What’s most finance for? Investment Start up or early stage Expansion capital Acquisition funding Management buy outs And/or Cash flow/working capital e.g. funding stock, debtors
The funding landscapePre-2008, sweetness andlight, Finance Cornwall, SouthWest Ventures, plenty of bankcredit etcThen…Sub-prime securitizationCredit crunch Lehman Brothers Sovereign debt problems Credit crunch, again When will it ever end???
Funding structures Most entrepreneurs are likely to use a whole mix of finance Equity Debt Grants Tax breaks
Understanding risk and reward Bank finance - with securityCapital Growthneed Flotation VCs/private equity Business angels/small VCs equity and loans Friends and family Risk Seed Start up Early growth stage Sustained growth Time >
Access to finance - some metrics Only 6% of private equity is invested in start-up or early stage companies - most equity is invested in more mature, larger companies Success rates with applications for equity funding = 1% with VCs and ~5% with business angels Less than 5% of SMEs demonstrate the > 20% per annum growth potential, which makes them investment attractive Bank funding is virtually impossible for any companies that do not have a very strong track record and some robust security to offer Alleged ‘Funding gap’ in the £50k to £2m range So it’s not that easy to get funding!
What does ‘equity’ look for? It’s all about FINDING excellent entrepreneurs with great IDEAS that can be converted with FUNDING into a high growth business For the best entrepreneurs, with the top 1% of propositions, there is plenty of funding out there What about the next 5% or so who have a really good chance of building a worthwhile business? Most of them need ‘investment readiness’ to help them successfully raise finance – faster, better, cheaper Most will require a minimum of £250k in the early growth stages
Finding Equity Sources VCTs, Venture Capital, private equity’ Business angels How do you find them? Google, advisors, BVCA and NBAA Ensure they’re a good fit Other equity - friends, family, staff Crowd funding e.g. Crowdcube Tax incentives - Enterprise Investment Scheme
Example - MMC VenturesWhat we look forStrong teamsOur model is to back dynamic, smart entrepreneurs who have built up a team of fantastic individuals - we have to beconfident that a team can deliver. Often we will work with a portfolio company to recruit senior members of themanagement team and over time to build a strong board.We invest in great entrepreneurs with compelling business models.Compelling business modelsWe look for capital efficient, highly scalable business models where we can see a route to profitability. We valuerecurring or transactional revenue models where there is either a short lead time or large transaction value.Strong growth prospectsWe back companies that have the ability to be market leaders or gain significant share of a large market. To deliverthat growth to exit and beyond the proposition needs to be defensible.
Other sources of finance - debt Bank overdrafts and loans Enterprise Finance Guarantee – only £170m 1 Jan – 30 June 2012 Factoring and invoice discounting – and new models on the web Leasing, other asset finance, trade finance and Letters of Credit Peer to peer lending e.g. Funding Circle and Crowdcube Regional sources – SWIG and FC Fund Managers Mezzanine loans
Other sources of finance - Governmentinitiatives Grants generally e.g. GBI, R&D, Nesta – note matching requirements Enterprise Finance Guarantee Business Growth Fund e.g. PWGF Regional Growth Fund Funding for lending Enterprise Capital Funds and Angel Co-Fund R&D tax credits
The business plan Aim it at the right audience e.g. Banker – repayment, credit history Investor – valuation, exit timing, potential for growth, EIS The market – who is going to buy and how are you going to get it to them Management team A credible set of financial projections and assumptions The compelling reasons to invest Ultimately, the amount of depth will depend on the type and amount of finance needed
Funding process Manage the funding process and costs How long it takes to raise debt or equity Negotiation of terms Due diligence - lots of questions Legal documents – far more if you are raising equity Costs - manage them proactively Promotion – FSA rules – FSMA penalties
Avoiding common errors Quality of the management is questionable Lack of commercial reality Lack of credibility in financial projections No real customer need or benefit established / lack of USPs Route to market unclear / vague on market drivers Insufficient evidence of demand Competition complacency and not properly identified Unclear on the need and level of funding