Is Equity Financing Right for your Start Up?

I wanted to follow up from my previous article about EspressGo closing and share further insight into whether your startup or business needs finance support. In our case, and with most apps that launch a consumer-2-business product we needed capital to get us off the ground. If you dont have to raise ‘early stage’ or venture capital (eg. You are raising through self, friends and family or you are growing and are cash flow positive), there is no reason you HAVE to, but there may be reasons why you would want to. Hopefully this article can shed some insight into the benefits and potentially the disadvantages of doing so.

Is giving away Equity right for your Startup?

Your first instinct is usually ‘no’. You’ve had an idea, you’re building it from scratch, you’re starting to gain traction. There’s no way you want to give a slice of it away.

However, snaring a big-name VC or angel investor at an early stage can be the difference between success and failure for your startup. Furthermore, those investors only accept one type of collateral for their investment, equity in your company. 

Of course, there are advantages and disadvantages to giving away equity in your company in return for investment. However, I believe that the pros far outweigh the cons. If all goes well and your business scales, everybody wins, and the worries aren’t worth worrying about. Here’s why.

Benefits of Equity Financing

There are so many benefits to trading equity in your startup for VC or angel investment at an early stage. Firstly, it means you don’t need to rely on loans from banks. Bank loans charge interest, which can deplete your cash reserves when you need them the most. 

Next, you minimise your personal risk in your project. If your business fails, you would still have to repay your bank loan. Equity financers do not require this, they take on a share of the risk in the hope of a bigger return. 

You can also find different types of equity investors depending on what life stage you’re at. At the proof of concept stage, on top of your own money (friends and family included), you can find accelerator programmes and business angels. At the seed stage, you can receive investments from Angels, Seed Funds, Corporate Venture Funds and early stage VCs. You can also get involved with Crowdfunding. After the first round of funding, you turn your attention to growth VCs and Private Equity. All with a view to an IPO when you’re heavily scaling. All these solutions require a trade of equity for investment, but it means you can achieve it at any stage of your startup’s life.

As well as the financing, taking on equity backers brings other benefits. When news of your backing from a big-name investor gets out, it reflects extremely well on you. It’s someone who knows what they’re talking about endorsing you with their money. What a story! It’s not a guarantee of success, of course, but it goes a long way.

Sometimes, VCs and angel investors move in packs. If you can get one on board, others may follow. As well as receiving the benefits of their money, you may also be able to utilise their network too. Expert advice, introductions and connections are all available to you through your investor. After all, they have a stake in the success of your startup. 

Disadvantages to Equity Financing

Sure, there are a few cons to receiving equity backing. For starters, if you’re only after some short-term money to tide you over, trading equity is probably overkill. Investors want to be in it for the long haul.

Next, talking to VCs makes you think about the endgame for your startup. VCs are likely to want to see a return at some point, and the nature of that return, by selling to a larger business, for example, may not be for you.

Your investor may have different ideas from you about how they see your startup developing, which you may disagree with. They will also want to see a disciplined approach to running your business, which may not be your style.

Finally, when you’re a success, they will want a share of your profits, which may leave a bad taste in your mouth after all the effort you’ve put in to get to that stage.

Don’t Worry

I would always advise you not to worry about these bad points. Don’t focus on your slice of the pie, focus on the size of your pie. If all goes well, your investor will help you grow your company to a size that you wouldn’t have been able to do without them. Even once you’ve given your investor their share, what’s left for you will still be greater.

An exit focus works for everyone. If you have to sell your company, you will suddenly have a lot of money to use doing something else. Plus, a little bit of discipline could be good for you.

But seriously, your investors will not be your new management team. While they want to help they have better things to do, portfolios to manage. They don’t have enough time to meddle in the minutiae of your startup.

What do you think?

To conclude, I’m all in favour of trading equity for investment in your startup. If you really believe in your startup, that it has the power to change the world, then you will have no fear of equity financing. The ultimate aim is to grow your pie, and equity financing can help you do that.

How about you? What do you think about offering equity for investment in your startup? What would make you turn down an investment offer? Let me know in the comments.