Venture Capital Investment & Alternatives
With 2022 underway, many entrepreneurs will be thinking about their key milestones for the year and how best to achieve them. For most, funding requirements will be a core objective and thoughts might immediately turn to venture capital. In this week’s newsletter, Dragon Argent’s business startup advisory team look at what kind of businesses venture capital is right for and the alternatives if VC funding isn’t the best fit.
What is Venture Capital?
Venture capital is not the panacea that many entrepreneurs think it is. There is a whole industry designed to preach the virtues of venture capital and there are lots of people with an interest in entrepreneurs raising venture capital. Not surprisingly given this backdrop - many entrepreneurs believe that raising venture capital is key and tend to focus on it as an end in itself. The truth is that it is a tool (a very important one!) for an entrepreneur to use when building their business and nothing more.
As with all tools it should only be used for the job that it’s designed for. It’s not useful in all situations. Many people left disgruntled with venture capital have simply misunderstood its purpose. They have tried to use the wrong tool for the job with predictable results. Venture capital is appropriate for a small number of businesses, so before you try to raise it you should think clearly and honestly about your motivation and your business.
If it is appropriate then go for it, it is more likely to help you than hinder you. If it isn’t appropriate, then you’re probably on a road to frustration and possibly worse. Even if you can raise venture capital it’s likely that the mismatch will become clear, at which point you’re likely to have a problem on your hands.
At Dragon Argent, we use 3 simple questions to test whether a client is really the right sort of business to be focusing on a VC raise:
Are you (and your management team) really committed to building a big business? This isn’t a case of saying you’d like to. You need to commit to this accepting the pressure, late nights, and difficult decisions that it will require.
Can Your Business Grow Really Quickly? Growth is the venture capital industry’s raison d’etre. If you don’t believe that your business can grow at over 50% p.a. for the foreseeable future - it’s probably not a good fit for you.
Does Your Business Have a True Sustainable Advantage? Some people see this as a requirement to answer ‘Yes’ to question 2 but it is worth looking at separately to be sure that you are clear on this. Where does your business have a true sustainable advantage? Does it truly have one? If so, your business would be a good fit for VC investors. If you don’t have a sustainable advantage, you should probably think carefully before raising venture capital.
If you would like to learn more about the venture capital model and the process of raising VC investment, download our Demystifying Venture Capital whitepaper here.
9 Types of Alternatives Funding Options for Startups & SMEs
For businesses that VC funding may not be appropriate for, there are many alternative ways to finance what can become extremely successful, profitable, and fulfilling businesses. We have included a short summary below of some alternatives, but this is by no means an exhaustive list:
Friends & Family: This is the avenue through which most entrepreneurs gain the pre-seed or seed funding needed to develop and test the product-market fit of a business before trying to achieve scale and commercial success
Angel Investment: A wealthy individual who provides capital for a startup, usually in exchange for convertible debt or ownership equity. Due to the significant tax reliefs angel investors can benefit from in the UK, they can be more passive as shareholders than a venture capitalist.
Crowdfunding: Similar in some ways to angel investment, Crowdfunding is the practice of funding a project or venture by raising small amounts of money from many people. There are several popular, self-serve platforms for founders to raise crowdfunding.
Venture Debt: A type of debt financing provided to businesses that have previously raised equity investment by specialized banks or non-bank lenders to fund working capital or capital expenses, such as purchasing equipment.
Invoice Financing: A way for businesses with repeatable revenue to borrow money against amounts due from customers helping to improve cash flow, pay employees and suppliers, and reinvest in growth.
Mezzanine Financing: A tool for companies to raise funds for specific projects or to aide with an acquisition through a hybrid of debt and equity financing, but commonly utilized in the expansion of established companies
Micro Private Equity: A method for a founder to sell a majority position in a stable, cashflow positive company to an investor with a portfolio of adjacent businesses who can realise value due to the synergies across their investments
Grants: Financial assistance given by a public entity to a business meeting criterion that will benefit the interests of the public entity, such as the creation of jobs, innovative technology or the development of local infrastructure.
Small Business Loans: For small business with a trading history or approximately two years, there are also a number of loan products available at historically low rates of interest, making them extremely affordable, not least the government backed Recovery Loan Scheme
Conclusion
Dependent on the age and stage of your business there are many ways to secure the funding needed to achieve your targets for 2022 and if you would like to discuss any of these in more detail, please schedule a discovery call with our advisory team here.
However, at the risk of ending on a slightly unfashionable note, there is also a lot to be said for achieving growth through the reinvestment of profits that come from having a well-run, commercially viable business. Whatever route you take this year, we wish everyone in our network great success in 2022 and management consultancy service team remain available as a trusted advisor to our clients offering joined up and commercial accountancy and legal advice.
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