A utilities start-up looking for cash is giving investors the chance to share in its growth with an eye-catching bond offer—and there's free fuel, too

It's a classic entrepreneurial conundrum: the banks aren't playing ball, but you don't want to give away any more equity. Where do you turn? Utilities start-up Spark Energy chose an innovative bond scheme to help raise much-needed funds. If investors like what they see, it could raise £1.3m at a crucial period in the company's growth.

The Spark Energy Bond is a £5,000 two-year product, offering returns of six per cent a year, paid quarterly to investors. And here's the hook: investors qualify for two years' free gas and electricity up to a maximum value of £1,000 a year, a potential return to the value of 52 per cent.

Spark founder and chief executive PJ Darling says that conventional sources of finance aren't always the best option. "Given we are one of those no-man's-land companies, too big to be small but too small to be big, funding is always a struggle, because we don't need VC funding and frankly don't want it," he explains.

Darling set himself a target of owning at least 25 per cent of Spark. "I don't feel like losing any more of the company," he adds. "It's not cheap money but it's a lot cheaper than not taking advantage of the opportunities we've got."

Spark's investment adviser, Beer & Partners, which has already provided the company with equity capital through its network of angel investors, will sell the majority of the bonds to "small and medium-size investors".

Beer & Partners chief executive Michael Weaver says the scheme will have wide appeal, especially with those looking for a simple, no-frills investment. "PJ came up with this idea of widening the shareholder base with some smaller shareholders. With a small investment you don't want to do masses of due diligence so it had to be straightforward," he says. "I think it will bring people who haven't been angel investors in the past into an environment where they may become angel investors in the future; it's a taster."

Darling says the money is "about protecting the downside risk". Spark wants to fit smart meters in the homes of all its customers, mostly landlords and letting agents. The firm also aims to upgrade its billing and registration software to the package that "95 per cent" of the industry uses. "Rather annoyingly," Darling adds, "half the money we're raising is purely to post as collateral for our trading activity, so it sits there in an escrow account doing nothing."

Tongue in cheek, Darling says he is "fortunate" to be allowed a £25,000 overdraft by his bank. If the bond issue is successful, he believes it's a source of finance the company could return to "again and again". But, he admits: "I have absolutely no idea how it's going to perform."

Spark's bond scheme is similar in style to the "shaving bond" issued by King of Shaves, which founder Will King launched to customers in June. King believes the scheme represents a useful alternative to the "restrictive, covenant-heavy" loans currently offered by the banks. King of Shaves bonds pay out six per cent a year over three years, but in a fiercely competitive shaving products market, King views the cost of finance as a marketing expense.

Darling points out that his bond issue is purely financial. "I'm not so fussed about profile," he says. "In the winter we had more customers than we wanted. It's good to build profile from the City perspective... but I'm more interested in getting the funds."