Capital Raising Options for Entrepreneurial Businesses.
If you are an entrepreneurial business owner, with ambitions to grow your business beyond a life style business and to create tangible wealth, then you will need to figure out a way to fund the business growth beyond your personal resources through capital raising. This presumes that you have not inherited a substantial nest egg or have not made your fortune selling a previous business. Most of us start off our businesses with our own personal resources or savings and this is known as bootstrapping the business.
Many of us have in the past relied on family and friends to fund the first growth steps of our business, with soft loans or sometimes cash in exchange for shares in the business. When banks were more borrower-friendly, they often bridged the funding gaps with term loans or working capital financing. Those businesses with pledgable assets may still be able to avail of short to medium term bank financing but cash hungry fledgling businesses may have fewer options open to them apart from invoice discounting, if the quality of their receivables is adequate.
Typical stages in equity capital raising are shown below.
Capital Raising – Internationally
Many entrepreneurial business owners may not be familiar with all of the financing options open to them, and they may differ from country to country. That said, the United States is at the forefront of providing capital to entrepreneurial businesses, and the best representation of how this works, is contained in an article by Anna Vital on http://www.fundersandfounders.com. She has produced a particularly useful infographic, which that I have reproduced below for your convenience. Her full article is available here http://fundersandfounders.com/how-funding-works-splitting-equity/. For more information on what each of the funding rounds are for; how much you might expect to raise in each round; and what type of investor might be interested in providing the funding; you might also take a look at the following article by Elad Gil
In essence, growing your business quickly requires that you give away part ownership of the business in exchange for cash. Parting with some of your ownership (equity) may be somewhat unpalatable for entrepreneurial business owners but this is one of the requirements for taking in cash from external investors. There is no such thing as free money, unless you can receive grant aid from State or semi-State bodies, and even then, there are terms and conditions you must observe.
The problem with accepting investor money from external investors, particularly if it comes from an Angel investor fund or a Venture Capital fund is that you not only lose some ownership, you also lose some of your control of the business. Angel or Venture Capital investors will typically require one or more seats on the board of your business and you may find that there is an additional administrative burden of providing the investors with regular information packs on how the business is performing. You may also find that you no longer control the destiny of the business as large institutional investors will often exercise their rights to vote on issues affecting the business and this may not always be in concert with what you, the founder, may wish to do.
You must also remember that there is a cost attaching to equity, in the same way as there is a cost to borrowing money from banks or other financial institutions. With financial institutions you will typically pay interest and arrangement fees, but the bank will rarely take an ownership interest in your business, and when the loan is repaid you will no longer have any obligation to the bank and you will not experience any loss of ownership or control.
When you raise finance from investors, you will typically be required to pay dividends as the business prospers but you will also concede absolute control of the business. Even when you have paid substantial sums in dividends to the investors, you will not be able to claim your equity stake back. The investor will be a part of your business until they decide to dispose of their shares and this will typically be to a third party, usually as a result of an initial public offering of the shares (IPO).
Also, you may have a long-term vision for the business with a payday for you in ten or 20 years time while your typical investor will want to cash in his chips in a one to five year period. This short-term imperative may be totally contrary to your own vision so be aware of it before you invite in external shareholders.
Capital Raising in Ireland
Raising capital in Ireland is similar to the model discussed in the previous section. However, there are a number of State supports available for qualifying businesses, which enhance the options available internationally. These supports are provided by Enterprise Ireland (EI), and the Industrial Development Authority (IDA). EI is concerned with aiding export driven domestic businesses whereas the IDA is concerned with encouraging Inward Investment by foreign firms into Ireland.
EI offers a wide range of up to 80 different supports, which are dependent on the stage of company development:
- Startup Idea
- High Potential Startup Funding
- Established SME (>10 employees) Funding
- Large Company (>250 employees) Funding
They range from training grants, to market research, to R&D and Company Expansion. Check http://www.supportingsmes.ie/businessdetails.aspx to see what supports your business may be eligible for, if you own a business domiciled in Ireland. Enterprise Ireland invests in over 70 High Potential Start-Up companies each year and manages a portfolio of over 1,300 investments in client companies. A summary of the grants and equity available by company stage is shown below.
Angel Investor organizations in Ireland include the following:
- HALO – Northern Ireland Business Angel Network
- HBAN – Halo Business Angel Network
- EBAN – European Business Angel Network
- GBAN – Global Business Angels Network
- Irrus Investments – Syndicate of individual Angels who regularly invest together
- Angel Investment Network
There are multiple Venture Capital funding businesses investing in Irish companies. A list of 25 of these VC companies can be found here
For information on Start-up funds and incubators in Ireland, check out this link