Feb 1, 2019 | Techcelerate Ventures |
How funding can accelerate scale WAY TO GROW 2 (source: Beauhurst) (source: Beauhurst) 2017 8.27bn invested in 1,505 companies 2015 4.3bn invested in 1,010 companies 2014 3.4bn invested in 739 companies 2013 4.3bn invested in 488 companies 2016 3.9bn Invested in 1,436 companies Total investment in SMEs doubled in 2017, but the latest data reveals that surprisingly few scaleups have secured external funding. Of the 35,210 in the UK, only 1,505 received investment. The investment landscape The number of deals being brokered is encouraging, but growth capital has plateaued over the past five years. Seed and venture stage funding still accounts for the majority of deals. Number of deals 2013 2014 2015 2016 2017 260 310 440 310 460 620 300 540 690 270 460 700 280 530 690 Growth Venture Seed 3 Scaleup companies matter. They are across sectors, in every area of the country and are generators of exports, jobs and growth in our local communities. They are highly productive, innovative, diverse and international. Increasing their numbers is vital for improving UK productivity and national economic growth. Over the past few years, the number of UK scaleups has grown. ONS data indicates that the number of businesses that can be classified as scaleups in the UK has risen from 26,985 in 2013 to 35,210 in 2016. This is encouraging, with these businesses generating an estimated 900 billion in turnover and 3 to 3.5 million jobs. However, we still lag significantly behind international counterparts and we need to continue to step up our game if we are to realise our ambition to be the best place in the world to scale a business. While scaleups most need help on talent, access to markets and leadership, they also cite access to finance - and notably patient capital - as a barrier to their growth. Scaling businesses consistently point to the problems of finding long-term investors for Series B and above, which is why they have often turned to overseas investors. This requires deeper pools of connected capital in the UK, available through the lifecycle of a business to reach global scale, sustained growth and longevity. When it comes to finance, scaleups are not just looking for cash: they want smart money which brings knowledge, skills and customer and market connections with it. Financial providers must work more closely with local communities to provide tailored solutions for scaleups where they are based. But it's not just a question of supply. It's also important to increase the provision of education about growth capital finance so that scaleup leaders are fully aware of all the available options so they can structure their companies appropriately. The economic growth that scaleups can generate will only occur if scaleup leaders understand where and what growth capital is available. We know that learning from the experiences of peers has the biggest impact. In fact, nine out of ten scaleups believe peer- to-peer networks are vital sources of help when growing their business. The Supper Club, which we re-endorsed in 2017, has championed peer group networking and learning for the past 15 years. With the emerging sentiment among our fastest-growing firms that the UK could become a harder environment in which to scale, it has never been more important to make sure the UK is 'match fit' for scaling up. We all have a critical role to play. Together, let's make Britain the best place in the world to scale a business. Irene Graham, CEO of the ScaleUp Institute underlines the importance of scaleups in today's economy. WE NEED MORE SCALEUPS FOREWORD Irene Graham, CEO ScaleUp Institute 4 Contributors Adam Blaskey, The Clubhouse theclubhouselondon.com Member insightpage 16 Aftab Malhotra, GrowthEnabler growthenabler.com Industry insightpage 32 Andrea Reynolds Swoop swoopfunding.com Industry insightpages 11 & 35 Christopher Baker-Brian, BBOXX bboxx.co.uk Member insightpage 31 Chris Hulatt Octopus Group octopusgroup.com Partner insightpage 48 Duncan Cheatle, The Supper Club thesupperclub.com Founder insightpage 47 Edward Keelan, Octopus Investments octopusinvestments.com Partner insightpage 29 Henry Gladwyn, BGF bgf.co.uk Partner insightpage 28 Irene Graham, ScaleUp Institute scaleupinstitute.org.uk Forewordpage 2 Marcus Stuttard, London Stock Exchange lseg.com Industry insightpage 42 Matt Katz, Buzzacott buzzacott.co.uk Industry insightpage 19 Reece Chowdhry RLC Ventures rlc.ventures Member insightpage 25 Sam Smith, finnCap finncap.com Partner insightpage 43 Stephen Welton BGF bgf.co.uk Partner insightpage 49 Stuart Andrews, finnCap finncap.com Partner insightpage 41 Tom O'Hagan, Virtual1 virtual1.com Member insightpage 35 5 EXECUTIVE SUMMARY 06 DOING IT FOR YOURSELF 08 FREE MONEY 10 Enterprise grants 11 R&D Tax Credits 12 DAY TO DAY FINANCE 13 Working capital finance 14 DISRUPTIVE DEBT 17 Peer-to-peer lending 20 Venture debt 20 EXPLORING EQUITY 21 Private equity 22 Risk capital 24 Angels 26 Equity crowdfunding 27 Venture capital 30 Corporate VC 32 Growth capital 34 Family offices 36 AIM HIGH 38 Floating your business 39 The cost of IPO 40 CONCLUSION 44 POLICY RECOMMENDATIONS 46 OUR SUPPORTING PARTNERS 52 ABOUT THE SUPPER CLUB 54 Contents Disclaimer: This publication has been prepared for the exclusive use and benefit of the members of The Supper Club and other contacts of The Supper Club and is for information purposes only. Unless we provide express prior written consent, no part of this report should be reproduced, distributed, or communicated to any third party. You must not rely on the information in this publication as an alternative to advice from an appropriately qualified professional. In no event shall The Supper Club or any of those contributing to this publication be liable for any special, direct, indirect, consequential, or incidental damages or any damages whatsoever, whether in an action of contract, negligence, or other tort, arising out of or in connection with the contents of this publication. 