Venture capital funding, or Private Equity (PE) as it is often known, is where an external investor buys a stake in a business from the existing owners.
There are various forms of venture capital or PE funding for different phases of a company's development including:
· Seed financing - funding while you research and develop a project or concept until you are ready to launch a company.
· Start-up financing - to help you develop a product and begin marketing it. This sort of funding is often based on your business plan and investors will usually help you put a management team in place to help bring the product to market.
· Expansion/development capital to increase production capacity and sales activity, for companies growing strongly
· Buy out/Buy in/Acquisition to enable an existing or an external management team to buy the business or for the existing business to buy other companies.
But what impact does equity funding have on growth and how does selling shares benefit the existing shareholders?
MSIF investment director Simon Thelwall-Jones who oversees MSIF’s equity investments explains: “Equity funding is often used in companies where a significant cash injection is needed to accelerate their growth. This growth is supported not only by providing capital, but also strategic guidance and input at board level and also operational levels to enable companies to realise their full potential.
“Some people hold a sceptical view of equity funding believing they are giving up a share of their business, but in reality an equity investor is looking to form a partnership which will create more value for all parties. So yes, whilst you may own fewer shares those shares will be worth more.
“The nature of the equity funding provided by organisations such as MSIF is that returns can typically only be generated by supporting growth. We are therefore keen to ensure that the managers running the business are continually incentivised, and all parties’ interests are aligned.
“Growth opportunities may include geographic expansion, acquisition or product or service development, but to pursue these opportunities additional capital is required.”
So why choose equity investment funding over other forms of investment?
Equity investors look at a business’s future prospects, as opposed to traditional lenders who base their financing on current security and historic performance levels. As a result, greater funding levels and potentially more flexible funding structures may be available through equity. An equity investor’s return typically comes from increasing a business’s value and ultimate disposal of a shareholding rather than ensuring the business can repay borrowings.
In some cases a business may use a mix of debt and equity or ‘cocktail finance’ to create a tailored funding package.
Simon Thelwall-Jones continued: “At MSIF we look at a business on a case by case basis and come up with the best package for the business. We want to help the business grow and add value so as an investor we’ll be actively involved, providing our own expertise and putting the right people around a business to develop the management team and help build a strong board.
“An equity investment can actually attract good people as it shows that a business has aspirations to develop and is an exciting career move.
“We have a large network of individuals with proven track records in relevant industries that we can introduce to provide invaluable expertise, contacts and know-how to really drive growth in a business.”
What sort of businesses is MSIF looking to make equity investments in?
“Any business which is looking to grow either organically or through acquisitions where substantial investment is required to take it to the next level. This could be because it wants to buy a competitor, a business that complements its existing offering or will enable it to expand into new markets.
“We’re particularly keen to support Management Buy Outs (MBOs), where an existing management team with knowledge of the business, its products, clients and operations, acquire the business from its previous owners. MBOs have a strong correlation with growth as a new team can reinvigorate the business.”