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Different types of equity investors, and which is right for your business

Securing investment can be a pivotal milestone for businesses. Not only does it provide companies with a financial boost to help them scale faster, but it also helps founders access the capital needed to turn their idea into a reality, and get their product to market.

If you decide that external investment is worth pursuing for your business, you should always make sure that the investor panel in front of you is best suited to your product, your business’ stage, and your team. This will maximise your chances of turning their heads and attracting funds.

So, what are the different types of investors? And how can you decide which one to pursue?

Investors can be categorised into specific groups, defined by traits such as their preferred funding method, sectors they like to invest in, and where prospective businesses land on their growth timeline.

In this blog, we’re going to look at the different types of investors that make-up the equity funding ecosystem, so that you can identify which one might be inclined to take a chance on your business. Equity fundraising is the process of securing funding on the agreement that an investor will receive part-ownership or ‘equity’ in your business. Equity-based investors are motivated by the return that would arise by selling their share of the company for more than their original investment, which is otherwise known as a high ROI (return on investment). To categorise the different types of equity investors, we’re going to break down funding into chronological stages, often used to represent a business’ lifecycle. The first three stages of investment are called:

  • Pre-Seed;

  • Seed;

  • Series A.

These three stages are rarely surpassed, but it’s worth noting that Series B, Series C, and IPO investment deals with enormous amounts of capital, private equity firms, and hedge funds.

So for now, we can focus on getting started with early-stage equity investors.


Equity Investors: Pre-Seed Stage


Pre-Seed Investment is a business’ first instance of fundraising, and typically provides funds up to around £250,000.

  • Friends and family

Many founders start out by depending on their close acquaintances, friends, or family to support their business by investing during the initial stages. These types of investors are otherwise referred to as personal investors. Of course, investing your own capital into your business – or bootstrapping – is also an equity investment, with return arising when you decide to exit the business.

Equity Investors: Pre-Seed & Seed Stage

Businesses that have previously secured capital at Pre-Seed level and are now looking to access another investment will approach a Seed funding round. Typically, the Seed stage deals with funding in the range of £250,000 - £1 million. The following equity-based investors work with both Pre-Seed and Seed companies:

Angel Investors / High Net-Worth Individuals

Angel Investors and High Net-Worth (HNW) Individuals look to invest in early-stage companies. Their motivation behind investment is often one or more of the following:


  • Financial motivation – to increase their wealth by backing businesses that go on to generate high ROI.

  • Altruistic motivation – to support their industry, or give back to startups and small businesses.

  • Reputation-based motivation – investing in a business can appeal to an Angel’s/HNW individual’s personal brand and status.


An experienced Angel Investor/HNW individual will not only bring capital to the table, but relevant contacts and valuable business advice. For this reason, they’re often more hands-on than family and friends.

Early-Stage SEIS Funds

An SEIS fund is a managed investment vehicle that raises capital with the intention of investing in SEIS-eligible businesses, in the hopes of returning a profit to all those who have pitched in.

But what do we mean by SEIS, and SEIS-eligibility? SEIS, or the Seed Enterprise Investment Scheme, is a government-led initiative that offers significant income tax deductions for those who invest in either an SEIS fund, or SEIS-eligible ventures directly. This was implemented to financially support startups and SMEs in the UK, by incentivising investors to provide them with funding.

Business raising under the SEIS scheme can raise up to £150,000.

The tax relief offered to SEIS investors are as follows:

  • Income tax relief of 50% on funding up to £100,000;

  • Zero Capital Gains on the sale of shares held for a minimum of three years;

  • Further loss relief, determined by investment multiplied by investor’s tax rate.

It’s clear why the scheme attracts both businesses and investors! Eligibility for SEIS funds simply refers to the fact that businesses must obtain certification to prove that potential investors will be rewarded with subsequent SEIS tax benefits. This is secured through HMRC granting your business SEIS Advance Assurance.