6 USE IT OR LOSE IT From the rise of fintech and peer-to- peer lending to R&D tax credits and the Enterprise Investment Scheme, there have never been more ways to fund scale. But too few founders are taking advantage of them. According to the ScaleUp Institute's latest survey of UK scaleup leaders, there is a general reluctance to use growth capital. Core bank finance (loans, overdrafts and credit cards) are still the most mentioned source (39 per cent) and a quarter of scaleups use leasing, money from friends and family, or third-party loans. Only 28 per cent report using equity finance and a mere 13 per cent plan to use it in the near future. This might explain why there are so few scaleups and high growth small businesses (HGSBs), which are generally defined as those with over 20 per cent annual average growth over a three-year period, an annual turnover of between 1 million and 20 million, and more than 10 employees. While access to talent and digital infrastructure are frequently identified as obstacles, scaleups need funding to sustain and accelerate growth. IN THE DECADE SINCE THE 2008 CRISIS, THE GOVERNMENT HAS CREATED A BENIGN ENVIRONMENT FOR THE FINANCE INDUSTRY TO INNOVATE FURIOUSLY. BUT A RECESSION WILL BRING INCREASED REGULATION AND TOO FEW FOUNDERS ARE TAKING THE OPPORTUNITIES AVAILABLE TO THEM. EXECUTIVE SUMMARY Alex Evans, Programme Director, The Supper Club 7 We need scaleups to grow faster, and we need vastly more startups to scale. The figures are sobering. According to the Octopus High Growth Small Business (HGSB) report, despite creating 3,000 new jobs each week and contributing an astonishing 22 per cent to the UK'S Gross Value Added (GVA), HGSBs comprise less than one per cent of companies in the UK. That's a vast proportion of the UK's economic potential concentrated in the hands of relatively few firms and it demonstrates the huge economic incentive for Government to create and support more HGSBs. Poor uptake of finance among scaleups is puzzlingand it's pivotal to the UK's competitive edge. What's behind this dearth of demand? At The Supper Club's Foresight event, The Future of Finance, low awareness and limited understanding were frequently cited as contributors to this poor appetite for external funding. Financial jargon was also highlighted as a barrier to investment, with founders having to educate themselves about different kinds of funding. It seems the finance industry, while laudable in its efforts to create a wealth of funding options, has done a remarkably poor job of helping business owners to understand them particularly female founders. Speaking at finnCap's Ambition Nation event in March, Lesley Gregory, Chairman of Memery Crystal, called upon the funding industry to demystify finance. But psychological barriers are paralysing many founders. Almost 60 per cent of those surveyed by the ScaleUp Institute cite fear of losing control or poor comprehension of equity finance as obstacles to taking the funding plunge. The Supper Club has seen how peer learning can help founders overcome these barriers, with members sharing their experiences of different funding options to scaletheir average growth is 34 per cent year on year. We want to help all scaleups to understand the impact the right funding at the right time can have on their growth. We also understand that it's about more than money, and members have valued the support that should come with it. Clearly, the funding landscape has evolved faster than its perception. This guide to raising finance is aimed at closing that gap. It combines open and honest insight from members of The Supper Club each of whom have used a broad range of external financing with technical advice from supporting partners who have helped them. It's a reminder that scaleups shouldn't fear investment, but should expect more from it. This is a rare moment in British business history when high growth entrepreneurs are so revered; afforded so much Government support, and investor appetite. Scaleup leaders have more choice, power and opportunity than ever. But if you don't use it, you might not have it for long. "Entrepreneurs can have a tendency to hold themselves back during scale-up. We're good at running a business; accessing capital is another skill. But there's only so far you can go organically: without external investment, you can plateau. There is a fear of giving up control that must be assuaged" Shelley Hoppe, CEO, Southerly 8 DOING IT FOR YOURSELF Maximising your own revenue will generate working capital and help you get better terms from lenders and investors. 9 While this guide is primarily concerned with the benefits of external funding, it's crucial to first ensure your own house is in order. A business that washes its own face will be an infinitely more attractive investment for scaling.If you need help financing the everyday operations of your company, many members of The Supper Club have implored peers to first investigate other options, rather than immediately reaching for working capital finance. To manage the perennial issue of late payments they advise keeping a close eye on the Cash Conversion Cycle quicker money in from customers and slower out to suppliers with incentives to close the gap. An oft-used phrase within the Club is "cash is king, margin is emperor, and it's margin that puts cash in the bank." Many members believe that companies should first focus their time and energy on increasing profitability. This point is echoed by member, Stephen Sacks, who founded a new venture called Funding Nav to help scaling startups find cheap and even free ways to fund growth. Stephen finds that many young businesses are too quick to seek investmentwithout exploring the possibility of raising working capital through sales growth. In theory, it's the business' customers that should be doing the funding. Often the reason owners require a quick cash injection is because they haven't been charging enough or finding enough customers. SELF GENERATED CAPITAL Before considering any external funding, the key question any credible adviser will ask is: 'has this business already optimised its own ability to generate incremental