By Oliver Woolley, Envestors
For entrepreneurs looking to fundraise, there are myriad investment sources, ranging from seed funds, incubators, business angel networks, family offices, regional funds, corporate venturing funds, international investors (individuals and companies) and enterprise capital funds (ECFs). At Envestors, we understand the big questions and the finer details of a successful fundraise, and to help you plan your raise, we’ve prepared a brief guide to the fundamentals of fundraising.
Enterprise Investment Scheme (S/EIS)
Private investors paying tax in the UK can benefit significantly from tax relief of up to 72.5% of the funds they invest into UK limited companies under the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).
Approximately 70% of private investors in the UK prefer to invest in companies that provide them with tax relief under the S/EIS(). In fact, the majority will not even look at an investment opportunity unless the eligibility of tax relief is explicitly stated upfront.
There is also 100+ S/EIS investment funds which pool private investors’ funds and look to invest into early-stage ventures to obtain tax relief on their behalf.
Entrepreneurs need to strike a balance between explosive hockey-stick shaped financial projections which they believe investors will want to see and credible numbers that have a realistic chance of being achieved.
Typically, you will need to show financial projections for five years: the first two years broken down by month and the following years in quarters. It can be helpful to prepare target and realistic (and even worst-case) scenarios.
Financial projections should include the following:
- Cashflow forecast outlining the cash needs of the company. This will include capital expenditure, exclude depreciation, and allow for delays in receiving payments from clients/customers as well as building in payment terms to suppliers.
- Profit and loss account forecast outlining the profitability of the company. A company can be profitable and yet still require cash for capital projects.
- Balance sheet forecast outlining the financial position of the company at each year end in terms of assets and liabilities.
Do keep it simple. Massively over-complicated and detailed excel models that can only be understood by the author will put off investors. It is important to show the key revenue drivers to enable investors to understand the business model.
A pet peeve of investors is business plans that only tell you the good bits. Investors need to see the whole truth to make a decision – that means the good, the bad and the ugly.
If raising money from experienced investors and funds, you will be expected to provide disclosures on a range of matters, including:
- Do you employ your spouse, son or daughter, or any other family member?
- Has any member of the team been involved in insolvency or been disqualified from being a company director?
- Are any of the management team members involved in another business? Ideally, they are wholly and exclusively working for the company without any potential conflicts of interest
- Have you disclosed all financial liabilities, including taxes due?
Spending the investment
Investors will want to have some idea as to how their money is to be used. This could be sales and marketing, tech development, new hires or working capital.
Importantly S/EIS funds cannot be used for certain items, for example (a) buying a freehold property, (b) acquiring shares in another business or (c) paying off existing loans.
A clear exit strategy should be part of your investment proposition. The business exit is where investors will get their money back – hopefully with a return.
Business angels research conducted by UKBAA and British Business Bank shows the most common way in which businesses exit are:
- Trade sale 55%
- Sale to other shareholders (including management buy-outs) 10%
- Sale to a third party through a secondary sale process 10%
- Listing on a stock market 10%
- Other 15%
It is good practice to provide examples of businesses that are similar to yours who have exited.
Finally, it can be easy to underestimate the planning, hard work and cash that goes into a successful fundraise. Raising capital requires assistance in a number of areas from the legal documentation to the S/EIS application to marketing. As a rough guide, it is recommended you have a ‘war chest’ of around £10,000 to £20,000 plus fees. In total, the cost of raising finance can be around 8% to 10% of the funds raised.
ABOUT THE AUTHOR
Oliver Woolley is CEO and co-founder of Envestors. Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early stage investment in the UK.
Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks.
Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club.
Envestors is authorised and regulated by the Financial Conduct Authority.
 Source: Research conducted by Envestors Private Investor Club (EPIC) on investor references of its 4,000 private investor members, July 2021