Vfb2012 Funding your Startup Jerry Davison


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Venturefest Business Masterclasses - Funding Your Startup

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Vfb2012 Funding your Startup Jerry Davison

  1. 1. Access to Finance andInvestment Readiness Jerry Davison, The Mill Consultancy and SouthWestfd
  2. 2. Introduction
  3. 3. 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
  4. 4. 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???
  5. 5. Funding structures Most entrepreneurs are likely to use a whole mix of finance  Equity  Debt  Grants  Tax breaks
  6. 6. 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 >
  7. 7. 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!
  8. 8. 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
  9. 9. 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
  10. 10. 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.
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. The End!