Starting a business can be a significant investment, and it is essential to do your homework before making any decisions. Business start-up investment can be a great opportunity to make money and grow your wealth. However, it is crucial to understand the different investment opportunities available and how they work like venture capital funding, venture capital trusts, and equity crowdfunding. In this article, we’ll take a closer look at business start-up investment opportunities.
Starting a new business requires capital, and securing investment is often a critical component of the start-up process. Here’s what you need to know about business start-up investment.
What is a startup?
Startups, or ‘early stage businesses’, refer to ideas in the beginning stages of development or ones that have only recently been developed. They are suitable for the market but still undergoing marketing research and product development. These companies may be generating revenue and have a developed business plan but might not be profitable yet.
Who invests in UK startups?
Typically, private investors invest in startups and early-stage businesses. They are often referred to as angel investors.
Is investing in UK startups the right step for me?
Angel investors
Angel investors are usually entrepreneurs themselves or those with experience in the business world. They invest in startups with their own money for a minority stake – usually between 10% and 20% – often focusing on the process of mentoring and supporting the business. These investors take a hands-on approach, spending much time with the entrepreneur and helping to develop and grow the business. The angel and the entrepreneur will typically spend at least five years working closely together, so it is essential to have a strong relationship.
Although the educational and supportive side of startup investment may not mean that an investor is focused solely on their financial goals, the return target can be high but also carries higher risk.
These types of investments can also be referred to as seed investments, although some consider there to be differences between the two based on the investor’s relationship with the startup. They suggest that an angel investor takes on a more significant role as a mentor in startup investing, using their experience to guide entrepreneurs. In contrast, seed investors are more likely to focus solely on supporting the entrepreneur, possibly as a friend or family member. The two terms are, however, usually interchangeable.
Angel investors can compare with venture capital investors – another type of early-stage investment. This is a form of private equity investment whereby a business receives funding in exchange for a share of its equity. By making investments in early and mid-stage companies, the investor’s aim is to profitably exit the investment at a later stage in the future, usually within 5-10 years, Those involved in venture capital investments are generally a mix of entrepreneurs and bankers, and the scale is much larger than an angel investor, ranging from a few million to tens of millions of pounds. These investments usually happen within a venture capital firm whose work is concentrated mainly in one specific sector.
If the hands-on, educational side of investing in startups doesn’t suit you and your area of expertise is more finance than entrepreneurship, it might be worth looking into something closer to a venture capital investment rather than a hands-on startup investment.
Self-Funding:
using your own savings or assets to finance the business
Friends and Family: borrowing from or receiving investment from friends or family
Crowdfunding:
Crowdfunding through organizations is known as investment-based crowdfunding, which is also regulated under the Financial Services and Markets Act 2000. This means that your investment is protected not just by the crowdfunding platform you choose but also by UK authorities.
Types of Investment:
Once you have identified your source of investment, you need to understand the types of investments available. The most popular types of business start-up investments include:
1. Debt Financing:
This is a type of investment where you borrow money from a financial institution or lending company. You are required to pay it back with interest over time.
2. Equity Financing:
This is a type of investment where you sell part of your business’s ownership in exchange for funding. This means that investors become part owners of the business and share in the profits.
3. Grants:
Grants are free money given to entrepreneurs who meet specific criteria for eligibility. This type of investment is only available to certain niche categories of businesses.
4. Government Loans:
The government offers various loan programs to help entrepreneurs start or grow their businesses. These loans come with favorable terms and low-interest rates to aid business growth.
Investment Considerations:
There are several things to consider before choosing the type of investment that best suits your business. Remember that not all investments are equal, and the type of investment you choose has a direct impact on the ownership structure of your company, cash flow, performance, and future opportunities. Some considerations include:
1. Risk: Every investment carries risk, and it’s essential that you understand the potential risk involved in each investment type.
2. Dilution: With every investment, you’re sharing ownership of your business with someone else. Be careful not to dilute your ownership too much.
3. Interest Rates and Fees: For debt financing, look for interest rates, origination fees, and any other fees and charges to ensure you can make those payments.
4. Investor Compatibility: When you sell equity or take on a loan, you enter into a relationship with investors that you need to factor in.
Preparing for Investment
To attract investment, it’s important to prepare a solid business plan that outlines your strategy, market, and financial projections. Additionally, you’ll need to prepare a pitch that clearly communicates your vision and the potential for return on investment. Having a strong team in place and a clear understanding of the risks and opportunities associated with your business can also help you attract investment.
Evaluating Investment Offer
- When evaluating investment offers, it’s important to consider several factors, including:
- The amount of investment being offered
- The terms of the investment, including the type of equity or debt financing being offered
- The level of control or influence the investor will have over the business
- The reputation and track record of the investor
Managing Investment
Once you’ve secured investment, it’s important to manage it effectively. This includes developing a clear understanding of the investor’s expectations, communicating regularly with investors, and maintaining accurate financial records. It may also involve seeking additional investment as the business grows and evolves.
