Growth Investment

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How can a start up or seed company access the best finance?

To access any type of finance a start up or seed company requires a sound business proposition. The most complete business plan from an investor’s point of view will address issues such as:

• the potential market for the product or service and how it is defensible
• the competition
• the unique selling points (USPs) of the product or service
• any intellectual property
• the routes to market and how sales will be created
• the team
• income and expenditure forecasts
• finance required (when and for what).

The proposition is strengthened further if some sales have already been generated, demonstrating customers will buy, and if the founders have invested their own money into the company providing the underlying assumptions stack up.

A business wishing to raise finance needs to focus on developing it’s vision and strategy, management team, routes to market and money as shown in the diagram above.
 

Management team
Finance providers invest in the management team and those with a successful track record will generally raise finance easier than those without. The management team are particularly important since they are charged with the responsibility to exploit the market opportunity and drive product to market to generate sales and value. 

Access to finance
A start up or seed company needs a good understanding of finance options, of investor requirements and of the fundraising process itself. Knowing how to make a pitch based on the investment opportunity rather than on the technicalities of the product or process is essential.

Connect Midlands run best practice events and nationally recognised workshops to help early stage companies understand the process of raising finance. Our Right Funds for You networking events introduce businesses to finance and finance options.Our Amber Stream workshops show businesses what investors look for, how to develop a compelling business proposition, and how to make that all important pitch for money. Our Green Stream mentors offer one to one coaching to help company owners finesse their business plans and funding propositions prior to presentation.

Connect Midlands introduces companies to investors via showcasing events, direct introductions, competitions, specialized activities and via other investor networks. Connect has assisted 1,200 companies in 7 years with over 200 going on to raise over £135m of finance.

Understanding finance
Finance comes in basically 3 forms: grants, debt and equity.

Grants are the cheapest form of money, they are free, and very useful as a source of money to part-fund research & development, prototype development and new product development at pre-commercialisation stage. However, companies should not chase grants for the sake of it and should want to carry out the project regardless. There can be quite onerous terms and conditions attached and often expenditure requires to be defrayed before it can be claimed thus creating potential cash flow issues. Regional Development Agencies such as emda and AWM run various schemes such as Grants for Research and Development, Proof of Concept Funds and Innovation Support Grants, varying from £10K to £200K +.

Debt finance such as loans, overdrafts, the Small Firms Loan Guarantee Scheme and asset finance are excellent sources for companies depending upon their turnover, cash flow, ability to service the debt and security available. However, early stage technology based and high-growth companies find bank debt difficult to source because they are seen as risky ventures with little or no security.

Finally, equity finance. Along with grants this is often a main source of finance for start-up or seed companies particularly where risk is involved. Typical sources of equity finance are the founders and owners, friends and family, business angels and venture capitalists. Friends and family typically offer up to £20K; business angels £20K to £1m and venture capitalists from £100K to £m’s.

It is worth bearing in mind that business angels are often looking to bring their business experience and expertise alongside their own money to help young companies develop and grow. This can be very useful providing of course the business owners and the business angels are aligned and can work with each other. Angels either invest as part of a network or separately.

Venture capitalists on the other hand are professional fund managers managing other peoples money to provide a significant return. VCs are more structured and bring in expertise to help the company with strategy and financial control and can be a great ally in assisting companies with high-growth potential. Regional funds as well as national funds are available.

To re-cap, with all finance the funding providers are looking for a credible management team with the drive to make it happen; a good differentiated market opportunity with defensible USPs; a scaleable business model; clear routes to market; a good understanding of finance required and when breakeven will occur. In addition, the ability to be able to make a pitch based on the investment opportunity rather than on the technicalities of the product or process is critical.

Connect Midlands offers early stage enterprises a great introduction to financing options and a follow-on programme of activities to help them develop their propositions and raise money. We are nationally recognized as delivering best practice. For more information please visit www.connectmidlands.org or call 01509 228702 or 024 7632 3320.

 

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10 Tips for Raising Finance

You MUST

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Pitch Perfect

Pitch Perfect:

1.Understanding what you are selling

2.Researching your investors

3.Exciting your Investors

Here’s the situation, money is tight and the downturn continues. Competition for investment is higher than ever, but you have a great business with significant potential. Exploiting the opportunity requires cash, so how do you maximise your chances of raising the money you need?