cash?' "I know some businesses who have gone on eight-month funding rounds, which seems crazy when they could be improving net margin organically" Emma Wilson, founder, Harvest Digital 10 FREE MONEY There are many sources of 'free cash' in grants and credits but they remain largely untapped because of low awareness and understanding of how to access them. 11 Enterprise grants Andrea Reynolds FCA explains the types of enterprise grants available and how scaleups can increase their chances of qualifying. Andrea Reynolds, CEO Swoop Andrea Reynolds FCA is on the Board of South East Midlands LEP, a member of the Start-Up Advisory board for Enterprise Ireland, and provides access to finance masterclasses under the European Regional Development Fund in partnership with Virgin. She is also CEO of Swoop, a one-stop shop for business finance with over 1,000 providers on its platform across equity funds, family offices, angels, grant agencies and loan providers in the UK and Ireland. Grant schemes vary in size and complexity. Amounts range from as low as 500 to 10 million. The higher the amount, the more complex the process. Most grant schemes open and close several times over their lifetime, so it's a challenge to keep up with what is available and when. National and European Funds are focused towards research and innovation and improving competitiveness. The main national UK funding bodies are Innovate UK and the recently formed UKRI. European funding is also still available while the UK remains a member of the EU. The two main programmes Horizon 2020 and Eurostars both require collaboration with other SMEs in other EU countries. These national and EU grants range from 25,000 to 10 million. There are 38 Local Enterprise Partnerships (LEPs) across England, and each has their own grant programme. An example is the Growing Business Fund by New Anglia LEP and Suffolk County Council. The grant provides up to 500,000 in funding and covers a maximum of 20 per cent of the overall cost of a project. For example, if you apply for 400,000, you will need to find 1.6 million to cover a 2 million project. The size and quality of grants vary greatly between regions, so it's worth contacting your LEP either directly or via the Government Growth Hub in your area. If you're exporting and your bank or credit insurer can't help, you may qualify for government-backed finance or insurance from UK Export Finance, the UK's export credit agency. Typically, UKEF helps businesses when the private sector finance and insurance market is unable to provide full support. Smaller companies may, for example, have trouble securing financial support in a situation where an important contract proves too small for private underwriters. UKEF offers different products and services across export finance and insurance. 12 R&D tax credits Since being launched for small businesses in 2000, the research and development tax relief has helped to boost UK innovation but is still chronically underused. R&D tax credits work by allowing claims against Corporation Tax liabilities for money spent on researching and developing innovative products or services. Since 2014, this can even mean a cash refund for loss- making startups. A total of 2.9 billion was claimed in R&D tax credits by innovative UK companies during 2015-16, according to HMRC, with the average amount of relief claimed via the SME scheme increasing from 56,223 to 61,514. There are two schemes: one for SMEs and one for large companies. For the former, the Government has extended the standard definition of an SME (under 250 employees) to include companies with under 500 employees and either an annual turnover of less than 100 million or a balance sheet of less than 86 million. In 2015, a new, simplified process was launchedthe Advance Assurance. Under this scheme, open to small companies turning over 2 million or less and with fewer than 50 employees, HMRC will allow claims without inquiring into them further. While HMRC can claw back this money later if the relief has been claimed for projects that don't qualify, it's a big improvement on the previous system, which was offputting to small businesses and could take over a year to process. This is still a largely untapped source of capital because founders either don't know about it or if they qualify for it. In October 2016, The Supper Club called on HMRC to increase awareness and understanding of this scheme in its special report Britain Unlocked: A Tax Code for Global Ambition. HMRC updated its site in April 2018. "R&D credits can be claimed in more areas than you might think. It's always worth claiming for failed projects written off because they were obviously risky. And, you can get the cash quicker than some other sources of capitalas little as 12 weeks." Stephen Sacks, founder, Funding Nav To check if your project qualifies, visit: gov.uk/guidance/ corporation-tax- research-and- development-rd-relief. According to Forrester's 2016 research, whilst 80 per cent of companies intended to innovate in the next three years, only 20 per cent were intending to make an R&D tax credit claim. 13 DAY TO DAY FINANCE While better cashflow management can provide some working capital, there are numerous alternatives to debt and equity. 