External funding to launch a recruitment business is surprisingly accessible, and the process of securing investment is much faster and more straightforward than many other industries.
As a start-up founder, you don’t have to sign away control of your business or an eye-watering chunk of your future profits and rewards either – the average investor stake for customers launched on the RecruitHub platform with seed capital sits within a range of 5% – 25%.
That means all founders are majority owners of their businesses with total control.
Why is it easier to get funding in recruitment than in other sectors?
Rather than gambling on a new product or concept, investors in recruitment ventures are investing in your ability as the founder to re-create (and hopefully exceed) the success you have achieved within agency environments as an employee. Your track record provides evidence to investors that you have generated results before,and with the right support you can stand a high chance of replicating and improving on these through your own company.
You’re also likely to have significantly lower investment requirements than other industries, with the majority of capital going towards keeping your bills paid while your new agency’s revenues ramp up in the first year of trading.
On top of this, carefully-structured investment models and government tax incentives to encourage start-up investment can make your company even more attractive to investors, enabling you to launch while giving away minimal equity.
Many of the recruiters we speak with regularly who are keen to explore starting their own agencies lack key information on the options available for them to receive funding to launch.
We have prepared this resource to help future founders better understand the routes and models open to them, and to make the best choice for themselves and their business.
Please note that this guide is produced and shared for informational purposes only and should not be considered investment advice.
Equity financing means the sale of shares in your business to investors in exchange for cash. It’s one of the most common routes for launching start-ups, but there are several types of investor and investment model to choose between.
The options at launch
1) Minority shareholding
Owners of some existing recruitment agencies and various investment vehicles offer funding packages which enable founders to pay themselves a salary during launch, sometimes claiming to invest north of $250k.
These propositions typically position the investment as an opportunity for you to become a recruitment ‘entrepreneur’, but the reality is often that you may be a minority shareholder in the start-up, working as part of an umbrella brand and effectively reporting to the investor. This can mean lots of operational controls and limited ability to raise funds independently or even exit the business on your own terms.
Under this type of structure, the investment terms are typically not designed with the goal of maximising your equity position. They instead favour the investor by handing them the lion’s share of the short and long-term rewards – rewards which only grow and grow as your start-up becomes more successful.
These types of models can suit founders that want a lot of operational guidance and don’t mind giving up the controlling share of equity or operational independence, but are less likely to be a fit if you want full control of your company, your profits and the long-term value of the entity you build.
If going down this route, it’s important to look out for large ‘overhead’ costs which can be part of these deals – we’ve seen fixed charges in excess of $8k per month to provide operating infrastructure to an individual founder.
Access to Funding
Minority shareholding can provide access to funding from investors, allowing you to secure financial resources to launch and grow your business.
Working as part of an umbrella brand with investors can offer operational guidance and support, especially for founders who prefer a structured environment or benefit from the expertise of the investor.
Salary During Launch
Some funding packages may allow founders to pay themselves a salary during the early stages of the business, providing financial stability during the startup phase.
As a minority shareholder, you may have limited control over decision-making processes and the overall direction of the business. Major decisions may be made by the majority shareholders or investors, potentially impacting your influence.
Reduced Equity Position
Minority shareholding often means owning a smaller percentage of the business, resulting in a reduced share of profits and potential returns on your investment.
With limited ability to raise funds independently or exit the business on your own terms, your options for financial independence and flexibility may be restricted.
Favourable Terms for Investors
Investment structures in minority shareholding arrangements may be designed to maximise returns for the investor rather than the founder, potentially resulting in a larger share of rewards going to the investor as the startup becomes more successful.
Some minority shareholding deals may include high overhead costs, such as fixed charges for operating infrastructure, which can impact your profitability and financial resources.
10 Questions to ask Minority Shareholder Funding Providers
- What is the ownership structure and percentage of equity offered?
Determine the exact percentage of ownership you would have as a minority shareholder to understand the extent of your control and potential returns.
- What decision-making rights and influence will I have as a minority shareholder?
Clarify the level of involvement you will have in strategic decisions and operational matters to ensure it aligns with your expectations.
- How will the investment terms impact my equity position and potential rewards?
Understand how the investment structure favors the investor and how it may impact your share of short-term and long-term rewards as the startup grows.
