Venture capitalists and business angels provide finance to start up and growth enterprises.
Business angels vs venture capital
Business angel investors are individuals who invest their personal funds in a potentially rewarding business opportunity.
Venture capitalists, on the other hand, are companies that use other people's money to buy shares in a private company not listed on the stock exchange. Such companies raise venture capital by offering investors the chance to take part in a fund.
These investors are not always angels, but they may take an active role in your business and be a useful source of knowledge, mentoring and contacts. A venture capitalist looking for high profits would usually invest in the establishment or expansion of a small enterprise that has a proven product and market.
The high profits justify the risk that investors in small enterprises take. The few that are very successful generate enormous equity growth, so the venture capitalists are trying to pick winners in a high-risk environment.
Social enterprise, venture capital and business angels
Business angels and venture capitalists will essentially have the right to take control of the company if the existing management does not deliver the performance targets specified in the enterprise development plan.
Venture capitalists and business angels usually require a seat on the board, the right to cash in their investment after a few years, and implement a ceiling on salary increases. A well-balanced and qualified management team, preferably experienced in their trade, is often another key demand.
Both investor types will also hold a large stake in the increased equity created from adding their cash to the balance sheet (often as much as 50%). They will need a system of valuing that equity stake against the performance of the company.
All the above can add up to loss of control, surrender of cash profits for the foreseeable future and a problem in raising buy-out funding in a few years’ time. This type of finance is broadly unacceptable to social businesses. It’s geared to the aspiration of small enterprise owners looking to the possibility of an OFEX (the UK stock exchange for shares in small companies) flotation in a few years’ time.
Before you dismiss the idea of capital partners altogether, you could try and come up with your own set of criteria for capital partners. Here are the criteria set recently by a co-operative:
- No more than 25% of members can be capital participants
- One member, one vote
- At least 75% of members need to be worker members
- Minimum investment to qualify for membership as investor member is £10,000
- Minimum term of investment is five years
- Withdrawal of investment must be accompanied by resignation as a member
- Investors receive expenses for attendance at Co-op meetings
- Investors receive payment for work done on behalf of the enterprise at agreed salary rate
- Investors receive agreed minimum rate of return
- Investors additionally share in profit distribution at the average rate for worker members per £10,000 invested
And yes, investors did come forward.
Community Interest Company Limited by Shares
The new social enterprise specific corporate structure 'Community Interest Company Limited by Shares' provides for an investor-led model of social enterprise. The net profits that can be set aside to reward investors are capped at 35%. This is known as the 'maximum aggregate dividend cap'.
In the past, individuals were only entitled to an additional 20% return on investment. This 'dividend per share cap' is no longer in effect (from 1/10/2014).
It’s not easy to balance control, use of outside resources, enfranchisement and disenfranchisement. Decide what’s best for your own enterprises and then offer it to see if anyone is interested. You never know until you ask.