14 Stock finance For those looking to explore a more innovative investment vehicle, some companies use stock finance as a mechanism to release working capital. Here, lenders purchase the goods from the seller on behalf of the buyer or business owner. Invoice discounting Another frequently-used working capital solution is invoice discounting. This releases funds from your unpaid invoices to help manage cash flow, while you maintain responsibility for collection of payments. By receiving cash as soon as a sales invoice is raised, the business will find that its cash flow and working capital position is improved. The business will only pay interest on the funds that it borrows, in a similar way to an overdraft, which makes it more flexible than debt factoring. Debt factoring Debt factoring is a similar method to ease invoicing woes. Here, companies can sell their accounts receivable as a complete transactionceding control over collection altogether. This credit control and collection service is an additional benefit, enabling you to focus your resources on other areas of your businessparticularly useful for smaller businesses. Watch out: While flexible and relatively quick to organise, stock finance can be costly and the security may be difficult to assign. Watch out: Invoice discounting may make it harder to secure other more conventional loans as the lender will require accounts receivable as part of the collateral. Watch out: Your credit ratio could be affected because your book debts will no longer be available as security. Working capital finance A wide range of alternatives to traditional debt routes like overdrafts has emerged to shepherd companies through inevitable teething troubles in early stages of growth. Founders are no longer restricted to overdrafts and business loans, but these vehicles remain the most common way to inject cash. Where process optimisation and increasing profitability is proving difficult or where a cash injection is needed sooner traditional debt is still worth considering as it, too, has evolved. New lenders such as ESF Capital (part of Thin Cats) offers SMEs secure loans between 100,000 and 5 million over a period of up to five years. Larger banks, such as Santander, have introduced flexible growth capital loans suited to the scaleup's needs. Secured loans Secured loans, which require collateral such as property or another tangible asset, usually yield higher amounts with lower interest rates than unsecured loans as the lender can repossess the collateral. A secured loan is like a credit card, with no need to provide collateral (some lenders may ask for a personal guarantee). Unsecured loans Unsecured loans tend to have lower limits and higher interest rates but are quicker to secure. New players include online portal, Caple, where applicants input growth stats and forecasts for an unsecured loan at rates of 611 per cent. 15 Bridging finance Bridging finance is another option. Bridging loans became very popular after the recession and, between 2011 and 2014, gross lending more than doubled from 0.8 billion to 2.2 billion. Quick and flexible, they can be obtained in a matter of days, and improve your negotiating position as a cash buyer. However, interest compounds every month the loan remains unpaidand many default because of high-interest charges. Pension-led funding Pension-led funding is still a relatively unknown product within alternative finance, but for some firms, it's incredibly useful. If your business needs a loan, it can borrow money from the personal pension of one of the directors and pay it back with interest. Alternatively, the pension can invest directly in the business. Although it's a complex vehicle, there are significant benefits for businesses in certain situations, and it's well worth exploring as an alternative route to business finance. Firstly, it allows you to borrow funds from an existing pension within HMRC rules. The turnaround is relatively swift, with six to 10 weeks from quote to drawdown and it promises more security and independence than some traditional forms of lending. Asset finance Asset finance works by paying in instalments over a period, with the asset used as security until the last paymentwhen ownership transfers to you. Asset finance can be used for buying computer systems, specialist machinery, property or vehicles. It has grown in popularity, with 2016 marking its sixth year of consecutive growth. The advantages are improved cash- flow and balance sheet strength in exchange for an increase in monthly operating costs over the life of the lease or hire purchase agreement. Watch out: Bridging finance rates are higher than other forms of finance and penalty interest rates can be extremely punitive. Watch out: Remember that you can't claim capital allowances on a leased asset if the lease period is less than five years. Watch out: Be aware that any business failures could have a drastic impact on your retirement finances. 16 The funding spectrum Adam Blaskey, a former banker, developed high-end, central London residential property projects under the banner of Northbeach and Northbeach Capital Partners for over a decade. Having spent much of his working life meeting in hotel lobbies and coffee shops, he decided to launch The Clubhouse in 2012. This private business members club and meeting space has since grown into a network around London. Adam has raised finance from a wide variety of sources, from crowdfunding through Seedrs and venture debt from the British Business Bank to private investors from his club's membership. How have you raised investment and what types of funding have you used? When pitching for investment, you need to present the problem you're solving, your understanding of your customer base, market potential, your operating model, your revenue streams, and a clear vision, mission, and purpose. We've raised different forms of funding, from equity to convertible loans, venture debt and asset finance. The first was an SEIS equity round where we raised 150,000 from ten angel investors and we've gone on from there with different equity rounds. What did you learn from raising investment through crowdfunding? We did a crowdfunding round on Seedrs a couple of years ago to allow some of our members to put their money where their mouth is. They've always been great fans and advocates of what we do, and when we were raising a bit of early-stage capital before going for larger venture debt or PE rounds, we wondered if our members would support us which they did. Crowdfunding was great for profile raising and awareness but there are better solutions for higher levels of growth capital. What has been the easiest source of funding, and what do you wish you had known before you started? To date, most of our funding has come from friends, family, connections, and various introductions. My advice to anyone raising money is to build in enough comfort room