Scrutton Bland Tech Newsletter - Winter 2021

The Art of Making People Thirsty

Luke Morris, Corporate Finance Partner, offers his thoughts on how to go about raising start-up capital following his recent talk to the Ipswich and Suffolk Tech Network. No doubt you’ve heard the saying that “it takes money to make money”, and that was the slide I started with when speaking to these budding entrepreneurs.

Unfortunately, the saying fails to mention where the money actually comes from.

But what about when you are pre-revenue, still developing an idea or a technology, or trying to prove a concept? Or what if you are trying to exit your business and realise some cash on the table for the shares that you hold in a business you have built up? The bank will not be a buyer then, so how do you go about generating the liquidity? In my experience the basic lessons of early- stage fundraising are equally applicable to shareholders who may be looking to exit their business by private sale.

Private investors, including “Private Equity”, will often quip that “if you want a loan, go and speak to the bank”. So, we are talking equity investments here, not debt. Why? Equity will become more rewarding than debt for the investor if the company is successful. Equity unlocks the potential of synergy for the investor, who may have good reasons to pay you substantial goodwill, over and above the book value of your net assets, in recognition of all of those nebulous intangible factors that you have built up in developing your business. This is the “risk and reward” factor that leads to the high valuation multiples that you will have read about. In effect, an equity investment offers no means of transaction reversal; that is, you marry your investment partner—unless he or she wants to divorce you. As a result, for all intents and purposes many private investments are permanent equity investments.

In theory the answer is easy. Companies primarily raise finance in two ways: by incurring debt or by selling equity. In practice it is more complicated. It is one thing when you are up and running, with a profitable established business, accumulated assets, and a trading history. With collateral and a demonstrable and predictable ability to pay interest and capital back there will be no shortage of visits from the established banks looking to place debt with you.

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