EQUITY FINANCING STRATEGY FOR SMALL AND MEDIUM ENTERPRISE BASIC INFORMATION AND TUTORIALS

Equity finance
Although the UK venture capital industry is the largest and most developed in Europe, it currently invests little more than 5 per cent of funds in start-ups and early-stage finance, compared with 20 per cent in expansion capital and as much as 75 per cent in management buyouts/ management buy-ins (MBOs/MBIs).

Moreover, the figures for average deal sizes suggest that the opportunities for SMEs, including TBSFs, to raise formal venture capital of under £500,000 are fairly limited.

Research shows that the majority of SMEs have never accessed either private equity or public equity finance. Private equity finance comprises the two distinct markets of formal and informal equity. Formal private equity is sourced from banks, special investment schemes and private equity and venture capital firms.

The term ‘private equity’ is commonly used in the United Kingdom in place of ‘venture capital’, which is reserved for a subset of private equity involving the smaller, earlier-stage and often more risky deals. The British Venture Capital Association (BVCA) has acknowledged this tighter definition by extending its logo to include ‘Representing British Venture Capital and Private Equity’.

The comments that follow on SME financing reflect the narrower definition of venture capital. Essentially, venture capital involves the long-term commitment of external equity to enable businesses not listed on any public stock exchange to grow and prosper.

In becoming an equity partner, the venture capitalist will place more emphasis on realising the final capital gain than regular cash flows. Typically, investments last for three to seven years, although exits are generally anticipated within five years.

Typically, the venture capitalist will also provide expertise, experience and contacts to help nurture the business and the capital gain will be realised either as the result of an independent public offering (IPO) or through a trade sale.