Seed Enterprise Investment Scheme
The Seed Enterprise Investment Scheme (SEIS) is a UK government initiative designed to encourage investment in start-ups and early-stage businesses. Here’s what you need to know about the SEIS.
The Seed Enterprise Investment Scheme provides a valuable source of funding for early-stage businesses and offers investors significant tax incentives to invest in these companies. However, the eligibility criteria and application process can be complex, so businesses and investors should seek professional advice before participating in the scheme.
Understanding Early-Stage Companies
Early-stage companies, also known as start-ups, are newly-formed companies that are in the early stages of their development. Here’s everything you need to know about early-stage companies.
Select a route
As previously mentioned, in the UK three core avenues exist for investors looking to invest in startups, under which various schemes, providers and opportunities fall.
Exploring each in greater can be an essential task for investors in identifying which pathway best suits their investment goals and personal circumstances.
Direct investment
Direct investments occur when an investor chooses to invest directly into a startup without the assistance of any intermediaries.
Due to a significant level of prior experience and/or capital that is required to structure this type of investment, direct investments commonly occur when a startup approaches a high-net-worth angel investor or informal angel investor network for investment.
Co-investment
Co-investment involves an additional party that groups and facilitates investment opportunities for investors to select from. This route will often take the form of online co-investment platforms (though can also include offline networks) that group together startup investment opportunities for investors to browse and select from at their will.
Where co-investment platforms can vary in their level of due diligence, sophisticated platforms will research, vet, and select portfolio companies against strict eligibility criteria before advertising them on their platform to best ensure growth potential.
Individual VC opportunities on co-investment platforms will often target between 5x – 20x money-on-money returns. Some platforms will also offer the option to benefit from tax-efficient investment schemes with certain opportunities that can minimize the risk and maximize the potential returns associated with startup investments.
Assess startups
Whilst a range of tactics can be employed to enhance the potential success of a startup opportunity prior to investing, ultimately the growth of the investment will rely on the strengths of the company itself.
Subsequently, it is crucial that investors conduct adequate due diligence into portfolio companies and investment providers prior to parting with their capital.
Before exploring the more granular details of an opportunity, a trusted starting point for assessing a startup’s strengths on a broad level can be to consider the ‘5 Ms’:
- Management Team – how experienced and entrepreneurial are the founders? Can the founders build a team capable of executing the growth strategy and creating shareholder value?
- Model – business Model and revenue model. Does the startup have an innovative and disruptive business model? How does the company generate capital?
- Market – opportunity, size, and overall market growth potential.
- Money – how much capital does the business need and how will management deploy funds to create value?
- Momentum – what has the company achieved to date? Does it have a strong pipeline of customers or any early commercial traction?
Understanding Fund Manager
Fund managers are professionals who manage investment portfolios, such as mutual funds, exchange-traded funds (ETFs), and pension funds. Here’s what you need to know about fund managers.
What Do Fund Managers Do?
Fund managers are responsible for making investment decisions on behalf of their clients or the funds they manage. They analyze market trends, evaluate potential investments, and make decisions on when to buy or sell assets within the portfolio. They are also responsible for monitoring the performance of the fund and communicating that performance to investors.
Types of Fund Managers
There are several types of fund managers, including:
- Mutual Fund Managers: These managers oversee investment portfolios made up of a variety of securities, such as stocks, bonds, and other financial instruments.
- Hedge Fund Managers: These managers typically manage portfolios with a higher level of risk and complexity, often requiring more specialized investment knowledge.
- Pension Fund Managers: These managers oversee investment portfolios designed to meet the long-term obligations of pension plans.
- Private Equity Fund Managers: These managers manage investment funds that invest in private companies, with the goal of generating a return for investors through the sale of those companies.
Diversify your portfolio
Before deciding which startup investment route is best suited to an individual’s goals, one consideration every private investor should take into account is their level of portfolio diversification.
Investing exclusively in particular markets, sectors or geographies can result in overexposure to unforeseen issues that may occur in one particular field, and potentially have detrimental impacts on a portfolio’s value.
Therefore, diversifying investments across a range of asset classes, regions, and sectors is a common approach that most experienced investors will adopt to strengthen their portfolios against unforeseen macroeconomic impacts. Simply put, this is known as developing a portfolio diversification strategy.
Conclusion
Business start-up investment can provide the capital needed to get a new venture off the ground and fuel growth over time. By understanding the types of investment available, preparing effectively for investment, and managing investment effectively, entrepreneurs can position themselves for success and build thriving businesses. Visit Blue14 now!