in your model and raise slightly more at the outset so you don't have to worry about cash flow as you're growing. You need to have an optimistic plan which is realistic at the same time. What is the most valuable lesson you have learned about raising finance? The best lesson I've learned is that there are lots of different sources of funding available. On the one hand, there is lots of money out there, but getting that money committed and invested in your business is not as easy as it may seem. It takes a lot of hard work. Remember that there are more options than equity. My recommendation would be to look at everything from asset finance and discounting to venture debt. I used an adviser to help me find the right option, as they can help you to explore all options and answer the trickier questions during the due diligence process. Adam Blaskey, founder and CEO of The Clubhouse, explains the range of funding options he has used at different stages of scale. MEMBER INSIGHT Adam Blaskey, founder, The Clubhouse 17 DISRUPTIVE DEBT There is a raft of new lenders and debt solutions challenging traditional lending terms to enable businesses to scale without surrendering equity. 18 The term debt alone can send a chill down the spine of some entrepreneurs and many have been deterred by conditions, financial covenants, hidden costs and redemption penalties. Mike Lander, founder of Ensoul and a member of The Supper Club recalls his experience of debt finance. "Having borrowed over 7 million between 2007 and 2009, I know only too well the impact of having a bank looking over your shoulder every month, especially if you breach any of your loan covenants. You can quickly find that what you thought was an arm's length relationship with your bank with you in complete control turns into a situation whereby they have significant and very real powers to force your hand." Banks are most interested in lending over 2 million and tend to lend on 1.52 times consolidated earnings, before interest, taxes, depreciation, and amortization (EBITDA). Because early-stage businesses are higher risk with generally fewer assets, they will often be asked for a personal guarantee from the owners and directors. This has deterred members DEBT FINANCE IS PREFERABLE FOR FOUNDERS RELUCTANT TO GIVE UP ANY CONTROL OVER THEIR BUSINESS, BUT IT OFTEN COMES WITH OTHER RESTRICTIONS DEBT... BUT NOT AS YOU KNOW IT 19 Matt Katz, Head of Corporate Finance at Buzzacott, offers five tips for avoiding or mitigating personal guarantees 1. Align your borrowing with a personal investment in the businessbanks will be more comfortable in waiving a personal guarantee if an entrepreneur is visibly investing themselves but timing is crucial. Banks often ignore 'historic' investments, no matter how close to the loan application they were made. 2. Build a good track record before askingthe better a bank knows you the less likely it is to ask for a personal guarantee. 3. Rule out a personal guarantee agreement at the outset this may restrict the pool of potential banks but if you have a good business you are still likely to find a supportive bank. 4. Negotiate a limitationeither to a timescale (12 months for example), milestone (such as the investment reaching an agreed return) or size (a guarantee limited at 25,000, for instance, will in theory put you 'on the line' but shouldn't lose you your house). 5. Consider your lender carefullymainstream banks are unlikely to call upon the guarantees as long as you have 'behaved' as an entrepreneur. Smaller banks and other lenders tend to enforce them more frequently whatever the circumstances. REDUCING PERSONAL RISK because a personal guarantee merges your business and personal risk, meaning that should your business be unable to pay off the loan, your savings, real estate and even valuables are on the line. And there are hidden threats to look out for like Material Adverse Change (MAC)a contingency provision often found in venture finance contracts and lending agreements. It grants the lender a right to back out or call in debt in the instance of a 'major adverse change' in the company or even the broader market. The good news for borrowers is that MACs can always be heavily negotiated and because a material adverse change is notoriously difficult to establish are not commonly used to default a borrower. Indeed, recent case law restricted their scope considerably: most significantly ruling that the burden of proof is on the lender to show that a MAC event has occurred. But the landscape is changingfast. Challenger banks have prospered by breaking these conventionsoffering different lending options and assessing risk by other factors like balance sheet, customer base, and growth potential. "Being able to make quicker decisions based on data in a more informed way is the biggest disruption in lending because we can lend more to entrepreneurs at a cheaper cost" Cristina Alba Ochoa, CFO, OakNorth 20 Four years on from Santander's landmark partnership with Funding Circle, peer-to-peer (P2P) lending is set to disrupt business lending further. Players including Zopa have now gained full authorisation from the Financial Conduct Authority to offer innovative finance ISAs (IFISAs). Peer-to-peer lending P2P lending has grown dramatically since the financial crisis and innovation is set to boost its uptake even further. IFISAs allow individuals to use some (or all) of their annual ISA investment allowance to lend funds through P2P lenders with tax-free interest and capital gains. These, it is predicted, could help unlock an estimated 80 billion in cash ISAs for small business growth. Watch out: If your credit score isn't great, a higher interest rate will cost you more in the long run so it's better to improve your credit before applying. Available earlier and in larger amounts than traditional bank loans, venture loans tend not to ask for personal guarantees. OakNorth, which backed the Leon restaurant chain, lends between 500,000 and 30 million at rates of between 5 per cent and 10 per cent. Co-founded by The Supper Club member Joel