The difference between debt and equity finance
Startups have several options when it comes to securing growth funding, with alternatives such as asset-backed loans and revenue-based financing becoming increasingly popular in Europe. Generally, debt and equity finance are the two most common routes taken by high-growth companies in the UK, both of which we track on the Beauhurst platform.
Debt finance
Loan or debt-based fundraising involves borrowing money, usually from traditional lenders like banks and building societies, as well as government-backed funds, asset managers and other debt investors. This money will need to be repaid under certain conditions and, like a normal loan, these repayments will involve interest. But the attraction for startup founders and management teams is that control over their business remains the same. It may be more difficult for companies to raise money from lenders if they’re seen as being high-risk, however, which many early-stage startups will be by nature.
Equity finance
With equity financing, founders will be required to give up a degree of control over their business but there’s no obligation to pay back the investment. Instead, an equity investment is made on the basis that share value will increase in the form of capital gains, with investors receiving higher returns. As there is no loan involved, the risk to founders is lower, particularly those in need of funds larger than they are personally able to borrow.
How does equity financing work?
Equity financing can be secured from a variety of sources (more on that in the next section) and may come into play at different stages of a company’s evolution, from the earliest days of a startup’s journey or a more established company preparing to IPO on a public stock exchange. High-growth businesses, like those listed in this article, will typically complete several rounds of equity fundraising as a private company.
Once an equity investment has been made, investors will have a say in the direction of the business. It’s worth noting that anyone who owns more than 50% of a company’s shares will become a controlling shareholder—they’ll be able to control the management of the business through their majority equity stake.
Types of equity investors
There are several types of equity investors in the UK, with private equity and venture capital firms being the most active.
Venture capitalists
Venture capital firms (VCs) specialise in investing in the high-growth space, buying shares in private companies and then helping to increase their valuations. To inform their investment decisions, VCs look for past performance that indicates the potential for rapid growth and a high valuation.
Many VC fund managers (General Partners) have been startup founders themselves, and thus offer invaluable business insights, alongside equity finance. Venture capital firms also tend to take a seat on the board of directors as part of equity investment agreements.
Private equity investors
Like VCs, private equity firms are a type of institutional investor that raise money through fund investment from Limited Partners and then invest those private equity funds into businesses for a profit. A private equity firm will also usually lend their expertise and management skills to portfolio companies in order to increase profitability.
Private equity investments are well-suited to businesses that are profitable and have a track record of demonstrating growth. The investment strategy taken by private equity firms tends to be lower-risk than that of venture capital firms.
Corporate venture capital funds
Corporate venture capital is a type of venture finance where investment comes directly from corporations. Corporate venture capitals (CVCs) generally invest in smaller subsidiary businesses that are in a similar industry to them, making it easy to assist growth through existing knowledge and contact networks.
As well as a stake in the company, many corporate venture capital funds will look to benefit from their portfolio companies in other ways. This could be anything from gaining new market insights, expanding their market reach, or the specific technology being developed by the company.
Crowdfunding platforms
Crowdfunding platforms are a way in which equity investment can be sourced from “the crowd”. The crowdfunding investment approach is very different to private equity and venture capital, with businesses raising smaller amounts of investment from a larger number of individual investors. It is a popular source of funding for B2C companies that can leverage strong brand loyalty from their customers.
In the United Kingdom, the most popular platforms for crowdfunding are Seedrs and Crowdcube. Crowdfunding platforms carry out a certain amount of due diligence on behalf of individuals, checking company pitches to ensure they aren’t misleading to investors, and as with peer-to-peer lending, all equity crowdfunding in the UK is also regulated by the Financial Conduct Authority (FCA).
Angel investors
Business angels are individual investors rather than funds or corporations. Typically high-net-worth individuals or entrepreneurs themselves, angel investors use their personal capital and expertise to back growing businesses. It’s also common for groups of angels to pool together funds or share introductions to each other’s contacts, in what’s known as an angel network or syndicate. Angel networks are well-placed to invest in companies at an earlier stage, due to their hands-on approach and typically smaller round sizes.
The 10 top-funded companies in the UK
Now that you know more about equity investment and the most common investors in the UK equity market, let’s look at where the money’s going. This list ranks the UK’s top high-growth companies, in order of the amount of equity funding they’ve raised to date, nearly all of which are startup unicorns valued at more than $1b.
