Different investors look for different things from a business. The key is identifying what people do want from you and the investment they are making.
True, everyone wants a return on their investment but experienced investors, venture capitalists and so called business Angel investors do know they can lose their cash. If you are to persuade them to take a risk there has to be a good reward.
So what is a good return? Well that also depends but most venture capital investors expect at least a 40% IRR (internal rate of return). That, put simply, is around 5 times their cash investment back after 5 years. People will dispute this, but it serves to illustrate that if you want to attract an equity investor, one who shares the risk with you, then they want a good return.
Of course, you can use a bank who, in theory, will lend you cash in return for a simple percentage interest rate, currently anything between 6-18%. However, they won’t take the same risk as the reward is smaller, and they can’t afford failures, one reason why most banks won’t lend to start-ups with no sales, assets or track record.
There are alternatives to the more traditional sources of venture capital, business angel as “equity” finance (selling shares in your business) and simple bank loans. However the same principles apply. So a quick look at what you need:
- A clear simple but comprehensive business plan
- Demonstrate how your business works and how it makes money
- An experienced management team and show you really understand the business
- A clear grasp of the finances and legal issues around your business.
The alternative sources of finance; mostly “Crowdfunding” and “Peer to Peer lending” websites are not an easy option and still require all of the above and often more. There are so many participants seeking cash in competition with you now on the web that you do need a clever marketing campaign to make this all work. The better crowdfunding sites will coach you but it’s still hard work, but like all other investors you can get the cash if you are good!
Crowdfunding, is effectively selling shares in your business to the public. There are over 30 platforms to choose from in the UK alone. The better known ones are Crowdcube and Seeders, ask around and see what people who have raised finance really thought and try and talk to ones that failed too.
Peer-to-peer lending is just that, you are borrowing money from people via a broking website on-line for a simple interest rate. Be warned interest and other charges vary and most small businesses will end up paying between 8% and 18% or more. Funding Circle is the most famous site but there are many others. They also expect high-standards and will assess you and your business to determine the rate of interest to charge.
The North East has benefitted from the JEREMIE funds over the last 6 years with in excess of £140m invested into more than 800 business alongside over £200m of additional private cash. These funds become fully invested at the end of December this year but are due to be replaced by a further £120m for the North East sometime in 2017.
At Rivers we have run the £7.5m North East Microloan Fund and the £10.5m North East Angel Fund from the Finance for Business North East programme.
The North East Microloan Fund provides ‘Microloans to Fund Big Ideas’ committed to providing straightforward loans between £1,000 and £25,000 with the potential in exceptional cases to go to £50,000.
The North East Angel Fund is a specialist fund investing in new and established small companies with growth potential in the North East of England. The Fund will typically invest between £10,000 and £150,000 in any one funding round. The Fund operates as a normal venture capital fund, with investment terms to match.
Rivers are now working to raise larger sums of equity finance and have a private investment activity called WhiteGold. This is new but builds on the last year or so where we have done a few larger deals working with private investors.
What differentiates us from other fund managers is our ability to take the entrepreneurs position as all our senior team have created, successfully managed and raised finance for their own businesses.