Starting A Business – Equity or Debt?

I don’t know whether it’s just me, but business angels, dragon’s dens, VCs and giving up equity seem to be all I’m hearing about at the moment in terms of start-up …

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17th May 2007 at 2:06 pm

I don’t know whether it’s just me, but business angels, dragon’s dens, VCs and giving up equity seem to be all I’m hearing about at the moment in terms of start-up funding.

The most recent example to come to my attention being “Running The Gauntlet“, an interesting investment competition and education programme run by the East of England Development Agency for businesses and start-ups on its patch.

So, it was quite refreshing during a recent podcast interview with entrepreneur and host of Channel 4’s Risking It All, Martin Webb, to hear him say that he hated the idea of giving up equity and would always prefer to borrow.

Although Martin clearly doesn’t have a problem with raiding a bank, borrowing is not the sexiest form of business finance out there. TV shows like Dragon’s Den have raised the idea of equity finance to the level of gladiatorial sport – a must get badge of honour for any self-respecting entrepreneur.

A quarter of real business owners, however, see shows like Dragon’s Den and The Apprentice as ‘demeaning business for the sake of entertainment’, according to a survey released today by Bibby Financial Services [disclosure, Bibby kindly sponsor the SmallBizPod podcast]. While a third think these shows are creating a generation of ‘armchair entrepreneurs’.

All in all, the hype over equity-based funding generated by this sort of entertaining TV is probably just that. The vast majority of start-ups are going to borrow or bootstrap.

How are you funding your start-up or growth in your business?

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Alex is the founder and editor of SmallBizPod, the UK's first podcast dedicated to small business, start-ups and entrepreneurship. Alex writes about topical small business issues, entrepreneurs and anything else that catches his eye here on the small business blog. http://www.smallbizpod.co.uk

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  1. James says:

    Running the Gauntlet has been around for a few years and is really well run by EEDA: the investments are genuine and entrants to the Gauntlet can win various support packages along the way. I believe that Running the Gauntlet was actually the inspiration for Dragons Den… Doug Richard was on the panel last year and had some interesting comments to make about the TV show.

    Events like Running the Gauntlet are great for new businesses, even if you don’t really want investment. The opportunity to meet other local early stage or rapid growth companies should not be under-estimated and the experience of hearing how those companies go about their pitch is useful.

    Having been through the first 18 months of a new business, I wouldn’t dream of letting any equity go unless the sale was for a very clearly defined goal – and that means a lot more than just cash!

  2. Excellent point you make James about the value of attending these types of events whether or not you’re looking for investment.
    Cash is ephemeral, experience is forever! Aphorisms from the top of my head. Sounds good, probably meaningless!

  3. Clive Birnie says:

    We executed our MBO in 03 with debt, debt and more debt.

    As the takeover vehicle was a newco it qualified for SFLGS so that formed the first part.

    As we were buying some assets we had something to leverage so this was tranche 2.

    We emptied our pockets, tranche 3.

    Tranche 4: vendor finance. No use to a blue sky start up but never to be overlooked when acquiring. In our instance this was 50% of the finance, interest free and paid out in four slugs over 24 months.

    Cash flow we financed with invoice finance / factoring.

    The vendor wanted to keep some equity. We said no. Stuck to our guns. Got our way.

    Would we have looked at an equity partner? Yes. If that had been the only way to get the deal financed.

    Our Yr 1 balance sheet showed debt of more that £1million “payable on demand or within 1 year”. So you can do it with debt alone but it is not for the faint hearted.

  4. An interesting mix of borrowing strategies, Clive, and a salutary reminder of the nerves of steel required to get deals done. I guess management buy-outs usually have the advantage of some significant and tangible assets against which to secure debt.

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