- What operational controls or restrictions are in place for minority shareholders?
Inquire about any limitations on raising funds independently, making business decisions, or exiting the business to assess the degree of independence and flexibility you would have.
- Are there any additional costs or obligations associated with the minority shareholding?
Ask about any overhead costs, fees, or obligations that come with the investment to evaluate their impact on your profitability and financial resources.
- Can you provide examples of previous successful minority shareholding arrangements?
Request case studies or examples of similar investments they have made to assess their track record and the experiences of other minority shareholders.
- What support and resources will be provided to help the business succeed?
Inquire about the level of operational guidance, mentorship, and resources the investor will offer to support the growth and success of the startup.
- Can I review the investment agreement and legal documents?
Request to review the investment agreement and associated legal documents to understand the terms and conditions in detail, seeking legal advice if necessary.
- How you view your involvement in the business?
Understand the investor’s expectations regarding their ongoing involvement, communication, and potential influence to ensure they align with your desired level of collaboration.
- What is the investor’s long-term vision for the company?
Discuss the investor’s plans for the future of the business to ensure they align with your own goals and aspirations.
2) Angel investors
Angel investors are individuals – often high-net-worth professional individuals or experienced investors – who invest in early stage businesses in exchange for a shareholding.
This can be an excellent route for start-ups if you are able to clearly and convincingly demonstrate significant future reward to investors through high quality financial forecasting and business planning, or by connecting with angel investors via a trusted intermediary.
It can, however, lead to disappointing valuations and offers if direct investors sense inexperience they believe they can leverage to push for a better deal, or reference their own professional experience (for example a background in the recruitment sector) to demand a larger shareholding in comparison with other funding sources.
RecruitHub works with a syndicate of angel investors who have experience investing in recruitment start-ups, but importantly do not come from the recruitment industry.
This allows founders to receive investment from sophisticated investors familiar with the market and its underlying commercial structure, typically investing at double the valuation of other sector-specialist investors (i.e. founders give away half as much equity for the same cash investment).
Access to Early-Stage Funding
Angel investors provide a valuable source of funding for start-ups in their early stages when traditional funding may be limited. They can inject capital into the business to fuel growth and development.
Expertise and Guidance
Angel investors often have significant industry experience and expertise. They can provide valuable insights, mentorship, and guidance to help founders navigate challenges and make informed decisions.
Angel investors typically have a wide network of contacts and connections. Their involvement can open doors to potential customers, partners, and other investors, providing valuable networking opportunities for your start-up.
Angel investors may offer more flexible investment terms compared to traditional funding sources. They may be willing to take on higher risks and be more open to negotiations, allowing for customised agreements that suit the specific needs of the start-up.
Potential for Disappointing Valuations
If angel investors perceive inexperience or lack of market knowledge, they may negotiate for more favourable terms, leading to lower valuations and offers that may not align with the founder’s expectations.
Potential Loss of Control
Accepting funding from angel investors often means giving up a portion of equity and decision-making control. Founders may need to consider the balance between the resources provided by the investors and the level of control they are willing to relinquish.
Angel investors may have different expectations for the business and its growth trajectory. Misalignments in goals and visions can lead to conflicts and challenges in decision-making.
Dilution of Ownership
Taking on angel investment may result in dilution of the founder’s ownership stake in the company. Founders need to carefully consider the trade-off between access to capital and retaining control over their business.
Reliance on angel investors for funding can create a dependency on external sources of capital. Founders should plan for future funding needs beyond the initial investment to ensure sustainable growth.
5 Questions to ask Angel Investors
- What is your investment philosophy and approach?
Understand the investor’s criteria, preferred industries, investment stage, and expectations to ensure they align with your business and goals.
- What is your level of involvement and support for portfolio companies?
Inquire about the investor’s active involvement, mentorship, and network connections they can provide to support your start-up’s growth.
- What is your track record and experience in the industry?
Ask about the investor’s previous investments, successes, and expertise to assess their ability to add value to your specific business sector.
- What other resources or connections can you provide?
Ask about the investor’s network and potential strategic partnerships or introductions that can benefit your business beyond capital infusion.
- Are there any specific milestones or targets you expect the start-up to achieve?