When asked how they select opportunities, investors are analytical by nature and so, will list the usual ‘routes to market’, ‘scalability’, ‘return on investment and so on. The reality is that all investments they consider offer these. You don’t want to be just considered, you want to be successful. So how do you excite them and beat off the competition? The answer is threefold.

Firstly, understand what you are selling. You are no longer pitching to a potential customer, you are pitching to a potential investor. You still have to sell but now your offering is you and your business as an investment opportunity.

Secondly, know your audience. Research your investors, their personnel, previous investments made and their criteria for making them and understand why you are approaching them in particular.

Thirdly, make your investor excited. You need to grab their attention and tell them a compelling story and this is where you have to be pitch perfect.

The secret to telling any good story is to start with the current situation, explain what problems it presents, pose the question of how do you solve them and then present the answer. Using the following guidelines should help you do this.

Start with the current situation and problem with that. Try to paint a picture of the demand by using individual examples with which your audience can associate or by quoting numbers affected by the situation. Then demonstrate how you are going to solve that that problem and/or meet that demand. This is where you talk about your secret sauce – what’s unique about you. But don’t lose them at this stage by going into too many features of your product. The benefits will do. Remember, they are investors not customers.

Tell them the business model for delivering your solution to the problem. In other words, where is the money coming from? How do you know it will come and how do you know it will make a profit? Remember a business model is simply a system for producing a profit.

Then explain who you are and why you are well placed to deliver. Talk through the team and make sure roles are clearly defined. Next make it clear why somebody else couldn’t do this. What is your competitive advantage and how can it be sustained? Highlight your competitors and explain what distinguishes you from them now and in the future. Introduce any key strategic partners in the venture for delivery, sales, support, mentoring and so on and explain why they enhance your chances of success.

Finally, the financials. Explain how much you need. What you are going to spend it on and how it will make you successful. State any assumptions you have made in your forecasts. Know the detail behind your figures but don’t present it all. This will come out in the questions if necessary.

Personally, I’d conclude on a light note. Summarise your presentation but try to leave them with a good impression of you. If they like you they are more likely to work with you!

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What do investors want?

Introduction

Private equity transactions cover a variety of arrangements including:

• funding for businesses starting from scratch (start ups),
• the injection of funding into existing businesses to help them expand (development capital); and
• the funding of purchases of businesses by management teams (buyouts).

In this article we will consider some common issues for Investors when providing funding for start-ups and for existing businesses looking to expand.

Business Plan

A key document that any Investor will want to see is a detailed business plan. The business plan acts as an insight for the Investor into the major objectives and key strategies of the business and it helps the Investor understand the business’ strengths, weaknesses, opportunities and threats.

The business plan should be concise and contain a description of the industry in which the business operates, possible new markets, the products, the management team, the key customers and suppliers, the amount of funding required, forecasts of future performance, possible returns for Investors and possible exit routes for Investors.

Management Expertise

The abilities and track record of the management team is vital. Where the team is inadequate it should be restructured or have additional team members added at an early stage of the transaction.

Length of Investment

The time period for any investment will depend upon the requirements of the Investor. The rate of return is influenced by the rate at which money can be invested and realised. As a general rule, the longer the investment is held the more difficult it is to achieve a good return, so typically Investors will want an “exit” within 5 years.

Due Diligence

On any transaction, the Investor will need to obtain sufficient information about the target company to enable him to decide whether the proposed transaction represents a sound commercial investment.

A review of all material contracts of the business will be needed to determine whether there are any change of control provisions in these contracts. If there are change of control provisions then the Investor may insist that the consent of the other contractual party to the change of control of the business is obtained prior to the completion of their investment.

The Investor will also ensure that the company has good title to all material assets including all intellectual property. All title documentation should be reviewed to ensure that the company has full legal and beneficial ownership.

Articles of Association

The articles of association of a company are the regulations governing the relationships between the shareholders and directors of the company and they typically cover the issuing of shares and the different voting and dividend rights attached to different classes of share.

The Investor will generally seek to take equity in the form of preferred ordinary shares in return for their investment. The preferred ordinary shares will rank ahead of the existing ordinary shareholders so that in the event of an insolvency situation the Investor is repaid ahead of the ordinary shareholders. In addition the Investor will seek to further protect its position by ensuring that in the event that the company underperforms, the voting rights attached to the ordinary shares are suspended so that the Investor can then take full control of the company.

