Fundraising, whether debt or equity, is rarely a straightforward process for most businesses.
That is particularly so with start-up and early stage fledgling businesses for the simple reason that they are at what is perceived as the riskiest stage of development.
Often the business concept is new and, at best, only partially tested by the market; and the early stage businesses rarely have much financial wool on their back.
What might knock a more established business off its stride could be fatal for an early stage business. This is why many businesses start with business training as a fundamental step towards success.
Although there are multiple sources of finance for start-ups, the funding landscape is complex and there is no easy single point of entry for a business to begin to access funding.
If the business has a tech angle we have found that Local Economic Partnerships (LEPs) can be a good initial start and they may be able to signpost founders to tech hubs and support eco-systems for their early stage businesses – particularly for those which are pre-revenue and perhaps little more than an idea.
Once an idea has been developed further, with proof of concept established with some initial paying customers, the next stage is loosely termed ‘Series A’ and is designed to scale the business.
Getting to this stage of development will typically involve bootstrapping the business and often require equity investment from High Net Worth Individual (HNWI) angel investors – usually via tax efficient Enterprise Investment Scheme (EIS) structures.
The funding landscape up to Series A is less structured and often related to HNWI and their own contacts and angel network.
From Series A and beyond, a relatively wide market of Venture Capital Trust (VCT) funds are potentially accessible and forms the subject of this blog.
VCT funding
Let us take a look at the VCT funding landscape and how this works.
Before considering VCT funding, there are two fundamental questions the business owner has to ask – and crucially, answer honestly.
These are:
- 1. Is he/she personally ready to bring in an external investor? and
- 2. Is the business ready for institutional investment?
The first question can be the most difficult one as investment will result in changes to the corporate governance structure and the owner’s ability to make independent decisions.
There is a degree of relinquishing an element of control and being fundamentally answerable to another party.
That can be quite a culture shock for an owner.
If a founder has already received angel money from HNWI’s or EIS investors, this may not be a new experience and merely another individual’s view to take into account; but for those founders not used to being answerable to a third party, this change may take some time to bed in and feel normal.
If you believe that you are personally ready, how do you ensure the business is ready for VCT investment?
VCT funding often has a tech aspect to it, but the following are some headline considerations for any business to honestly reflect upon at the outset before it embarks on a VCT fundraise:
- 1. Do you have a proven concept that works and has (at least some) paying customers?
- 2. Have you assessed your addressable market, confirmed it is ‘large’ and un-cluttered, but most importantly, do you understand where the opportunity lies for you to grow rapidly?
- 3. Can you articulate how will the cash investment ‘now’ generate significant returns in the medium term (c3 years) for an investor?
- 4. Related to this, you must have a compelling growth story and a clear long-term vision for the future.
- 5. Ideally you will also have a capable senior leadership team (or the beginnings of one) who are all aligned and incentivised to work alongside you and deliver the growth potential.
Current issues
In the new world of rising inflation, supply chain issues and skilled labour shortages, the UK economy is considered to be primed to seek out automation solutions to overcome some supply side pressures.
VCT funding is primarily focused on tech-based businesses, and whilst tech is a broad church, what we are seeing is that funds are particularly excited by the potential of software solutions businesses across the wider, medium term, economy.
The funding world, aware of this emergent trend, is seeing a number of new early stage funds being established to support and drive the next big thing.
How can we help?
The VCT funding landscape is well set up to support aspiring unicorns of the future – however navigating this landscape is complex.
One size will definitely not fit all and getting the wrong investor on board can be, at best, painful and, at worst, potentially fatal for a fledgling business.
At MHA Corporate Finance we are both highly experienced in advising early stage businesses and extremely well networked with funders.
Our database tools enable us to segregate UK and European VCT funds by sector and investment size, ensuring that we are connecting our clients with the right VCT funds that fit the owners’ culture and the business’ requirements.
This is only a very quick overview of the early stage funding landscape, but if it resonates with you, contact us to see how we can help.