Understand if the investor has specific expectations regarding business milestones, growth targets, or operational metrics that need to be met.
3) Friends and family
Personal networks are an often-overlooked source of funding for start-ups that have many benefits.
Firstly, most friends and family members will trust you and want to help you succeed independently of any financial return, which can create a valuable supportive environment.
Secondly, many close acquaintances will have watched your career in the recruitment sector, have witnessed the success you’ve built for somebody else, and be excited about the possibility to invest in your future venture.
Funding sourced through these channels can also often be secured on more flexible, favourable terms, allowing some breathing space as your company begins to trade.
All investment through friends and family members should, of course, be supported by professional contracts to ensure that there are legally binding agreements in place to mitigate against any unwanted friction that could be caused by unclear informal arrangements.
RecruitHub helps founders source funds from their personal networks, sometimes alongside angel investors, providing founders with investment documents for both parties.
Trust and Support
Friends and family members are often more willing to invest in your start-up based on their trust in you and their desire to see you succeed, creating a supportive environment.
Close acquaintances who have witnessed your success in the recruitment sector may be enthusiastic about investing in your future venture, leveraging their belief in your abilities.
Flexibility in Terms
Funding from personal networks can often be secured on more flexible and favourable terms, providing some breathing space as your company begins trading.
Accessing funds from friends and family can be less bureaucratic and involve fewer formalities compared to institutional funding sources, allowing for a smoother process.
Mixing personal and business matters can put a strain on relationships if there are disagreements or difficulties regarding the investment. It’s important to handle financial arrangements professionally and have legally binding agreements in place to prevent potential conflicts.
Friends and family may have limited financial resources, which could restrict the amount of funding they can provide. This may not be sufficient for larger-scale start-up needs.
Investors from personal networks may not possess the same level of industry expertise or business acumen as professional investors, which could limit their ability to offer valuable insights or guidance.
How to maximise your equity at launch
Any deal you agree with investors will be based on an initial valuation of your company, determining how much equity you give away in exchange for the investment.
Many factors can shape this, and the more you can do to retain a strong initial equity position, the more you will benefit financially as your company becomes successful.
- Explore options to co-invest: Investors want to see that you have a stake in the business and are sharing the risk with them. By showing your willingness to co-invest, investors may give your business a higher valuation.
- Focus on long-term growth: Taking a lower salary or investing your own money shows that you believe in the long-term potential of your business. Sacrificing 1 or 2 months’ salary can make a difference in how investors perceive your commitment.
2) Present good financial forecasts and a clear business plan
- Present realistics financial forecasts: Investors want to see realistic financial forecasts that show you can effectively manage funds and build a profitable business.
- Prepare a clear business plan: A well-structured business plan demonstrates your understanding of the market opportunity and how your proposition will attract clients.
Get in touch: RecruitHub helps founders create professional financial forecasts and business plans that can be presented to investors in a clear and compelling way. Book a call with us today
3) Demonstrate strong customer (and potential customer) relationships
- Provide evidence of strong client relationships: Investors are more confident when there is a lower risk of venture failure. Demonstrating strong relationships with existing and potential customers is crucial.
- Identify target customers: Relying heavily on untested ideas or assumptions can negatively impact your valuation and ownership stake in the start-up. Clearly define your target customers and outline how you plan to win them over.
4) Leverage tax incentives
- Explore tax efficient investment schemes: Some start-up investment schemes (such as SEIS in the UK) help investors by enabling them to claim tax back for part of their investment, as well as providing additional protection against losses should your start-up venture fail.
- Reduced need for large equity stake: The safety net provided by these schemes allows investors to take on more risk without requiring a large equity stake.
- Increased equity retention: With investors needing less equity, founders can retain a higher percentage of ownership in their businesses after fundraising.
Get in touch to discuss funding with our team. RecruitHub has experience launching agencies under SEIS, providing founders access to investment capital at lower rates compared to non-SEIS models. Book a call with us today.
Debt financing refers to money loaned to the business, to be repaid in future in accordance with a loan agreement.
The key difference between debt and equity financing is that loans do not require founders to sell shares in their start-ups. They do, however, create a future obligation to meet repayments.
