Mark Lyttleton: The Importance of Private Companies Being Well Financed

Mark Lyttleton is a professional angel investor, business mentor and speaker, with extensive experience of establishing, growing and supporting both public and private companies.

This article will explore the importance of private companies having access to sufficient funding to enable founders to get the business up and running, scale, and weather any unexpected challenges.

Many business advisors recommend that companies maintain sufficient cash to keep running for at least 9-12 months without income, providing leeway if unexpected problems arise.

Private companies have several options to choose from in terms of securing investment, including:

• Friends and Family: A popular option for early stage funding, many fledgling business leaders find that once they have exhausted their own personal financing options, their nearest and dearest are more than happy to pool resources to help them achieve their business goals. Typically amassed from relatives and friends in small increments between £5,000 and £10,000, repayment schemes are often flexible. Usually, when an entrepreneur secures funding from friends and family, the investors do not take on an active role in running the business.
• Conventional Lenders: Provided that a business has a strong financial track record, acquiring a loan from a high street bank should not be a problem. However, for early stage companies, their lack of a proven financial track record could cause difficulties, with conventional lenders expecting to see detailed business plans, revenue sources and profit levels before approving the loan. While bank loans provide a smart source of funding for developed businesses, allowing extended repayment over time with fixed monthly payments, this route may not be fruitful for a private enterprise in the start-up phase of the business.
• Crowdsourcing: Platforms like Kickstarter and GoFundMe are popular funding options for private ventures seeking an injection of cash. The key to success is communicating business concepts and ideas in a concise, exciting and engaging way that appeals just as much to a mass audience of strangers as it does to the founder’s own social network. There is often an early opportunity for investors to buy or experience the product or service that the company is offering.
• Angel Investors: Angel investors are generally high-net-worth individuals who provide companies with financing in exchange for a stake in the business. In return for equity, angel investors can invest small or substantial sums of capital, with the intention of making material returns as the business grows and matures. In the UK there are often tax incentives associated with this type of investor, such as EIS and SEIS tax relief.
• Government Grants: Governments offer a range of grants to incentivise businesses to act in ways that benefit society, such as taking on employees or developing new technology. For example, the UK Government recently unveiled its new £20 million GovTech Catalyst Fund, incentivising British tech companies to develop innovative technological solutions to support public sector bodies.
• Venture Capitalists: Venture capitalists (or VCs) are high-net-worth individuals or companies that invest in a business venture. They typically invest in companies with a proven track record or revenue that shows potential for material growth over time. VCs require an exit strategy, making them an appropriate funding option for companies that plan to go public, or sell to another company at a later date.

In business and finance, liquidity risk leaves companies at the mercy of external forces beyond their control, effectively turning them somewhat lame. When a crisis such as the COVID-19 pandemic starts to unfold, these companies can no longer afford to operate in the same way, forcing them to adapt their business strategy by taking actions such as cutting costs, pivoting their business, or searching for new customers and revenue opportunities. Even for established, well-known companies, access to funding and capital can suddenly dry up when contagion spreads across financial markets. We saw this in 2020 at the start of COVID-19, when there was a huge amount of fundraising on a global basis as companies looked to secure the long-term health of their business in the face of the economic shutdown.

Compared with public companies, private companies have more options to choose from in terms of raising capital. Since options like crowdfunding and angel investing are very different propositions, it is crucial for business leadership to identify the right funding avenue, selecting the one that aligns most closely with their vision and future goals for the company.