Mark Lyttleton: The Importance of Adequate Financing for Private Companies
As an angel investor and business mentor, Mark Lyttleton knows what it takes to establish and grow a business, having helped build several successful companies from the ground up. For business founders, accessing sufficient funding to get their business up and running is vital. This article explores different avenues for entrepreneurs to gain the monetary backing required to turn their promising idea into a profitable enterprise; as well as helping them to scale their business, and grow it from strength to strength.
The business mantra “have enough capital to cover the next 12 months” is an astute adage for business owners to follow. The logic behind it is that accessing emergency funding always comes at a high cost, which can generally be avoided by business owners’ planning.
Companies can, and often do, “get away” with having much less; even just maintaining a float to keep them going for a mere three months. However, businesses can quickly run into difficulties, particularly in the private sector.
In his “Have Enough Cash” blog post, Mark Lyttleton gives the example of a company that had entered into takeover negotiations, only for the proposed buyer to pull out days away from completion, leaving the target company in a very tight financial position. In this case, the target company was essentially forced to sell at a drastically lower price, slashing a staggering 75% off the initial bid. As Mark Lyttleton points out, this could have been avoided by having a stronger balance sheet.
Business founders can sometimes feel like they are on a treadmill, with fundraising eating away all of their precious time, impinging their ability to concentrate on growing the business. Mark Lyttleton suggests that the solution to this problem might be to appoint one person to handle business funding, although as he points out, potential investors will usually want to hear the pitch from the founder themselves. Alternatively, he suggests staging concentrated funding windows, with business owners arranging pitches over a two to four-week period, freeing up more time outside of these windows for running the business.
The most appropriate funding route for an enterprise will largely depend on the business structure. Private limited companies raise capital by issuing shares. Limited companies are owned by shareholders, usually consisting of the business founders and possibly other stakeholders, typically supportive family members in an early-stage business. As a reward for their investment, shareholders receive regular dividends, representing their share of company profits. If a limited company fails, its investors are legally protected and have limited liability. All limited companies operating in the UK must be registered with the Registrar of Companies.
Unlike a private limited company, a public limited company or ‘Plc’ can sell shares in the company to the general public. There are specific requirements a company must meet to become a Plc, including having at least two directors, two shareholders, and a qualified company secretary, and having at least £50,000 in share capital.
Since they can sell shares on the stock market, public limited companies can often more easily raise capital. Although owned by shareholders, a Plc is controlled by its directors, which may result in outcomes the shareholders are unhappy with. In addition, there is always the risk that someone could buy enough shares to assume control of the company, a scenario currently playing out in the Twitterverse, as Elon Musk’s bid to buy the company hangs in the balance.
Interestingly, Musk plans to turn Twitter, a public company since 2013, into a private limited company. This is a direct reversal of the usual process. Normally, limited companies “go public”, and are floated on the stock exchange after establishing themselves, to increase their access to capital. There is currently intense speculation over Elon Musk’s rationale, although it should be noted that Twitter has only returned a profit in two financial years since becoming a publicly-traded company. Other corporate giants have gone from public to private in the past, including Dell and Hilton Hotels, although the latter then subsequently floated for a second time.
In terms of accessing and maintaining adequate financing for the business, there is a variety of different to choose from aside from issuing shares, including:
- Loans from shareholders or family members.
- Bank loans and overdrafts.
- Business grants.
- Invoice finance.
- Peer-to-peer lending.
Typically non-repayable, government grants are a popular option. Responsible business is key to building a strong society and prosperous economy. With that in mind, the UK government’s Industrial Strategy prioritises long-term business growth as a fundamental driver of national prosperity and a force for good in society. Seeking to support a new generation of businesses that go further in terms of committing to social and environmental purposes and missions, the Industrial Strategy pledges to ensure that the £6.7 trillion in investment capital earmarked for supporting UK businesses is not solely focused on generating a profit, but delivering mission-related objectives that create social and environmental capital.