Perlman, it has disrupted business lending with faster decisions backed by its ACORN platform. Its impressive growth indicates that it has uncovered an unmet need; achieving unicorn status and 10.6 million profit in just two years. Silicon Valley Bank (SVB) was one of the first to accelerate venture debt Venture debt Venture debt is becoming increasingly popular. These loans are provided by specialist lenders to pre-profit SMEs with an established business model. to the mainstream for early-stage businesses. Other venture debt players include Boost & Co and BMS Finance funded by the British Business Bank and offer loan rates between 11 and 15 per cent, depending on the risk of the business. Boost & Co lends throughout Europe and favours industries such as software services, internet, life sciences, hardware, and cleantech, while BMS Finance lends in the UK and Ireland. Traditional banks are trying to disrupt the challengers. Santander Growth Capital Loans are available to UK businesses with a turnover between 2.5 and 50 million, and 20 per cent growth, at a rate of 10 per cent per year plus 10 per cent fee at the end. Watch out: Venture debt can come with unattractive financial covenants which trigger defaults if certain metrics aren't met. "UK banks don't understand tech companies and they're less tolerant of low or no profit. By contrast, Silicon Valley Bank gets tech companies and their growth potential" Steve Phillips, founder, Zappi 21 EXPLORING EQUITY Equity investment doubled in 2017, but are you prepared to relinquish some control of your business to achieve the next stage of growth? 22 According to data from Beauhurst, 8.27 billion was invested in SMEs in 2017 more than double the previous year with firms at every stage of development receiving more cash than any period on record. The biggest increase was at the growth stage, with investment leaping from 2.4 billion in 2016 to 5.5 billion. Although the number of high growth firms hasn't risen in line with the increase in funding available, they continue to have a hugely disproportionate impact on the economy. The third Octopus High Growth Small Business (HGSB) report shows that, despite comprising less than one per cent of UK companies (22,074 out of 5.6 million), HGSBs created one in five new jobs and contributed 22 per cent of economic growth. So, if access, or attitudes, to finance is a barrier, it's in all our interests to remove it. A common misconception amongst founders is that equity investment means ceding control. While it's not unheard of for investors to restructure leadership teams, they ultimately have an interest in making your business succeed. The spectrum of private equity investment is broad, from angels and equity crowdfunding to venture and growth capital. At the larger end, private equity tends to invest for a YOU MIGHT BE STEADFAST ABOUT AVOIDING DILUTION, BUT AN EQUITY INVESTOR CAN BRING A LOT OF VALUE AT BOARD LEVEL. THEY CAN HELP YOU FOCUS ON YOUR GROWTH PLAN, BRING VALUABLE BUSINESS CONNECTIONS AND KEEP YOU ACCOUNTABLE TO AGREED OBJECTIVES PRIVATE EQUITY 23 majority stake in a mature, profitable company while earlier stage investors take minority stakes in younger growing businesses. Blackstone, which recently acquired a majority stake in The Office Group for 0.5 billion, is amongst the largest private equity investors. ECI Partners invests in management buyouts and buy-ins for majority or minority equity investments in midsized UK growth companies, with deal sizes of 20 million to 150 million, while LDC provides up to 100 million for buyouts and development capital transactions in UK unquoted companies. BGF is the most active investor of growth capital in the UK and Ireland with more than 2.5 billion to invest (it has backed 222 companies since 2011). BGF specialises in minority stakes and invests in a broad range of companies across all sectors, from post-revenue start-ups to more established businesses with revenues up to 100 million, as well as listed firms. Each type of investor can offer value beyond capitalsharing relevant skills and experience, introducing new partners, sourcing the best advisers, and helping to secure big clients. Access to senior executives is another key area of value, and differentiation, with investment firms building more entrepreneurial talent networks to support investees. "It's important that you look for investors who provide 'Money Plus'. They need to be able to give you sound advice, introduce you to potential clients, or help drive the business in the right direction" Suzanna Chaplin, MD, ESBConnect Alistair Brew, Investor at BGF "Chemistry is important. The founder should feel that the investor has empathy with their vision for the business. Hopefully, the entrepreneur, in turn, understands that a little more structure as it grows is going to help with that journey." Watch out: Corporate finance advisers warn that funds of 1 million could cost you 3 million over the lifetime of the investment. 24 The range of options for equity investment is vast. For early stages of growth, a burgeoning fund management industry has grown around the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT). Investors can offset part of the cost of their investment in a small or medium- sized business against their income tax and qualify for exemption from Capital Gains Tax on the sale of the shares. According to corporate finance partners and members, EIS and VCT tend to look for smaller multiples of five to seven times ROI within five years. Focusing more on sales than profit initially, investors look for 'J' curve businesses where the investment builds on a foundation for growth. The Seed Enterprise Investment Scheme (SEIS) comes with 50 per cent relief but it's capped at 150,000 to the company. SEIS has been credited for the start-up boom of recent years, but raising finance is a lengthy and time-consuming process and 150,000 will be used up quicklywith founders having to get follow-on EIS funding. It also encourages founders to deal with investors too early in the scaleup lifecycle when they could