Raising finance from external investors should be a unique moment in a growing business’ life and certainly one that you wouldn’t want to repeat too often – mainly because of the costs you are likely to incur.

These will go towards paying the fees of various advisers you will need to get on board, such as corporate financiers to help you source a potential venture capitalist (VC), lawyers to help secure the deal and accountants.

Perhaps that is why many venture capitalists, such as Sand Aire Private Equity’s managing director David Williams, compare the event of raising VC funds to a marriage.

He believes that managers of most companies raising venture capital will be as surprised by the costs of the whole enterprise as fathers of the bride are when footing the matrimonial bill.

Advisers don’t come cheap

Advisers can cost anything from three per cent to ten per cent of the gross amount raised – ensure you approach a few so you can get a range of quotes.

As Anthony Bull, investment director of Lloyds Development Capital (LDC), explains: ‘The costs will depend on the context in which the finance is being raised. Management buy-outs are more expensive than pure development capital, because of the costs of organising debt finance as well as equity.’

Rob Donaldson, head of private equity at accountant Baker Tilly admits that raising venture capital can be expensive, particularly for smaller amounts of money since ‘the same due diligence fees may have to be paid on a £2 million deal as a £20 million one’. This is why VCs like the scale that a larger deal gives them.

Indeed, Donaldson estimates that costs could amount to as much as ten per cent for a £2 million fundraising but would fall to as little as two per cent for a £50 million deal. He admits ‘we spend as much time thinking about fees and the structure of these as on the whole deal itself.’

Cut out the middleman

However, you don’t always have to use a middleman to get in front of relevant backers. But it does help if you are experienced in your field.

Deirdre Gillespie, chief executive and founder of Oxxon Pharmaccines, preferred to take this route In April 2003. She was looking to raise £15 million for her immunology venture, which finds therapies for HIV, Hepatitis B and skin cancer.

‘It was a terrible time to be raising money but we still managed to get £14.85 million net from the £15 million gross we raised. We did look at getting someone to raise the money for us but we decided to do it ourselves, saving the business about £1 million in costs,’ admits Gillespie.

However, she does acknowledge it took 11 months to raise the funds, as she principally used her own network of contacts.

Due diligence costs

But even Gillespie couldn’t avoid paying some fundraising costs. Quester, the lead investor in the syndicate backing Oxxon, had to carry out due diligence on the company prior to completing its investment. This amounted to £150,000, which according to Sand Aire’s Williams is a standard fee.

Due diligence involved advisers checking the company’s patents, clinical data and technological data as well as its legal agreements and financial information. Gillespie had to foot the bill, but says that Quester ‘were good as they didn’t choose the most expensive advisers’.

LDC’s Bull believes companies should not fear the due diligence process. Although it is a formal and necessary part of drawing up the investment agreement, the VC does not want to over-burden the business it is backing with additional costs as these would reduce returns on the investment as well. So don’t be afraid to negotiate.