Lay strong foundations and growth will follow, say Robert Levett and Heather Tulloch, Associate Directors at Evelyn Partners.
As advisors to entrepreneurs and their businesses, we hold a unique position in the Cambridge market and East of England region. The type of clients and markets we service, and the entrepreneurs who entrust us to advise them, give us invaluable insight into the growth phase of the entrepreneurial journey.
Over the years, the region has been home to several entrepreneurial success stories, attracting both national and international headlines. Many entrepreneurs attribute their success to the foundations built at the start of their journey and investment in people and talent.
It all starts with an idea and investor conviction to back the entrepreneur
A fundamental consideration for any entrepreneur in the growth phase of a business is funding, particularly its sources and how much is required to sustain short to medium term growth. The investment needs to be sufficient to deliver on strategic milestones and growth, and to uplift the valuation of the business before further funding is secured.
Funding is often obtained in rounds or tranches, and falls within the main categories of equity, debt, government grants or crowdfunding. The predominate form of financing for growth businesses is equity, whereby businesses with high growth potential offer prospective investors the opportunity to exchange capital, in the form of cash for equity, for a percentage of the business.
There are a number of tax-incentivised investment methods available to investors, which if met based on qualifying criteria, could increase the investment proposition.
The schemes most likely to be relevant to entrepreneurial companies are the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). As you might be able to tell from the names, these two schemes are very similar.
But whereas EIS is for established businesses with assets under £15m and no more than 250 employees, SEIS is aimed at smaller, earlier stage companies and as these are riskier investments the tax relief available to investors is higher.
As the tax relief available to investors can be significant there are stringent rules for the company, the investor and how the funds raised are used.
Seasoned investors will be aware of these schemes and will often ask if their investment will qualify – professional advice should be sought before answering this question, and it’s possible to get advanced assurance from HMRC before the investment is made should the investors require additional comfort.
Ordinarily, the equity of the business would be presented on a capitalisation table showing the existing shareholders, any share option holders and future equity funding round requirements. It’s key for existing and prospective investors to understand what future equity dilution looks like based on projected funding requirements.
In the growth phase, a business’s valuation is highly subjective and influenced by several factors, including quality of ideas and size of market opportunity, intellectual property and patents, product and service development, market traction and whether the company is pre-revenue or actively providing goods and services.
Investors will also consider the quality of the management team, the entrepreneur’s expertise and, fundamentally, the business plan and how the owners intend to deploy the investment capital. This will all depend on whether the business is labour or asset intensive and its working capital requirements.
Entrepreneurs need to carefully balance the time they spend raising capital and pitching for investment against how long they spend on core business operations and potential commercial trading and supply opportunities. There is always a balance between opportunity and risk, and this is where most entrepreneurs find themselves deploying their key skills of critical thinking, problem solving and, most importantly, communication.
Beyond monetary capital, is the power of human capital
There are a number of tax-incentivised remuneration methods that a business can use to attract and retain talent, many of which are initially non-monetary. The most common scheme used by a business in the early stages is Enterprise Management Incentives (EMI) options.
These allow employees to obtain an interest in the company in a tax-efficient way so that it becomes in their best interests to stay with the firm and work towards increasing the overall value of the business. Their use is becoming increasingly widespread and, in some industries, particularly the tech sector, are an expected part of the remuneration package.
There are strict qualifying criteria for both the company and the employee so professional advice should be sought before making any offers to current or prospective employees.
More information about Evelyn Partners of Cambridge is available here.
