Private equity: a funding option for start-ups?

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Not so long ago private equity funds were seen as the barbarians at the gates. Today private equity funds own huge chunks of industry, including Debenhams, Whitbread, RHM, Weetabix, Homebase, NCP and KwikFit. In 2005 private equity funds bought 271 British companies for a total of £365bn. They are said to be risk averse, but do take risks and not all their investments pay dividends - or survive. The point is, with record sums to invest, can start-ups and existing smaller ventures count on some of their largesse?

Let's assume you've got a great idea for a new business, but it needs serious funding - well into six figures. Can you count on your bank's support? Is venture capital a more likely route? Or private equity funding? What about business angels? How do you find them and choose the best one?

Even if your bank refuses to play ball, others, such as online banks and former building societies may be more helpful and even charge less. Unless you can find a small private equity fund, the big ones are more interested in mega deals. There is a lot of private equity capital about for small businesses, says one corporate finance adviser. How can it be accessed? If you want funds to expand your skills base, achieve faster growth or launch new products, money can be found.

Your first point of contact should be your accountant or lawyer. They can help you prepare a professional approach to your bank. They are also likely to have a wide network of contacts looking for investments.

Don't count on a swift outcome, however - even if you've already found a suitable site and equipment and the right staff - if everything depends on a fast infusion of cash.

It took Tim Hall a year to raise the money to set up POD, a new sandwich, salad and hot food bar, near London Wall in the City, which opened last October. With extensive retail experience, he approached his bank, but also a small private equity fund and business angels. The bank was prepared to lend part of the funding, provided he could attract additional equity capital.

He found four private would-be investors, all of whom are now non-executive directors. They are people with wide experience - two in retailing, one in marketing and one in corporate governance and finance.

One of Hall's investors, Nick Payne, is chairman of the company as well as being a non-executive director of several other companies. A chartered accountant, he has spent the last two years on venture capital projects and start-ups, following 10 years as finance director with Thorn-EMI companies and 10 years on corporate strategy and business development with GrandMet (now part of Diageo) before leading a successful MBO from Laporte plc backed by 3i.

Hall's concept has clearly attracted business, offering City worker Scottish porridge, takeaway hot lunches and salads, freshly made pasta and sandwiches. To attract outside funding, Payne explains, "a start-up must show evidence of a strong management team, effective financial controls and a business plan with forward projections and how investment will speed up growth and profits. If you've already got a proven model, you need a sound balance sheet." Payne saw opportunities for developing more POD outlets initially in London, despite powerful competition from groups like Pret a Manger. Their first outlet trades a few yards from a branch of Pret - and it's trading well.