Access to Finance and Investment Readiness

Jerry Davison, The Mill Consultancy and SouthWestfd

Introduction

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 landscape

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Pre-2008, sweetness and light, Finance Cornwall, South West Ventures, plenty of bank credit etc

Then…

Sub-prime securitization

Credit 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

Time >

Capitalneed

Growth

Seed Start up Early growth stage Sustained growth

Risk

Flotation

VCs/private equity

Business angels/small VCs equity and loans

Friends and family

Bank finance - with security

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 Ventures

What we look forStrong teams

Our model is to back dynamic, smart entrepreneurs who have built up a team of fantastic individuals - we have to be confident that a team can deliver. Often we will work with a portfolio company to recruit senior members of the management team and over time to build a strong board.

We invest in great entrepreneurs with compelling business models.

Compelling business models

We look for capital efficient, highly scalable business models where we can see a route to profitability. We value recurring or transactional revenue models where there is either a short lead time or large transaction value.

Strong growth prospects

We back companies that have the ability to be market leaders or gain significant share of a large market. To deliver that 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 - Government initiatives

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

The End!