find other ways of raising working capital. EIS and VCT offer income tax relief of 30 per cent to investors who subscribe for shares in qualifying companies. In April 2018, under the new Finance Bill, the annual investment limit doubled from 1 million to 2 million, and from 5 million to 10 million for 'knowledge intensive' companies. Entrepreneurs can also choose whether their firm's 10-year eligibility for EIS is measured from the date of their first commercial sale, or the date from which their annual turnover first exceeds 200,000. This will boost already growing investment through these schemes. VCTs raised 728 million in 2017/2018 compared to 542m for 2016/2017. Octopus is the UK's largest VCT manager with more than 900 million invested on behalf of 30,000 investors since the scheme was launched. Risk capital Tax reliefs to compensate for riskier investment in small private companies has been a game changer for SMEs and the UK economy. Watch out: It can take longer to secure this funding than you expect: get the best lawyer you can afford to highlight the things to look out for and help you avoid awkward provisions in shareholder agreements. 2,360 companies raised a total of 180m of funds under the SEIS scheme In 2015-16 3,470 companies raised a total of 1,888m of funds under the EIS scheme "VCT is a good source of patient capital but it takes a long time to get approval. Rules have been tightened to prevent abuse, but we nearly didn't qualify because our business started as a hobby. This needs to be taken into account so it doesn't disqualify other scaling businesses" Simon Hay, Co-founder, Firefly 25 Risk capital to scale Reece Chowdhry has helped grow LandlordInvest into a multi-million-pound business in two years and is the founder of RLC Ventures. MEMBER INSIGHT What are the advantages and disadvantages of risk capital? We used SEIS and EIS to support cash flow in the early stages of LandlordInvest. The tax breaks are a big advantage of SEIS for an investor, but it can attract the wrong type of investor if they are just trying to mitigate their tax bill. Debt is quicker to secure with far less documentation. It can take two to three months to process SEIS. But, like a lot of businesses, LandlordInvest wouldn't have got funding without SEIS. Greater awareness of investment opportunities in early-stage businesses and an increase in risk appetite from investors has brought more money into the small business community. It provided the lifeblood for LandlordInvest and the working capital for key hires. The value beyond capital has been strategic introductions from investors, access to senior talent, and getting some amazing investors on board. The rigour from investor expectations around due diligence also helped us professionalise the business. Access to advice when you need it is invaluable. RLC Ventures set up a WhatsApp group for investors so entrepreneurs can reach out to us 24/7. I would have benefited from this pastoral care in the early stages and implemented it in my own business. Were there any challenges? Time and legals were the biggest lessons. It always takes longer to secure funding than you expect, and you need the best lawyer you can afford to highlight the things to look out for. They can help you avoid awkward provisions in shareholder agreements that can come back to haunt you. LandlordInvest was approached by some investors who over-promised and under-delivered. I would be more patient, wait for better investors, and be clearer about expectations. You can't rely on a handshake so document everything in the right format to make it legally binding. What advice would you give other founders looking for investment? Understand where you are in the funding lifecycle: you can raise seed capital through friends and family. Also, don't fall into the trap of solely focusing on funding instead of growing your business. Get someone to find funding for you so you can continue making your business even more attractive for investment. What needs to change in the current legislation? You should be able to invest in startups with your ISA savings. There is an estimated 259 billion in UK cash ISAs and this could be optimised for seed-stage investment in growing businesses. It should be much easier to navigate and process S/EIS and there is still a poor understanding of tax- efficient schemes. There is little or no awareness of SITR (Social Investment Tax Relief) and it's such a good scheme that could boost social impact. Reece Chowdhry, founder, RLC Ventures RLC Ventures invests in startups; providing seed-stage capital for fintech, proptech, sports tech, and tech for good causes. 26 An angel investor uses their own capital to fund the growth of a small business at an early stage, often contributing their advice and business experience. EIS and VCT tax breaks have swelled the angel community, and the level of involvement of angel investors varies dramatically. Those who have built and sold their own businesses will generally feel a closer affinity to the founder. "When looking for a good angel investor, the single most important factor is personal fit," says Andrea Reynolds, CEO of Swoop. "Do they understand the market you serve? Do you both have a good chemistry?" An interest in your business and proven connections within your market will make for a healthier and more impactful relationship. It's fair to expect a process with any investor, that each meeting is getting you both towards a decision. There should be a step forward every two weeks at most." Andrea warns against time wasters. "Be wary of angel investors that put you through endless due diligence as they either get cold feet, never intended to invest, are hobbyists, or it's a delay tactic for the business to become so cash stretched they can get a better deal. Keep an eye out for other red flags alsoparticularly term drivers who offer, say, 500,000 to spark the round and then, as it gains momentum, start to reduce personal investment while seeking to gain shares or a position within your company." Angels Angel investment fills a vital gap