SEIS Advance Assurance is best obtained by using a specialist accountant with relevant experience in fundraising, and early-stage businesses – such as Jump Accounting. Applying for SEIS Advance Assurance is a service that we specialise in, within our various funding-friendly accounting tools.

Our experience in the field has previously enabled us to obtain SEIS Advance Assurance for our clients in as little as 4- days!

If SEIS funds appeal to you at this stage, or if you want to be prepared for future funding, let us obtain your SEIS Advance Assurance.


Equity Investors: Seed Stage

Early-stage Venture Capitalists

A Venture Capitalist (VC) is an investor who offers capital to startups and SMEs that they believe to have long-term growth potential. VCs are typically investment banks and large financial institutions.

Moving even further from the ‘family and friends’ relationship, VCs are companies with shareholders and employees, so their motivation behind funding is to generate profit and make money.

A VC would put their resources into a company that has demonstrated their ability to scale, and the potential to continue doing so. In return for their investment, VCs demand equity in the company and get a significant say in the company’s decisions.

A fundamental difference between other equity-based funding and that of VCs is that VC deals tend to focus more on growing companies that are looking for an abundance of funds for the first time.

So, if your business requires a lot of money to reach a clearly defined set of goals, along with some long-term experience and guidance, these investors are particularly desirable.


Early-Stage EIS Funds

Just as we mentioned SEIS funds at Pre-Seed and Seed stage, businesses exclusively at Seed stage or further can secure investment from EIS funds.

The difference between SEIS and EIS (Enterprise Investment Scheme) is simply that they’re designed to cater to different stage businesses (considering the reduction in capital-risk for investors and the greater sums of money being distributed) and adjusting the tax relief accordingly.

Under the EIS scheme, businesses can raise up to £12 million. The tax relief offered to EIS investors are as follows:

  • Income tax relief of 30% on funding up to £12 million;

  • Zero Capital Gains on the sale of shares held for a minimum of three years;

  • Further loss relief, determined by investment multiplied by investor’s tax rate;

  • No Inheritance Tax paid on shares bought through EIS and held for two years.

Just like that of SEIS funding, EIS funding requires businesses to obtain EIS Advance Assurance from HMRC. Again, Jump Accounting is well-versed in securing this by filing comprehensive, compliant applications on behalf of startups and SMEs. Find out more about our EIS Advance Assurance service here. Equity Investors: Series A Stage Ambitious businesses that secure a successful Seed funding round will probably consider approaching the next stage - Series A. Series A investment tends to deal in funding upwards of £1m.

Venture Capital firms

Series A businesses are typically invested in by Venture Capital firms. VC firms are corporations that fund and mentor early-stage (often tech focused) companies. Certain VC firms might even specialise in specific technology sectors. VC firms use capital raised from limited partners to invest in up-and-coming businesses, and often hold a minority stake (50% ownership or less) in exchange for funding.

A VC firm's selection of funded companies is known as their portfolio, with the businesses themselves earning the title of ‘portfolio companies’.


 

From breaking down these different types of investors, it’s clear that identifying the right one for your business is an important decision that requires a lot of thought.

Aside from obtaining investment for your business, a relationship with an investor requires an understanding of what they would expect in return. Before pitching, it’s worth considering whether your business is ready to meet their requirements.

A good place to start is to consider which funding stage your businesses is at, and whether you can obtain any documentation to help validate your argument – such as SEIS/EIS Advance Assurance, Financial Forecasting, Business Valuations, etc. (We’re always here to help with these!)

From there, you can align your financial needs with a relevant group of investors.

And finally, don’t forget to keep your options open - growing businesses undergo rapid change, and often rely on various groups of investors as their needs fluctuate.

At Jump Accounting, our team is comprised of corporate finance experts and, of course, Chartered Accountants. Our business advisory service offers personalised guidance when it comes to fundraising methods and investor options, and can help provide you with the necessary tools to state your case.

To explore how our advisory services allow us to surpass your traditional accountant, get in touch with our team.

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