Raising money is one of the most difficult tasks facing any start-up, and is the area which can be the most daunting. As with many other aspects of getting a business off the ground, it is important that you know where you can turn for investment and what hoops you will have to jump through. Many will have heard different terms but won’t be sure how they might be of use to them or how each of these different funding types work. Below we attempt to explain the funding types that a start-up is most likely to come across.
Business funding life cycle
Friends & Family
Start-ups often try to get a bank loan. This is not easy for a gambling company as many banks will not even open an account for a company in the sector, let alone lend one money. A start-up is also a very precarious business and banks and given they are often very risk-averse, they are unlikely to lend to a start-up business with no revenues and no product. More likely is for the bank to lend to an individual, a personal loan, which is guaranteed by that person and often secured against the value of a property. Many entrepreneurs will be funded by re-mortgaging their house. Often other investors like to see this because it shows that the entrepreneur believes in his idea and is taking risk alongside the investor.
Family and friends
This is often the second step an entrepreneur takes on their funding journey; selling shares to friends and family. There are risks in this sort of funding and we would always recommend taking proper advice to ensure that the business is structured in a way that is fair to all parties and doesn’t create problems at a later stage, putting those relationships at risk.
SEIS and EIS funds
Before one can understand what an SEIS fund is it is helpful to understand what the tax benefits of SEIS and EIS. These tax-efficient investment schemes only apply to UK taxpayers and UK companies, and are designed to help start-up companies attract early-stage equity investment. Other countries around the world operate similar tax efficient schemes to support early-stage businesses. With both SEIS and EIS, investors who are higher-rate taxpayers are allowed to claim back a proportion of their investment against their personal tax bill. If the company is sold for a profit then the gain is also immune from capital gains tax (CGT).
An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as provide advice to their portfolio companies. Some angels will be experienced within the industry, and typically these investors would have made some money in the gambling industry from the sale of a business and reinvest it into other companies. This type of investor will often add value and contacts to a start-up.
These are organisations that specialize in start-ups that are at a very early stage and provide some facility to help start-ups firms get to a second round of fundraising with a VC. An incubator can provide affordable office space, hands-on management training, marketing and accounting support and help in raising funds. An incubator will normally put in a small amount of money and take an equity stake in return for the money and the support. There has been a flurry of incubator activity in the gambling space recently with William Hill launching an accelerator programme under the name WH Labs.
Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically online. We believe that the benefits are wider than just financial for start-ups. The start-up will also recieve the input of the crowd, as opposed to smaller groups of funding decision-makers, such as VCs or executives at the large listed gaming companies. There are several types of crowdfunding. The models GamCrowd believe are most suited to the gambling industry are as follows:
• Debt crowdfunding: The entrepreneur or company borrows money and must repay it like a normal loan but the money is lent by many small lenders, typically trying to beat the return they get from a savings account.
• Equity crowdfunding: Investors receive equity in the company that is raising funds. This is the model that GamCrowd promotes. It is often “all or nothing funding”, which means if the start-up doesn’t get all of the money they seek, the funding doesn’t go ahead and early investors get a full refund.
• Royalty crowdfunding: Investors receive interest in the on-going royalty of a product. This could be used to fund an online slot game in portions of £500 at a time and each £500 slice entitles the investor to receive a fixed percentage of all royalties that the game generates. This represents a contractual arrangement and not a trade in equities. Therefore, it is subject to lighter regulation.
Separate and more detailed information regarding crowdfunding can be found elsewhere on this site.
A VC firm is a fund with a limited life period, often 10 years, in which investors commit to a certain level of investment. These investors are often pension funds and other City institutions. The fund is then managed by partners who invest capital in high risk (hence the term venture) start-ups with the potential to grow rapidly. These partners share in the upside along with the investors. Some VCs are considered ‘late stage’ i.e. they invest in businesses that have gone a long way to becoming a success while others are more early-stage, taking bigger risks in less established businesses.
Private Equity refers to investments in companies that are not quoted on a public stock exchange. It is a loose term which can cover a multitude of models. However,
what is normally meant by the term are investors and funds that make investments directly into established private companies or conduct buyouts of public companies that result in a delisting from the exchange. Private equity firms have often relied on raising high levels of debt for the business and this requires the target acquisition companies to be mature with substantial revenues and profits. It is rare that private equity companies invest in start-ups.
Initial Public Offerings
An IPO is the first sale of a company’s shares to the public, leading to a stock market listing, known as a flotation in the UK. This is done by listing the shares on a stock exchange of the company’s choosing such as the London Stock Exchange or the Toronto Stock Exchange. For many entrepreneurs, VCs and other investors an IPO is their main objective when they get involved in a start-up. It is both a way of raising money and a way of allowing early investors to sell their shares and move on. Increasingly IPO’s tend to require more established businesses with a track record.