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