The upfront costs of raising capital
If you are an ambitious entrepreneur, there may come a time when you need to bring extra finance and funding into your business to help it grow. That’s why it is important to have a good understanding of fundraising and in particular, the costs associated with it. Here, Oliver Woolley, CEO and Co-Founder of Envestors, gives an overview of what it costs to raise capital so that you can budget for what may be the most important part of your business journey.
As an entrepreneur, you may have a growing business, but perhaps you’d like to see it grow more quickly and also capitalise on the additional opportunities you see. To achieve this, you may decide to raise equity growth capital. But do you know what is involved and much this will cost?
At Envestors, we have raised over £100m for 200+ businesses and are well versed in budgeting for fundraising purposes.
Typically, upfront costs are around £7,000 to £29,000, factoring in success and/or monitoring and due diligence fees for funds. Your total spend will be £20,000 to £60,000 depending on where the funds come from and the total raise amount.
As a percentage, this spend can be as little as 5% to 13% for raises above £500k or as much as 9% to 24% for raises at or below £250k.
Below is a breakdown to the amounts required for fundraising and an explanation of why you need so much.
To avoid future problems, legal fees are an area worth spending your budget on. While we always recommend working with a lawyer specialising in early-stage investments, there are numerous platform-based services like Seedlegals and CMS, which range from £1,000 to £5,000.
This is important because selling shares in your business requires many legal documents. For example, a Term Sheet, which is a summary outlining the material terms of the agreement. You can create this yourself and your lawyer will use it as a basis for further documentation.
You will also require a Shareholders Agreement, Subscription Agreement/Investment Agreement, Disclosure Letter, Articles of Association and Deed of Adherence (used when new investors are joining a pre-existing group).
Additionally, you’ll need a Service Agreement which includes employment contracts with the managers/directors, incorporating non-compete restrictions, because many investors will review employment contracts during their due diligence.
In summary, there is a lot of documentation to put together – especially if you’re just starting out.
Sometimes for smaller deals, they will use a Letter of Agreement/Conditions of Investment Letter.
The advantage is that this process is quicker and cheaper; the disadvantage is that these documents may not incorporate proper legal protections for the investors. You may also need advice on your company’s articles and the shareholder’s agreement (if there is one).
Tax advisory fees
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) is a major incentive for investors. However, the schemes come with their own paperwork and due diligence, and we always advise working with a third-party on your application. Starting costs range from £1,500 to £3,000.
Corporate finance advisory fees
Investment readiness means you have a clear proposition and all requisite documentation to support your fundraising efforts. Some Local Enterprise Partnerships (LEPs) or Chambers of Commerce offer subsidized ‘investment readiness’ programmes but the services of a corporate finance advisor may also be required. Fees range from £1,000 to £10,000.
The right amount for marketing depends on several factors, including your audience, the size of your business, your current level of awareness and what kind of investor you’re targeting.
For many, using an agency to produce a pitch deck is a smart move. We see a lot of pitch decks that make it difficult to understand what the business is and why anyone would want to invest in it.
Videos have been shown to drive engagement and may be worth considering. However, a good video can be costly. £3,000 is a typical starting point for marketing.
Cold-approaching investors e.g. via LinkedIn isn’t the best way to raise capital.
There are organisations, with networks of registered investors, which understand the type of deals of interest to their communities. They usually charge fees for access. Some charge for investment readiness and promotion while others charge a flat fee for access.
Fees range from £200 to £6,000 and depending on the service may mean you don’t need to spend on other advisory fees.
Success fees are payable as a percentage of funds raised through an intermediary. Typically, it costs 5% to 7%of the funds raised, although some will charge much more. Some brokers may also ask for share options.
Due diligence fees and abort costs
These fees are often charged when working with funds. They cover the cost of conducting legal, financial and technical due diligence on your company.
This can be anything from £10,000 to £25,000 and is typically taken out of the funds they invest. If you pull out of the deal, you may also be liable for these costs as an abort fee.
Post-investment monitoring fees
Most investment funds will require you to pay monitoring fees once the funds are in place. These are usually around £6,000 per annum. In some cases, you may be able to increase the amount of finance raised to cover some or all of the costs.
You can see from this why it takes money to raise money. Fundraising is complicated and takes a lot of time. However, by understanding what is involved and you can budget accordingly, get the help you need and impress potential investors.
- The total cost of raising funds for your business can be anywhere between £20,000 and 60,000.
- Oliver Woolley is the CEO of Envestors, which has just launched a digital investment platform bringing together entrepreneurs and investors to create a single marketplace for UK early-stage investment: https://www.envestors.co.uk/
- For more information, advice and supporting on finding money, head over to the UMi platform: https://www.weareumi.co.uk/webapp/