in the early stages of scale, with budding businesses using this stepping stone finance before they transition into venture capital. Investors will expect the founder to pitch the opportunity, but it's a good idea to have a financial director in the pitch to talk about the numbers. When compiling your pitch deck, make sure it includes the following points: 1. The problem you're solving 2. What is unique/differentiated about your solution 3. Market size and growth potential 4. Key competitors and your differentiators 5. Customer segments and geographies 6. Growth plan and roadmap 7. Top line P&L and financial projections 8. Leadership / Management team 9. Investment required, how it will be deployed and the exit timeframe/valuation 10. Other ways the VC can support scale TACTICAL TIPS YOUR INVESTOR PITCH 27 The UK industry is regulated by the FCA, highly competitive, and growing. Despite a dip in deal numbers in 2016, the crowdfunding boom returned last yearattributable to its inherent ease to both list and invest. As a bonus, those seeking investment also gain profile from a highly marketed platform and confidence in the founder and their business from a broad range of advocates. For those looking to invest, all of the research and due diligence is taken care ofpeople can either opt in or out. Advice from members who have sought investment through crowdfunding is to participate as an investor first to understand the process from both sides. Look for the most active platform for the best chance of generating interest. They also advise creating PR and marketing collateral for your company, product or concept and use this as part of your application. As with any form of investment, you need to be able to answer any question about why you need it and how you will deploy it. So, do your homework on the financials as people will ask probing questions. Equity crowdfunding platforms vary, with different fee models and structures for raising capital. Many have a lead investor for each funding round and an expert panel to offer analysis and guidance to both investors and investees. Some platforms take an equity stake and arrangement fee for hosting a pitch. As a benchmark, equity crowdfunding fees range from 5 to 7.5 per cent of a successful raise, but members warn to look out for other payment processing fees. Indeed, some platforms have begun to take a cut of investor profits. Remember that if you do manage to negotiate a better deal, you should ensure that this agreement also covers future rounds. While valuations are primarily led by the founder, some platforms have an in-house investment team who will mediate valuations. Others can choose not to list you if they feel it's too overvalued. Platforms usually let the market decide if valuations are fair, but everything should be supported by evidence. While it's an intensely competitive industry, Crowdcube, Seedrs, SyndicateRoom and Venture Founders dominate by deal volume and size. According to Beauhurst, Crowdcube was the top-ranked platform by the amount of investment facilitated, whilst Seedrs participated in more deals. According to Off3r, a comparison site that lets retail investors compare investment options, Seedrs took the largest deal in 2017, raising 6 million in one campaignfor itself. Equity crowdfunding Crowdfunding has democratised equity investment. Now a key part of the finance mix, it bridges the gap between friends and family and angel or VC investment. Watch out: Equity crowdfunding boosts the profile of a business but failure is just as public and 30-40 per cent of companies do not reach their target. "Crowdfunding has democratised equity investment and brought more private capital into small businesses. We must give credit to the regulators for allowing innovation to flourish" Stephen Welton, CEO, BGF 28 Investing growth capital Henry Gladwyn, an investor at BGF's ventures team, offers insight into how to pitch for investment and what investors in earlier stage companies look for. Henry Gladwyn, investor, BGF Ventures What kinds of businesses do investors look for? In contrast to private equity (PE) which looks for later stage, viable and profitable businesses with lower but steady growth venture capital (VC) expects at least 50 per cent growth per year and over 80 per cent margin from SaaS businesses. In Europe, VC has almost exclusively invested in SaaS and marketplace businesses, but BGF looks at businesses across a range of sectors from MedTech to extreme-sports brands. Currently, there is a lot of money looking for investment and the more established the fund the more it needs to invest. That means PE funds are risking up to invest in earlier stages of growth and VC is considering lower growth. How should earlier-stage business owners pitch for investment? While PE investors are more interested in the numbers, earlier stage investors are more interested in the growth story and how it can support accelerated growth. So, present the problem you're solving, why you will dominate the market, and for how long. The most important numbers relate to the size of market and opportunity. The predictability of your business is a strong element when pitching, so think about all possible challenges. Earlier-stage investors are looking at the idea and the management team. As a founder, you need to inspire confidence in your ability to lead and deliver growth, with a solid leadership team including a strong FD or CFO. Often, the decision to invest is made by the Deal Lead who you will speak to at the pitching stage. They will feedback to an internal committee and come up with questions that structure the due diligence process. What board le
Helping tech companies raise equity investment
Total investment in SMEs doubled in 2017, but the latest data reveals that surprisingly few scaleups have secured external funding. Of the 35,210 in the UK, only 1,505 received investment.
Tech Investment and Growth Advisory for Series A in the UK, operating in £150k to £5m investment market, working with #SaaS #FinTech #HealthTech #MarketPlaces and #PropTech companies.