Navigating the investor landscape as an SME
Dani Saghafi, Senior Lecturer in Accounting at Brunel University, unpacks what it takes to secure investment as an SME.
Dani Saghafi Senior Lecturer in Accounting, Brunel University
Reading Time 4 minutes
Seeking external investment as a small business is often a necessary part of the growth journey. But navigating this landscape can be daunting due to the seemingly countless investment options, combined with concerns about not wanting to be taken for a ride, or not giving too much of the company away.
It is for this reason that it is essential to understand the type of investment options available to you, the terms used in financial investment, and how to prepare your business for investment.
The investment landscape
The UK investor landscape for SMEs is diverse, with a range of options available with their own benefits and drawbacks. The best choice will depend on the specific needs and circumstances of the business in question. Typical sources of SME funds outside friends and family include:
- Angel investors: high-net-worth individuals who invest in early-stage companies in exchange for equity. They often provide not only funding but also mentorship and expertise.
- Venture capital (VC): firms that provide funding to startups and early-stage companies with high growth potential. These firms typically invest in exchange for equity and take an active role in helping the company grow.
- Private equity firms: these invest in more mature companies that are looking to expand or undergo a significant transformation. They typically invest in exchange for a significant equity stake and may take a more hands-on approach in managing the company.
- Crowdfunding: platforms that enable startups and SMEs to raise funds from many individuals via the internet. This type of funding can be equity-based, reward-based or donations.
- Banks: these have traditionally been the primary source of SME funding. However, the landscape has broadened in recent years with the rise of alternative lenders, such as online lenders, invoice finance providers, and peer-to-peer lending platforms.
- Grants: grant funding often comes from government agencies, research councils and Growth Hubs. A prime source of grant funding for innovation-focused businesses is Innovate Edge UK.
How to prepare your company for investment
The funding process can be time-consuming and challenging, so SMEs should be prepared to put in the effort and seek advice from experienced advisors or mentors as needed. Here are some key steps that SMEs can take to ready their business for investment:
- Develop a clear business plan that outlines products or services, target markets, a growth strategy, and financial projections that identify realistic goals and milestones. This includes getting a comprehensive financial breakdown in order which involves establishing a clear understanding of revenue, expenses, profit margins, and how to use the funds you want to borrow and how you will pay back any debt.
- Research different types of funding available including grants, loans, and equity financing.
- Build a strong management team for attracting external funding with the necessary skills and experience to execute on business plans and achieve growth goals.
- Be prepared to pitch to potential investors. Your pitch will need to include an explanation of your business model, the market opportunity, your growth strategy, as well as what the investor will get back from their investment.
Demystifying investment language
The world of investors can feel alien if you are not familiar with the language used. Here is a short glossary with some of the key terms that you might hear.
- Equity: equity refers to ownership in a business. When an investor buys equity in a company, they own a portion of the business and are entitled to a share of any profits.
- Debt: debt is a form of financing where a company borrows money that must be repaid over time, typically with interest. This is different from equity, where investors take a stake in the business in exchange for their investment.
- Valuation: this refers to the estimated value of a business and is often used to determine how much equity an investor will receive in exchange for their investment. Valuation can be a complex process, but essentially it involves looking at a variety of factors such as revenue, profit, growth potential, and market share to determine what the business is worth.
- Seed funding: seed funding is the initial funding used to get a business off the ground. It’s often used to cover early expenses such as product development, market research, and hiring.
- Series A, B, C funding: Series A, B, and C funding refer to the different stages of funding that a startup or early-stage business may go through. Series A funding is typically used to scale a business, while Series B and C funding are used for expansion or acquisitions.
- Pitch deck/information memorandum: a pitch deck is a presentation that outlines a business, including the problem it solves, the market opportunity, and the team behind the business. It’s often used when pitching to investors or potential partners.
- Sweat equity: sweat equity refers to the value contributed to a business by its founders or early employees in the form of time, effort, and expertise. It’s often used as a form of compensation or ownership in early-stage startups, in lieu of cash or equity.
- Term sheet: a term sheet is a document that outlines the key terms of an investment agreement, including the amount of funding, the valuation of the company, and any other conditions or requirements of the investment.
Seeking investment as a business leader will seldom be a smooth process. But with proper research, preparation, and council from peers, you will have a strong foothold from which to explore some truly transformative opportunities.
About The Author
Dani Saghafi Senior Lecturer in Accounting, Brunel University
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