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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
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

                                                  Bank finance - with security



Capital                                                                                 Growth
need
                                                                            Flotation

                                                       VCs/private equity

                           Business angels/small VCs
                                equity and loans
          Friends and family                                                            Risk

            Seed           Start up     Early growth stage             Sustained growth


                                      Time >
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 for
Strong 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!

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Vfb2012 Funding your Startup Jerry Davison

  • 1. Access to Finance and Investment Readiness Jerry Davison, The Mill Consultancy and SouthWestfd
  • 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. The funding landscape 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???
  • 5. Funding structures  Most entrepreneurs are likely to use a whole mix of finance  Equity  Debt  Grants  Tax breaks
  • 6. Understanding risk and reward Bank finance - with security Capital Growth need 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. 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. 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. 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. Example - MMC Ventures What we look for Strong 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.
  • 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. 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
  • 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. 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. 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