Equity Financing: what it is, how it works, and where to find it

Equity financing is when you raise money by selling shares in your business, either to your existing shareholders or to a new investor.

This doesn't mean you must surrender control of your business, as your investor can take a minority stake.

Common equity finance products include angel investment, venture capital, and private equity.

Read on to learn more about the different types of equity financing.

As with all finance types, it’s a good idea to seek independent financial advice to help decide which type of finance is right for you and your business.

Angel investment

What is angel investment?

An angel investor is someone — usually an entrepreneur or successful businessperson — who invests their own money in your small business to help it grow.

They do this in exchange for a minority stake (typically 10% to 25%).

As well as providing financing, they also take a close interest in your business's future.

They will look to forge a strong relationship with you and use their experience, knowledge, and contacts to make sure your company thrives.

Which businesses are attractive to angel investors?

Generally, angel investors get involved at an early stage, when a business is about to launch or has recently launched.

They look for businesses that:

have much potential for quick growth
will give them a high return on their investment.

An angel investor might see your business as a viable prospect if you:

are pre-revenue, pre-profit or profit-generating
have a yearly turnover of less than £5 million
are based in an area of which they have local expertise.

If your business is generating revenue (pre-profit) or profit, an angel investor is likely to see you as a good investment, in that there's a strong chance you'll deliver a high return.

If you're a pre-revenue business, you'll likely need to show 'proof of concept', as the investor will consider you a higher risk.

Proof of concept means being able to demonstrate that your product works or that there is strong demand for it.

It might also mean having patented or copyrighted intellectual property.

How can my business attract angel investment?

You'll need to prove your value to any angel investor.

This means doing lots of research and networking, and perhaps writing a detailed business plan.

If you meet the investor's requirements, you must pitch to them to get them on board.

You can expect the entire investment process to take up to six months.

Learn more about Angel investment.

Venture capital

What is venture capital?

Like angel investors, venture capitalists (VCs) finance early-stage businesses to help them grow.

However, rather than invest their own funds, VCs use money belonging to large institutions such as pension funds.

As they seek a significant return on their investment, they generally ask for a bigger stake in exchange.

While VCs likely won't take part in the day-to-day running of your business, they will look to be involved in other ways, particularly when it comes to determining your strategy and direction.

Often this means taking a seat on the board.

Who is venture capital suited to?

VCs are most interested in businesses that:

have a track record of success
have the potential for rapid growth
are likely to generate a large profit on any initial investment.

They tend to target businesses whose products or services have a unique selling point and give them a clear advantage over their competitors.

Learn more about Venture Capital.

What are equity funding rounds?

You raise venture capital in a series of stages (or rounds), and most VCs specialise in one specific stage of investment.

Start-up/pre-seed stage

For start-ups or new companies to develop products and/or conduct some initial marketing.

VCs rarely enter at this stage. Most start-ups finance this stage themselves.

Seed stage/early stage

For companies to refine their product or develop their concept, before bringing the product to market.

VCs who work with early-stage and micro businesses enter at this stage, and often invest in businesses local to them.

Series A stage

For revenue-generating companies to do things such as finalise their product, pay staff salaries or conduct market research.

At this stage, VCs provide investment in return for equity.

Series B stage

For profit-making companies that want to scale up, expand, increase their market share or branch out into other product ranges.

Most of this finance will come from established VC funds.

Series C stage

For companies with huge potential or market traction to do things such as gain a greater market share, develop more products, or prepare for a buyout or an IPO.

Not all VC funds will take part at this stage, and the ones that do will effectively treat it as their exit strategy for their investment in the business.

Learn more about equity funding stages.

How does a business attract venture capital investment?

VCs are in high demand and don't typically advertise themselves.

The best way to find one is to have someone they trust — such as a colleague, another entrepreneur or investor, or a lawyer — set you up with an introduction.

Alternatively, you could contact the British Venture Capital Association (BVCA), who can point you in the right direction.

Securing VC investment can be a long, drawn-out process.

You're likely to incur legal fees, whether you manage to secure that investment or not.

