.
- Understand your costs – be realistic with your costs, an investor will want to see that you’ve thought through your plan carefully and fully. Any investment will be in you, in addition to your business idea and an investor will want to be confident that you can deliver the goods within your projected budget.
If you have any queries about understanding investment, feel free to drop me a line at firstname.lastname@example.org or call 0131 558 5800. Alternatively, I’ll be at the Investing Women Ambition & Growth Conference 2018 running 1-2-1s and masterclasses. See you there!
Dave Philp in our Entrepreneurial Tax Team has also written a blog for startups called Are you missing out on Research & Development Tax Relief. To read this blog, watch his accompanying webinar or download his related infographic click here.