A piece of the action

How do you find the ideal investor? Swoop’s head of equity has the answers

IF YOU’VE EVER watched the TV show Dragons’ Den, you’ll have an inkling of what equity is. In layman’s terms, it’s handing over a chunk of your business in return for fresh capital.

“It’s the purchase of common shares within a company,” explains Swoop’s head of equity, Neil Dillon, “and these entitle the owner to a certain portion of the profits and assets.”

When a start-up seeks fundraising help, Swoop’s equity team starts by reviewing its slide presentation, known as a pitch deck. “And if we think we can help with that raise, and we have the right investor network for them, we’ll take them on as a customer,” says Neil.

In late 2022, investors are cautious and “tiptoeing into deals”, but he believes there’s light at the end of the tunnel. “When January comes and the end of the tax year is looming, the funds who are sitting on cash now, who have been mandated by their limited partners to invest the money, will start writing cheques again.”

Hard questions

Before you commit to the process, however, Neil suggests examining your motives. Are you ready to raise equity, and do you really need to?

“Some founders register their company, start getting things in place and immediately think: ‘I need equity investment.’ Maybe it’s the influence of reading about venture capital,” he says.

“Yes, it’s true that you can grow faster when you’ve got more capital behind you, but it’s not the only way to start a business and grow substantially.

“I would ask of a founder, ‘Are you ready to give away some of your business, to give away some of the control?’ An investor who expects a return might want to influence decisions.

“Also, are you ready to give away a part of the start-up’s profits when all goes well?”

To begin with, companies that wish to grow organically might be better off avoiding equity funding, Neil suggests. “When you use the operating cashflow and invest your profits back into the business, that’s called bootstrapping.

“Lots of businesses have done this, and they can take venture capital money later on if they need it. But bootstrapping can really allow you to find that product market fit – to make sure you have a product that customers want without putting yourself under a lot of pressure.”

Friends and family

Grants and start-up loans, discussed elsewhere in this supplement, are options too. So is persuading friends and family to invest.

“This can be anywhere between £10,000 and £150,000. A high proportion of our businesses have taken on some sort of family and friends’ money before they look to raise from an institution or an angel investor,” says Neil.

Nonetheless, he recommends “keeping it professional” and using proper documentation in these circumstances. “Detail the risks that are involved, as they may not realise exactly what they are getting into,” he adds. “Start-ups sound great, but most fail in reality.

“Also, don’t give away too much of your business too early, because then your capitalisation table won’t look very attractive for investors later on in different rounds.”

Angel delight

Angels and high-net-worth investors are the next place start-ups might look, says Neil.

“Again, these might be within your immediate network, or you might get an opportunity to pitch to an angel syndicate. There might be pitch nights with angels in the audience.

“There are many angels out there. Often they are ex-founders themselves, or they know a certain industry very well.

“The big benefit I’ve found with angel investors is that they can write a cheque much faster than a venture capital (VC) fund can. It’s their own money, so if they really like you and your idea, they might write your cheque after a week of due diligence – or on the spot.”

Venture capital

VC funds are a huge part of the fundraising network, frequently highlighted in the media. Major international examples include Sequoia, LocalGlobe, Index Ventures and Andreessen Horowitz.

The jargon-buster

TAM: Total Addressable Market – total market demand for a product or service SAM: Serviceable Addressable Market – the segment of the TAM targeted by your products and services SOM: Serviceable Obtainable Market – the portion of SAM that you can capture EBITDA: Earnings Before Interest, Tax, Depreciation and Amortisation VC: Venture capital – a form of private equity VCT: Venture Capital Trust – private equity funds whose shares trade on the London stock market CGT: Capital Gains Tax – tax on the profit when you sell something (an ‘asset’) that has increased in value Advance Assurance – provisional confirmation from HMRC that the investment made into a company will be eligible for tax relief Runway – the amount of time a business has to remain solvent, provided they don’t raise any additional funds Run rate – the financial performance of a company, using current financial information as a predictor of future performance Burn rate – shows how much money a company uses before it starts generating income

“These guys are the big funds, but there are many, many funds that are global, European or UK-based and we have a large network of them within Swoop that we try and keep warm.

“We make sure that they’re seeing all the best deals that are available in the market that we have for them and giving our founders the opportunity to get in front of them,” says Neil.

In addition, many funds have been set up to take advantage of two government tax schemes, the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).

“From April 2023 the SEIS scheme allows a start-up to take £250,000 of investment within three years of their first commercial sale, then the investor can write off 50% against their tax bill that year. They’ll also pay no capital gains tax, or no inheritance tax, on the profit from their investment.

“EIS, the big brother of SEIS, allows a business to take on £5 million within any given year, or £12 million over the lifetime of a business. They just need to take in those funds within seven years of their first commercial sale.

“These two schemes have been a huge benefit to the UK ecosystem, with loads of funds starting up to take advantage of them.

“It’s one of the reasons why the UK is so far ahead of other European countries in the start-up space.”

Some VC funds, such as the Midlands Engine Investment Fund and the Northern Powerhouse Investment Fund, invest in individual UK regions. The advantage for businesses based there is that “you reduce your competition to that specific region. So, you may be competing with just a handful of other start-ups that are within your sector.”

The wisdom of crowds

Elsewhere, family offices that traditionally concerned themselves with property and retail have become major investors in tech start-ups, says Neil. “They can be hard to get in front of because they don’t publicise themselves as much as a venture capital fund would. But Swoop has them within our network.”

You may well have heard of crowdfunding too. The platform best known to the public, Kickstarter, enables fans to finance creative projects by clubbing together in their thousands.

As far as Swoop is concerned, the two main players to watch are Seedrs and Crowdcube. “Unlike Kickstarter, here you are giving away equity. It’s great for consumer businesses,” says Neil.

“You don’t just go live on these platforms without having some of the investment already committed, because sitting there with 0% invested doesn’t get the FOMO, the fear of missing out. But crowdfunding can be an absolutely brilliant way to raise the funding you need and get great publicity.”

How to succeed

All in all, then, what do SMEs need to know about raising capital? “Realistically, it will take three to six months to raise institutional investment,” says Neil. “Make sure you’re really willing to give time to the fundraising. That’s where Swoop can help, by giving you some of that time back and doing the investor outreach for you.

“You’ll also need a well-designed, well-presented pitch deck so that you’re giving all the key aspects of your business. We have an ideal Swoop pitch deck template you can use.

“And founders should understand their finances. We’ve all seen Dragons’ Den, when the dragons ask about financial projections and people fall to pieces.

“For the most part, you want to show product market fit – that is, your product satisfies a strong market demand. Maybe you’ve done some research to show there’s a problem and you’re the one to solve it.

“Finally, get to know the investors and choose wisely. This is also where Swoop can help, by finding those right investors. You need to see it as a partnership, because they’re going to be a part of your business for several years to come. Make sure there’s a trust there and that they’re adding value.”

To find out more, visit: swoopfunding.com

Available source and scale of funding

Pre Revenue Early Growth Expansion Growth

Friends & family

Savings / credit cards

Bank overdraft

Business angels

Crowdfunding

Growth equity

Venture capital

Private equity

Leveraged loans

IPO

M&A

Mature

Equity market