As a result, you must enter into the process fully prepared.

Corporate venture capital

What is corporate venture capital?

Corporate venture capital is a type of venture capital.

Where venture capital is financed by institutions such as pension funds, corporate venture capital comes from large, often multinational corporations.

A corporate venture capitalist (CVC) will provide funding in exchange for a stake in your business.

It will also typically offer you its expertise, network, and contacts.

What type of business is corporate venture capital suited to?

CVCs want to benefit strategically from any relationship they build.

This is why they tend to invest in smaller businesses that operate in the same or a similar industry to them.

They will look to gain from your business in some way, whether that's through, for example:

your special insight into the marketplace
your market reach
some innovative technology you've created.

If your business can't help the CVC develop its strategy, the CVC is unlikely to offer you investment.

Like Venture capital, you raise corporate venture capital in a series of stages (or rounds).

Start-up/pre-seed stage

For start-ups or new companies to develop products and/or conduct some initial marketing.

CVCs rarely enter at this stage. Most start-ups finance this stage themselves.

Seed stage/early stage

For companies to refine their product or develop their concept, before bringing the product to market.

CVCs who work with early-stage and micro businesses enter at this stage, and often invest in businesses local to them.

Series A stage

For revenue-generating companies to do things such as finalise their product, pay staff salaries or conduct market research.

At this stage, CVCs provide investment in return for equity.

Series B stage

For profit-making companies that want to scale up, expand, increase their market share or branch out into other product ranges.

Most of this finance will come from established CVC funds.

Series C stage

For companies with huge potential or market traction to do things such as gain a greater market share, develop more products, or prepare for a buyout or an IPO.

Not all CVC funds will take part at this stage, and the ones that do will effectively treat it as their exit strategy.

While VCs generally invest in cycles of five to 10 years, CVCs tend to invest in shorter cycles of three to five years.

How can a business attract corporate venture capital?

Like VCs, CVCs are in high demand.

However, CVCs tend to be more proactive in seeking out potential investments, attending networking events and accelerators in order to better understand the current business landscape.

Another way to get CVC funding is via an introduction from an existing investor or an entrepreneur with close ties to the CVC.

Learn more about Corporate Venture Capital.

Private equity

What is private equity?

Private equity (PE) firms raise capital from institutional investors such as pension funds and insurance companies.

With that money — and some of their own — they form a private equity fund, which they use to invest in businesses.

Their aim is to increase the value of those businesses then sell them (or their stake in them) for a profit.

The most common type of PE investment is the leveraged buy-out.

The PE firm buys a majority stake in your business using a combination of equity and a large amount of debt.

Although repaying the debt falls on the business, the investor uses its operational expertise and sound management to boost your company's profitability, and reduce the debt as a result.

PE firms typically manage their investment for a period of years, after which time they either sell (often to another PE firm) or list the company on the public market.

Which type of business is private equity suited to?

As PE firms want to make substantial profit on their investments, they usually target mature, well‑established companies in traditional industries.

Your business might be a good candidate if:

it's successful and profitable and showing consistent growth
its founders are looking to exit it
it has the potential to increase profitability.

Private equity is about large investments.

A PE firm might consider your business if you:

are mature and growing
are profitable
have an annual turnover of £10 million-£100 million.

How does a business attract private equity investment?

With private equity, the initial approach is often made by the investor, through intermediaries such as lawyers, investment banks or advisers.

Sometimes they approach businesses directly.

However, there's nothing stopping you from approaching a PE firm yourself, though you might want to seek independent advice from your accountant or financial adviser first.

Learn more Private Equity.

Equity crowdfunding

What is equity crowdfunding?

Equity crowdfunding is when you raise money by listing your business on a regulated online platform.

This allows investors and members of the public to buy shares in your company.

There are several crowdfunding platforms in operation and each one has different methods and specialities.

When you apply to take part, the platform will carry out checks to make sure your business complies with its requirements.

Some platforms can also offer advice or manage your communication with your shareholders.

What type of business can benefit from equity crowdfunding?

