This week Advantage Business Angels' managing director Neil Mackay asks what exactly are early stage businesses?
It is very easy to fall into use of jargon, or perhaps worse specialised meanings for words. At least with jargon people are confronted by an unfamiliar word but do get the opportunity to ask what it means.
Using words in different ways to their everyday meanings is more dangerous as it risks misunderstandings that go uncorrected.
I hope early stage businesses is a phrase that means what it says - businesses in the early stages of their development.
I think of early stage businesses as three distinct groups.
First there is the individual entrepreneur often with an embryonic team around him who is trying to get an idea off the ground.
Usually in the start-up phase and without any real sales revenue these businesses are trying to convince the world they have spotted a market opportunity and have the ability to deliver a product or service to make money.
From an investor perspective this is the highest risk area but also potentially offers the highest reward.
It is the lowest cost to buy into and there are plenty of opportunities.
The second is young growing companies. These businesses have an established management team, often with a plan to beef it up over time, but are effective nonetheless.
The business is making sales and there are the beginnings of hard evidence that a big successful business can be established 'if'.
The 'ifs' are varied but money is the key, and equity money at that.
The banks have come along way in the provision of debt finance.
The recent trend away from overdraft based lending towards sales-based lending (factoring, invoice discounting etc) is I am sure a positive step but, growing businesses need equity because in most cases cost has to be incurred before revenues and profits are made.
Cost can be people, marketing, premises, stocks - a whole host of things.
These businesses are still risky but the evidence of growing sales and customers makes them a very attractive investment proposition.
They cost more to buy into and there are far fewer opportunities.
The final business is the re-start of an older business based on new ideas.
This type of investment looks to be the lowest risk, and may well be, but in reality this type of situation is complex and each one needs to be looked at carefully.
Too often the new idea is just not new enough to make a difference.
If it is new enough the risks are probably as great as any start-up business plus the complexities of existing trading and customer relationships.
What do these businesses have in common? In a short word growth u the prospect of substantial capital growth which I believe differentiates them from the mature businesses quoted on the London Stock exchange, particularly the FTSE 100.
The question of course is how does the risk/reward differ? We'll take a look at this next.