By millionaire entrepreneur turned investor, Jamie Waller.
I have owned businesses since I was 16. In the past 18 months, I have sold over £40m of businesses where I owned all, or a significant part of the shareholding.
Since selling my last business I have gone from being an entrepreneur to becoming an investor – launching a £13 million investment fund called Firestarters, which is aimed at business founders who want to grow their businesses.
In May 2017, I invested in a new business and asked my bank manager for a £550k loan. I was asked if I was willing to sign a personal guarantee. Really?
I would love to spend the next 400 words telling you what an idiot my bank manager was for even suggesting that I use their money to fund my next businesses, pay them 5% for the privilege and then protect their organisation by agreeing that I will repay the loan personally if it all goes wrong. Anyway, I won’t. Instead I will tell you where you can go when the same happens to you.
Here is a brief personal overview of what’s available and what you should consider when needing investment:
Venture debt is early stage stuff. It’s money for an idea or money to support early proof of concept and growth. It normally comes in stages for example; stage A, B and C and on many occasions these stages have names matching the tax advantage like SEIS for seed investments.
It’s high risk, and when it goes well it has high returns. Research shows that on average two-thirds of these investments lose money and one third fail. Venture fund success needs at least one home run, a highly successful business that generates a 10 times (10x), or 100x return.
Venture debt providers typically invest in more companies than other funding providers as they need to increase their chances of a home run.
Who should look for venture debt?
People with an idea that need money to prove the concept or have proof of concept that needs funding to get to market.
Getting access to funds step by step allows an entrepreneur to benefit from progressively higher valuations and give up less equity as the business matures. This makes this a great form of funding for early businesses.
Who provides venture debt?
Almost everyone these days. There are typical venture capital funds that are normally run by entrepreneurs, there are on-line market places that allow anyone to club together and give you the funds e.g. crowd funding, and there are wealthy individuals known as Angels.
What will it cost me?
You will need to give up equity and in many cases, be willing for the provider to take a different class of shares than you, typically known as preferred equity. This establishes a hierarchy of claims on future proceeds in the event of an exit or liquidation. You may in some cases also be expected to have a fund representative sit on your Board (it’s not a bad idea and you should take it).
Growth Equity Funding
Growth equity is what it says in the title. It’s funding to enable growth. Typically, the provider of the funding asks for a minority shareholding in newly issued shares. It’s unusual, but in some cases a portion of the funding may be used to provide an exit for an existing business owner.
Who should look for growth equity debt?
Businesses that have a delivery model that shows more investment, comes more sales and profitability. Typically, the business will be a mature Small to Medium Size Enterprise (SME). Growth Equity is fantastic for owner CEO’s that want to keep their businesses but build them to the next level.
Who provides Growth Equity Funding?
Growth funding is not as easy to get as venture debt. Specialist organisations and groups provide this service along with some private equity companies. Growth funding organisations expect a strong culture alignment and will ask for many minority shareholder rights to protect their position. At Firestarters, we also provide growth equity funding.
What will it cost me?
You will need to give up equity and some control. Although growth equity partners tend to be minority investors they do expect to have some control, for example the exit strategy, voting and approval rights. You will, in almost all cases be expected to have a member of the funding organisation on your Board.
What can I expect from a growth equity partner?
Money, expert advice, guidance, contacts and a desire to grow the business and sell within 3-7 years.
Private Equity Buy Outs
Private Equity normally seeks to acquire the majority shareholding of an organisation. Funding is normally achieved by a mixture of bank debt, equity financing and management buy-in. In most cases the significant shareholder(s) are exiting and some funding is used to execute this.
Who should look for private equity buy-out funding?
Typically, an owner wanting to exit, a management team wanting to take control of the business they work in or an individual wanting to purchase an organisation which is known as a management buy-in.
Who provides private equity funding?
At Firestarters, we provide buy-out options, but there are also many organisations across the globe that do too. They are easily found through a quick search and many specialise in certain business types e.g. size, sector or markets.
Private equity organisations are typically managing funds on behalf of corporate investors. They are clinical on their method for valuations and adding value post transaction. They expect strong management teams and a profitable business that can service the debt interest that they will place into the business.
What will it cost me?
You will need to hand over controlling interest of the organisation. You will need to be prepared to accept that much of the funding (sometimes up to 75%) will come via debt with equity funding making up the balance.
Debt servicing will reduce the free cash flow available for further capital investment. It is not uncommon for further funding to be provided by the same provider in return for more equity. You will always be required to have at least one person on the board of directors and in many cases two.
What can I expect from a private equity partner?
Money, strong leadership, proven methodologies for operational improvements and a desire to grow the business and exit in 5-10 years.
Without doubt the best type of funding is bank debt but only if you don’t underwrite their risk with a personal guarantee which is almost impossible. So, for those of you that need investment to start a business, fuel growth or take the business to the next level then concentrate on the three main markets: venture, growth and equity buy-outs.
Jamie Waller is an entrepreneur and investor focusing on both growth and buy-out equity. He can be researched at www.firestarters.co.uk