The articles may also contain the terms of a ratchet. The effect of a ratchet is to incentivise the management and employees by rewarding them if certain performance targets are reached. By providing them with an incentive the Investor has a greater chance of achieving a higher return on investment.

The Investor will ensure that the articles contain adequate provisions in relation to leavers. When a director or employee (who is a shareholder) leaves the company the Investor will generally require that they offer their shares for sale in a prescribed manner and at a prescribed price.

Investment Agreement

The investment agreement governs the relationship between management, the company and the Investor and will contain the following key provisions:

A. restrictions on what management can and cannot do with the business without the Investor's consent;

B. rights for the Investor to appoint directors;

C. restrictive covenants which seek to prevent management from engaging in competing businesses or soliciting customers, suppliers or staff for a period of time following completion of the investment and/or them ceasing to be an employee of, or shareholder in the company;

D. restrictions on the ability of shareholders to transfer their shares freely to third parties;

E. warranties to be given by management to the Investor about the company, it’s business, staff and customers; and

F. possibly provisions under which the Investor takes control of the company if financial targets are not being met or the investment documents are not being complied with.

How can legal advisors help?

Experienced legal advisors who can identify and deal with the issues in a proposed equity transaction in a concise and pragmatic way, leaving their clients the time to deal with the commercial aspects of the equity investment and equally important the running of the business!

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How to approach the process of raising finance?

Ever tried to make a large sale to a new customer? Do you just walk up to them with a brochure and ask them yes or no?

No, you prepare for it properly. You research your customer. You find out what they like to buy, what products they have bought in the past. You might tweak your product or sales pitch accordingly. You investigate who are the key decision makers. You use your network to get introduced. You try to build a relationship before you start selling. And you only make your sales pitch when you think you have maximised your chances of being successful.

Well, you should approach raising finance in exactly the same way and the Growth Investment Network can help you do that.

Research your potential investors. Read about them here, here, here and here. Visit their websites. Research the deals that they have completed recently.

Understand what it is they are looking for and change your investment proposal accordingly. Use our investment readiness specialists to help. Connect Midlands run some great events to help you with this.

Network with others who have raised finance and ask them for their advice, learn from their experiences.
Attend our events to meet these investors and hear from others who have raised finance. Introduce yourself to the investors but don’t pitch straight at them! Ask them what they are looking for in an investment. Try to build a relationship. ‘People buy people’ and investment decisions are often people based as well.

Finally, research and understand how to pitch successfully. Target the investors you wish to pitch to and ready, aim, fire!

Written by Toby Reid

 

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It’s my baby syndrome...

As a business owner you have a strong emotional attachment to your business and the idea of ‘giving up’ some ownership sends shivers down your spine. But why is this so? Is it rational? More importantly, is it affecting your business growth?

 

It is very easy to understand any founding owner’s attachment to their business. You conceived it, brought it into the world and it’s your baby! No doubt your belief in it has been tested time and time again and the business only exists because of your sacrifices and your unwavering commitment and passion. These are extremely emotive forces and the feeling of attachment is as natural as it is between parent and baby.

 

But do you have to own 100 per cent of your business to justify your attachment and satisfy your sense of just propriety? Firstly, let’s examine why you wouldn’t own 100 per cent.

 

One day, no matter when, you are going to exit your business. Assuming you wish to do that on your terms and for a profit, you need to be growing your business now. It takes money to grow a business. The majority of the barriers you face in achieving growth can be removed with the right investment.

 

As an owner of an SME, access to debt finance is more restricted and will remain so. Loans and grants will be increasingly scarce which means you will have to consider equity finance. Considering equity finance doesn’t mean ‘giving up’ equity but rather trading, on an equal value basis, some of your ownership for the money and skills your business needs to grow.

There is an unhealthy cynicism towards equity finance and the public perception of ‘dragons’ and ‘vulture capitalists’ in the past hasn’t helped. However, in more chastened times I’m hoping we will see a new dawn of angels and equity partners joining forces with growth potential companies to reach new heights.

For this to work, business owners must be comfortable in letting other trusted partners be involved in growing their business and accept the impact that will have on their percentage ownership. The alternative to me is far less appealing. The ‘it’s my baby syndrome’ is likely to stunt growth and leave you with 100 per cent of a permanently baby sized business.