When a company or individual buys all or most of another company’s shares and assets to gain control of it. With more than 50% of the stock and assets (called a controlling or majority interest), an investor can make decisions about the company without the approval of other shareholders. Acquisitions can help accelerate growth and are typical of private-equity-backed businesses operating a ‘buy-and-build’ strategy (see below).
Usually high-net-worth individuals, angel investors offer financial backing for start-ups, often in exchange for equity. Angels can come from an entrepreneur’s personal network and include family and friends, but they also group together to create funds. They are usually experienced entrepreneurs and like to offer advice and support in a non-executive role.
Essentially a measure of negative cash flow, this refers to the money a company is using monthly. High-growth start-ups often incur costs before they get an income. Thus, they need to finance themselves until they can make money. The burn rate dictates how long before a company runs out of cash and needs to raise more. This is known as its runway (see below).
Buy and build
A strategy often deployed by private equity investors who buy a business and invest in its growth (building it up) to increase its value. A typical buy-and-build approach will include both organic growth and growth by acquisition. Investors will look to sell the larger entity for a gain within five years.
Due diligence is the careful examination of a person or business before entering into a contract with them. It involves an audit and assessment of facts and data to make sure any claims being made are accurate. Anyone looking to buy or sell a business will be expected to engage in detailed due diligence on both sides of the transaction.
Enterprise Investment Scheme (EIS)
The government’s EIS is designed so your company can raise money to help grow your business. It does this by offering tax reliefs to individual investors who buy new shares in your company. Under EIS, you can raise up to £5m each year, and a maximum of £12m in your company’s lifetime. The EIS can help smaller companies to raise capital because the tax relief acts as an incentive to investors.
This is the ownership of a company and is typically divided into shares. Sometimes called shareholders’ equity, it represents the book value of a company, or the sum shareholders would collect if all assets were liquidated and debts paid. Equity is nearly always offered to investors but also to employees as a reward for loyalty or service (either all staff or just senior management).
An exit is when founders sell their company, or a share in it, to investors, employees or another company. An exit allows the founder to reduce their stake or leave completely, usually in return for a lump sum, equity in the new owner, or a mix. Typical exits include a trade sale (to a competitor), a management buy-out (MBO) or sale to an employee ownership trust (EOT), an initial public offering (IPO; see below) or private equity sale or investment.
A gazelle is a young (up to five years old) high-growth enterprise or scale-up (see below) – one experiencing annual growth of 20% or more for at least three years. Gazelles are known for creating jobs, particularly in growth industries.
Funding that comes direct from government or through other public bodies to support businesses that help them achieve specific policy objectives. Such grants have rigorous criteria and complex application processes, but the benefit is that (unlike a loan or investment) the money doesn’t need to be repaid and there is no dilution of ownership.
This is funding aimed at giving businesses whose growth has hit a plateau the necessary boost to get them to the next stage. It is often provided in exchange for equity, as company valuation will increase if the capital is used to create the intended result. It may be money needed to launch a new product, expand into new markets or finance the acquisition of a rival. A good example would be a private equity fund taking a stake in a business to fund growth by acquisition.
These are systems to help those running high-growth businesses keep things on track as the company expands. While there are several to choose from, they are all built around similar principles, namely asking critical key questions of people across the business, and measuring and monitoring a selection of data points to show how the business is performing. Some of the best known include the Entrepreneurial Operating System (EOS), objectives and key results (OKRs), key performance indicators (KPIs) and the Rockefeller habits.
Initial public offering (IPO)
An IPO is an event in which shares of a company are sold to institutional and retail investors, usually at the same time as the shares are listed on a stock exchange. An IPO is typically underwritten by an investment bank. The company becomes a public company after IPO and has to follow a strict set of stock market rules.
The coming together of two or more companies, often resulting in the creation of a new corporate entity. Where one entity is larger or more powerful than the other, the difference between merger and acquisition can be moot. But mergers can re-energise firms and boost the growth prospects of all parties. They are also a good way to get into new markets.
A term to describe the amount of working capital (see below) a business has available to fund its day-to-day operations. The length of time the business can keep operational is often referred to as its runway (see below).
This is investment that comes with less pressure to scale and sell than most private equity funding. Often from a source that has the luxury of not requiring an instant return on investment, it allows the business the luxury of time to invest the money as it needs and grow at a more natural pace. Examples include some sovereign wealth funds that make long-term investments, as well as so-called ‘evergreen’ investment funds.
Private equity is medium- to long-term finance provided in return for an equity stake in potentially high-growth unquoted companies. Venture capital, hedge funds and angel investment are all examples of types of private equity.
Also called capital runway or start-up runway, this refers to the length of time a business can operate until it runs out of money. It is typically counted in months, but in extreme situations can drop to weeks or days. Runway focuses founders on what’s needed to keep a business afloat (lowering costs and finding more sales income or seeking another round of investment).
A high-growth enterprise, commonly defined as one with average annualised growth (turnover or headcount) of 20% or more over a three-year period – though definition may vary from organisation to organisation. See also gazelle.
Seed Enterprise Investment Scheme (SEIS)
The government’s SEIS is designed to help your company raise money when it’s starting to trade. It does this by offering tax reliefs to individual investors who buy new shares in your company. You can receive a maximum of £150,000 through SEIS investments. As a seed-stage business, investors might see you as a high-risk investment – but with the tax relief benefits offered through SEIS they could be persuaded to invest.
Series A, B, C, D
High-growth businesses in some sectors incur huge costs before they can begin to generate revenue, let alone profit. They therefore need several rounds of funding and investment, each one hopefully larger than the last and giving a higher valuation for the business. These are referred to as series A, B, C and so on.
First coined by angel investor Aileen Lee, unicorn refers to a start-up with a valuation of £1bn or more. The term has been followed by a slew of variants, including ‘soonicorn’ and ‘futurecorn’ (for companies approaching £1bn), ‘decacorn’ and ‘hectacorn’ (£10bn and £100bn valuations), and even ‘minicorns’ (start-ups with £1m valuations and big dreams).
Valuation is the analytical process of determining the current (or projected) worth of a company or its assets. There are many techniques used for doing a valuation. An analyst placing a value on a company will examine its current assets and liabilities (including any intangibles such as intellectual capital or goodwill), as well as taking into account future earnings. Most valuations are done as a multiple of EBITDA (a measure of profit), but some use revenue. The multiple depends on various factors including the state of the market, the sector and level of interest in the company.
A particular type of private equity, venture capital is finance from investors to companies in the anticipation that the company and its value will grow. Most VCs are limited liability partnerships that have gone to capital markets to raise funds to invest for a return, but some are owned by governments (so-called sovereign wealth funds).
A business’s working capital is the cash at its immediate disposal and is also known as its operating liquidity (see above). It is essential for a business to be able to pay creditors for day-to-day operations.