Equity crowdfunding generally suits businesses that sell consumer products or services, as these are the companies in which the public frequently look to invest.

That said, equity crowdfunding platforms are very diverse, and by doing proper research you should be able to find one that's a good fit for your business.

Equity crowdfunding is aimed at a wide range of businesses, from those that are pre-revenue through to more established companies.

There are no requirements relating to annual turnover.

As all equity crowdfunding in the UK is regulated by the Financial Conduct Authority (FCA), there are rules that determine how much you can raise and how much people can invest.

If your crowdfunding goes beyond €5 million, you must produce a prospectus, which the FCA will need to approve.

How does a business attract equity crowdfunding?

You can find information about equity crowdfunding platforms on the website of the UK Crowdfunding Association (UKCFA).

It's important to take the time to find the right crowdfunding platform for your business.

Keep in mind that platforms will do their due diligence and expect you to have your financial information in good order.

You're also likely to face questions from potential investors.

Learn more about Equity Crowdfunding.

Initial public offering (IPO)

What is an IPO?

An IPO is when your business raises finance publicly for the first time.

This is often referred to as 'listing' or 'floating' on the public market, which, in the UK, is the London Stock Exchange.

Raising money publicly in this way allows you to secure large amounts of investment without giving up control of the company — you can have many investors, each holding small minority stakes.

You can also repeat the process time and time again, over a period of years.

Once your business goes public, you have a responsibility to regularly update your shareholders and the market with your financial information.

What type of business is an IPO suited to?

If your business is established, profitable and growing, and has plans for further growth, an IPO could be feasible. As well as financing growth, listing shares in your business on the public market can help you to:

finance acquisitions
rebalance your balance sheet
broaden your company's shareholder base
provide liquidity.

There are different requirements depending on the market on which you list.

The three major IPO markets are as follows:

Main Market

For larger businesses. Home of FTSE 100 and 250.

High Growth Segment

For tech-specific businesses not quite ready for the Main Market.

AIM

The Alternative Investment Market (or AIM) is designed for smaller, growing businesses looking to scale up.

Technically, there's no limit to the amount of capital available, although how much investment you can secure will depend partly on the rules of whichever IPO market you choose.

The AIM market enables you to raise up to £200 million, while the Main Market gives you access to over £1 billion via a much wider pool of investors.

Learn more about AIM.

How can I seek an IPO listing?

Generally, there are two phases to seeking a listing:

Pre-IPO preparation
The IPO process itself.

Preparing for an IPO might involve:

reviewing your business plan
assessing your management team
recruiting accountants, lawyers and PR resources to support throughout the process
appointing a board
implementing or tightening financial controls
improving operational efficiency.

Once you've listed your business, you must then comply with the rules around how public companies should operate.

This includes producing financial statements and adopting corporate governance codes that will dictate how to engage with shareholders.

Learn more about Initial Public Offerings.

Expansion capital

What is expansion capital?

Expansion capital (also known as growth capital or growth finance) is money invested to enable your business to accelerate its growth without you having to surrender control or ownership.

Expansion capital firms can provide investment in return for an equity stake (between 10%-40%) and usually a seat on your board.

One of their main aims is to grow your business by around 15%.

What type of business can attract expansion capital?

Expansion capital investors target businesses with lots of potential for growth, in the form of a highly scalable product or service.

They look for ambition and long-term vision, and might also want to see a strong business plan.

An expansion capital investor might see your business as a good investment if you:

are profitable and growing
have an annual turnover of £5 million-£100 million.

How does a business attract expansion capital?

Applying for funding can be time-consuming.

You must be properly prepared, as expansion capital firms will want to examine your financial reports and plans for growth and assess the legal framework of your business.

There are a number of places you can go for expansion capital, including:

expansion capital firms
banks
investors
high net worth individuals.

Often, securing funding will mean delivering some kind of pitch.

You'll need to show evidence of your potential for growth and demonstrate why your business is worth the investment.

Learn more about Expansion Capital.

Find growth finance options

Answer six simple questions to understand more about the growth finance options available and whether they're suited to your business.

Visit our Finance Finder tool.

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