Late stage funding: Your options for business growth

Posted on Nov 7th, 2014 | Planning

You’ve set up a business, it’s been running for a number of years, you have a great product or service to sell and revenue is growing year on year. Now, you just need that extra bit of a push to expand your business, move into new premises, maybe hire some more staff and start turning a serious profit.

Making an investment at this stage in a company’s lifecycle is called ‘late stage funding’. But what options are out there and what are the advantages and disadvantages of each?

Angel investment

This is basically the kind of investment that happens on Dragon’s Den. An ‘angel’ is not a supernatural being, rather a wealthy (but usually not super wealthy) investor, looking to get a higher return on their investment than they could in banks or property, for example.

Angels have deep pockets and will usually invest anywhere between £10,000 and £1 million. In return, they’ll expect a high return on their investment, usually expecting 2.5x their original investment. Although they may not ask for a huge amount of equity in the company, they will usually expect some say in key business decisions.

The problem with Angels is that they’re highly risk-averse. It will usually take them between three and six months of due diligence before they decide whether or not to invest, and they’re unlikely to make follow-up investments.

In terms of finding an Angel, they could be anyone, from a friend or nextdoor neighbour, to a serial entrepreneur found through the internet. Angels often invest through a network, as this gives them a greater pool of experience, which helps with due diligence. Some examples include Angels Den, AngelList and Angel Investors Network.

Venture capital investment

Venture capital is secured through venture capitalist (VC) firms, which are pools of income managed by a limited partnership or trust. Some examples include Founders Fund and ACCEL, members of which were early investors in Facebook.

The individuals who own these firms are some of the wealthiest people in the world, so there’s much more opportunity to get large amounts of funding – VCs tend to invest anywhere between £300,000 and £3 million on average, but have been known to fork out in excess of £20 million.

VC firms expect a lot for their money, however. They’ll expect rates of return between 38% and 48% a year, and will ask for a large chunk of equity to go with it. Be cautious that if you start giving over 50 equity to one party you risk losing control of your own company.

Although generally willing to take more risks than Angel investors, VCs will take often a painfully long time in scrutinising the ins and outs of your company before investment. Taking as long as a year in some cases, this can be an extremely frustrating process.

Loans

Taking a loan allows you to keep complete control of your company, as it doesn’t involve the exchange of any equity, like with Angel or VC investment. The trade off is that if you have to pay interest on the money, and you will also have to pay the money back, whether or not your company is making a profit.

There are a number of options available. One of the most widely used business loans is a secured loan, which involves putting down an asset as security for the money you receive. A secured loan provides access to a lump sum payment which can be paid back on a monthly basis at an agreed rate of interest.

Invoice finance is an interesting choice of loan which allows you to sell your unpaid invoices to a loan provider who will then commission a collection company to ensure payment is made. This choice is excellent for those struggling due to credit control, as you’ll receive a lump sum equal to around 90% of outstanding invoices.

Finally, peer-to-peer (P2P) loans have recently taken off – a form of unsecured loan where lenders are connected with borrowers through an intermediary. The interest rates are either set by the lenders through an auction process, or by the intermediary, depending on the borrower’s credit score. Popular P2P lending services include Funding Circle, Rate Setter and Lending Works.

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Written by Nick Chowdrey

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