1) Personal loans
You may be able to unlock assets to raise debt financing cheaply, for example by re-mortgaging properties or other assets.
This can provide you with a low-cost source of capital without the need to give away any shareholding.
Unlike equity investment, you won’t be sharing the risk or the upside, so if you are able to take more financial risk this can be a very attractive option.
Unlike equity investment, personal loans allow you to raise funds without giving away any shareholding in your business.
You won’t have to share the risks or the potential gains with lenders, giving you full control over the profits and growth of your business.
Borrowing costs can be high when it comes to mortgages and personal loans, with interest rates averaging at higher percentages in the UK in 2023.Personal financial risk:
Taking on personal loans means taking on personal financial risk. If the business fails, you are still personally responsible for repaying the loan.
Limited access to larger amounts:
Personal loans may have limitations on the amount of capital you can raise, making it difficult to fund larger-scale ventures.
Reliance on personal assets
Using personal assets as collateral means putting those assets at risk if you are unable to repay the loan.
Potential impact on personal credit
Defaulting on personal loans can negatively impact your personal credit score, affecting future borrowing opportunities.
2) Start-up loans
Some government-backed loan schemes for founders will provide business loans prior to revenue – most other lending models and platforms require some trading history in order to decide whether or not to issue a loan.
Government start-up loans in the UK provide up to £25k per director, but as the director you are personally liable, and funds can’t be used for director salary.
Some government-backed loan schemes provide loans for start-ups prior to revenue, which is a helpful option for those who do not have a trading history yet.
Attractive loans for Directors
UK Government start-up loans in the UK offer up to £25k per director, which can be a substantial amount for some businesses.
As a director, you are personally liable for the loan, which means that if the business cannot repay the loan, you may be held responsible and your personal credit rating may be affected.
Cannot be used as a salary
Funds from government start-up loans cannot be used for director salary, which may limit the ability of the business to pay its leaders and/or founders.
Key Questions to Ask Yourself
Whichever model you opt for to fund your recruitment start-up, it can be useful to work through a high-level checklist to ensure you have the right partner and deal for your short and long-term goals.
Jumping to accept the first proposal you receive can be a mistake which will hang over your venture for years, becoming more and more painful as your business grows and flourishes.
As you assess your investment options, ask yourself:
- Will you have full operational control of your business?
- Can you raise future capital and sell the business on your terms, at your price?
- Will you pay any ‘service’ charges to investors in addition to their shareholding?
- Will investors sit on the board of your company?
- Do investors expect to be operationally active within your business?
- Have you spoken with other founders who have been funded by your chosen investor?
- Are you raising more capital than your business really needs to get started?
- Have you read and understood the full investment contracts?
- Have you calculated dividend payments to investors in years 1-5? 5-10?
- Will you still feel good about your deal when your business is worth $1m? $5m? $10m?
Case Study: RecruitHub
RecruitHub was recently introduced to two senior recruiters looking to launch and scale their own agency.
They wanted to quickly hire to build a business with international reach and maximise relationships they had with clients as well as add high-performing people to their team, and needed a six-figure sum to launch.
The founders had an offer from an investor that wanted a majority stake to invest, but they were nervous about giving away control of their business and parting with such a large portion of the long-term value they planned to create.
Both founders provided RecruitHub with information about their billing histories and their plans for their business. We worked with them to build a business model and create financial forecasts to assess how much launch capital they needed and indicate how much equity they might need to give investors to attract the investment.
Our team then worked with the founders to review and understand their restrictive covenants and other legal obligations.
After review, RecruitHub introduced them to our angel network who chose to invest for an equity stake of less than 25%, and both sides agreed to investment terms giving the founders full operational control of their business.
RecruitHub supported the founders with preparation and completion of paperwork for the investment and submitting SEIS applications.
The founders meanwhile focused on launching their business – building their brand with our design team, signing up clients and lining up retainer contracts inside their first week!
Want to explore?
We take a collaborative approach to new customer partnerships, working with prospective founders to create a detailed vision and financial forecast of their planned ventures.
We don’t expect founders to ‘pitch’ us their polished business plans – instead, we work together to test and explore the viability of each new business concept, projecting financial performance, founder income and wealth creation potential.
Want to learn more?
Get in touch for a confidential discussion to get the process started.
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