Helen Molyneux is the former Chief Executive of NewLaw Solicitors and Chair of the Institute of Welsh Affairs. She says that achieving accelerated growth is all about getting the right foundations in place.
It was 2004 when I set up NewLaw Solicitors in Cardiff. By 2010, we were one of the top ten fastest growing companies in Wales and by 2014 we had been bought by the Helphire Group for £43.2 million. That ten-year period taught me a thing or two about managing growth.
As a business owner, I know only too well the challenge of identifying the right funding structure to help supercharge growth. Without raising any capital you may be able to grow your business organically, self-funding and reinvesting profits but it may take a long time. Markets move very quickly and you may miss opportunities without an injection of capital.
From crowdfunding to invoice financing and debt funding, there is a plethora of options for SME’s in Wales that are looking to scale up but it isn’t always easy working out what is best for your business.
The first port of call is often your high street bank for working capital loans, fixed asset loans or factoring. The repayment amount will vary depending on the lender, the term and the rate of interest. However, one of the difficulties we experienced was in explaining our very non-traditional law firm business model to the banks. Our balance sheet did not look as they expected and we therefore did not match their usual risk profile. I’m told that this is a frequent problem if your business is new, has suffered initial or recent losses, has a poor credit rating or has recently been turned down for bank finance. In those circumstances, you may find non-bank finance easier to obtain, more flexible and possibly cheaper. This can include commercial loan providers, peer-to-peer lenders, leasing providers and invoice discounting providers.
The alternative is an equity investment. Equity is often referred to as patient capital. It’s a longer partnership than a loan. Also unlike loans you will not have to make monthly repayments therefore all the investment raised can be put towards your growth plans. You can generally raise larger amounts of capital than you could get if you were borrowing money.
This was the approach we took at NewLaw. I can confidently say that if you choose the right investor, they often bring valuable skills, contacts and experience to your business. They can also assist with strategy and key decision-making and some will have wide networks of contacts to assist your business. You should certainly look for an investor that can add more than just capital.
Like you, investors have a vested interest in the business' success - Its growth, profitability and increase in value. Investors make a return on their investment when the company is successful. You will often hear investors refer to an exit route, which is the point at which they make a return on their investment. This can be several years after they invest in the company. The most common exit routes are trade sales, share listing or sales to another investor or fund. It is vital to be clear what your investor’s preferred exit strategy is from the outset – and also the timescales they are working to. Alignment of ambition and objectives is key.
Equity funding is most suitable for high-growth businesses that need cash to speed up their growth plans, or early stage technology businesses that cannot support loan repayments whilst their business develops.
There are many sources of equity funding. This can include organisations like the Development Bank of Wales, family or friends, business angels or private investors, equity crowdfunding platforms, private investment funds, family offices, or other venture capital organisations. It’s worth noting that development bank, has the ability to offer equity, or loans or a combination of both.
The development bank can invest from £1,000 to £5 million at a time in Welsh businesses to start up, strengthen and grow. Equity investment from £50,000 to £5 million is available for established businesses to take a step change in growth and can provide seed finance for pre-revenue tech start-ups. They also offer loans from £1,000 - £5 million. The development bank will co-invest alongside banks, crowd funders, grants, investors and other lenders.
You can also use Angels Invest Wales, BVCA or UKBAA to find investors and funds in your area. Most business angels invest between £10,000 and £750,000. They usually invest in start-ups or young businesses that need to fund activities like product development or market expansion – but they can also be interested in established businesses that have a good growth strategy. They can make investment decisions quickly but will still need to see that you have a good business plan before they commit.
Some business owners think that by selling shares in their business, they are giving something away. But, you aren’t giving away shares in your business - you are selling them and getting value in return. In fact, by selling a share in your business now, you may well be able to speed up your growth plans and create a much larger, more profitable business.
So the question to ask yourself is are you prepared to sell a share of your company now in order to have a share of a much bigger business in the future – and achieve your ambitions for the business? You also have to consider whether you are prepared to take on board the relationship that an equity investment entails. Your investor will be an ‘owner’ of the business and that can sometimes be difficult for people who have run their own businesses without having to account to anyone else.
You also have to bear in mind that equity funding can take longer to raise than other forms of investment because the process can be complex. You will need to allow time to find the right investor for your business and to negotiate the terms. The investors will need time to undertake their due diligence on your business and the legals can be more complex. And of course you still have to run your business at the same time. You should allow at least three to six months for the full process – and don’t take your eye off the ball in the meantime.
You can help speed up the process, increase your chances of raising equity investment and limit the impact it has on your day-to-day business by ensuring you are well prepared. Have a well thought out business plan, which you can wholeheartedly stand behind. If you are raising a significant amount of capital you may want to engage a corporate finance adviser – but you have to drive the process as you are the person who best understands the business. Run your business plan past other people who will be able to test your assumptions and challenge your enthusiasm. It’s easy to over promise when you are excited about your prospects. It’s also worth talking to other businesses who have already been through the process. Irrespective of the equity funding, this is no bad thing.
It is important to choose the right investor for your business. This is a long-term relationship and you will want to secure an investor that you can work with, that can add value to your business, providing more than just money, and who has the same ultimate objective.
Supercharging business growth isn’t easy. It requires time, perseverance and capital. My advice is to speak to as many people as possible to work out the best option for your business and take advantage of the advice and expertise on offer from organisations such as the Development Bank of Wales.