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!