There is a huge equity gap in the UK. Businesses, particularly start-ups and the smaller businesses, are not able to raise the equity finance they need to grow. Various estimates suggest the gap is anything from £26 billion to £59 billion for smaller businesses. That is a lot of businesses losing out on opportunities to grow.
As someone who has been involved for many years in both sides of equity finance - raising finance for my own business and then going on to invest in other entrepreneurs' companies - this is an issue close to my heart. I can accept that it's not a topic ever likely to trouble the front pages, but at the same time this is a massive problem for the UK economy that needs urgently addressing.
I know from my own experience that when your business is still in its infancy, there are relatively few sources of finance. Friends and family are often eager to help if they can, but to take a business to the next stage of development takes more substantial backing. Banks often don't have the risk appetite to provide debt finance to early-stage businesses, so where can the entrepreneur turn?
The answer, I believe, is to the community of angel investors. Unlike the bigger private equity or venture capitalists, angel investors deal on smaller scales and are not looking to impose onerous terms or take control away from the entrepreneur. Of course, equity finance isn't for everyone, but for the high-growth early-stage companies, it is often the vital missing piece of the finance puzzle.
What's more, for angel investors there has never been a better time. Thanks to the Seed Enterprise Investment Scheme, angel investors can effectively buy shares at half-price. I do not believe that there is another country in the world that rewards early-stage investors as well as Britain.
Put simply, if you're an entrepreneur looking for equity finance, SEIS allows investors to invest up to £100,000 in shares and provides them with a 50% income tax relief. You can also get a Capital Gains Tax exemption on any gains made. It's open for companies with assets of less than £200,000 and under 25 full-time employees, which covers just about every start-up and early-stage company.
When I think back to when I was starting my own business, I wish a scheme like this was in operation. In common with many entrepreneurs, I was absolutely determined that I wanted to start and build my own business, but securing finance was always a struggle. Now that I am focused more on investing in early-stage companies - sometimes the business is even pre-revenue - I want to offer the insight from my own experience as well as just finance. So while I may invest anything from £25,000 upwards, I now see my role increasingly as acting as a business mentor or coach. It's not up to me to grow the business, that's the job of the founder, but I want to lend my support and be engaged in the entrepreneur's vision. Having been there and done it for myself, and subsequently invested in companies in a wide variety of sectors, I'm acutely aware that most challenges a business will face have been faced by someone else before. Maybe one of your team leaves, the cash runs out, or the products runs into problems. So aside from providing equity, it's important for angel investors to provide that strategic perspective.
I often hear that a reason entrepreneurs are wary of equity finance is because they're concerned they'll lose control of their company. The easiest way around this is to build some "traction" with your business - build a prototype product, or even better launch your website, win some early sales and get some revenue. If you do still need financing, your business will be worth more and you won't need to give away so much equity. Angel investors often state that they invest because they like the entrepreneur and want to add some real value. Because of this personal commitment they - we - should be in every entrepreneur's phone book.
Events recently took place in Oxford and Reading, to promote equity finance and other alternative funding sources to audiences of investors and entrepreneurs. I will be speaking at the final two events, taking place in Central London on 5 March.
For more details, about these events or to register, please visit: http://www.schoolforstartups.co.uk/woo/.
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