How to secure business funding for start-ups

   

Article written for Bytestart by Simon Littlewood, Grant Thornton and gateway2investment.

Finding the cash to develop a business idea can appear a daunting prospect but in recent years a huge range of resources have been made available to budding entrepreneurs.

Innovation and entrepreneurship have moved to the heart of the Government’s agenda as it has increasingly recognised the need to nurture the employment and wealth generators of the future. Private and corporate investors are also queuing up to talent spot the profitable companies of the future.

Investment Funding

Investment funding is an important part of getting a business idea off the ground, but the availability of good advice and the opportunity to link up with other companies to use their knowledge and services is also a major driver of commercial success.

In the early stages of a business, borrowing money from friends or family, or through a bank loan or even on a credit card may provide sufficient cash to get the ball rolling.

But those businesses embarking on a steep upward growth path often find that as they move from product concept to development to commercialisation, the funds required get larger and larger. With revenue from sales likely to be low in the early stages, the need for external financing becomes necessary to carry them over to the point of profitability and self-financing.

The problem for growth businesses is that it can be a huge leap from raising funds through personal contacts and their own bank facilities and securing external equity financing.

Bridging the Finance Gap

The Government report ‘Bridging the Finance Gap’ pointed out in 2003 that few companies raise more than £250,000 from sources such as their own capital, bank debt and equity from friends, family or private investor ‘business angels’. But many commercial investors such as venture capitalists are reluctant to invest sums of less than £1 million because of the high fixed transaction costs, shortage of available exit routes and perceived higher risk of investing in early-stage companies.

The report noted that while the overall number of private equity investments had grown by 17 per cent between 1997 and 2003, there had been a 10 per cent fall in the number of investments in the £500,000 to £1 million range.

Having identified this ‘equity gap’ and the negative effect it was having on the UK’s economic prospects, the Government has been keen to fill the void. Among its most recent innovations are Enterprise Capital Funds which are now starting to invite applications from companies seeking funding.

Enterprise Capital Funds

These are based on the US idea of Small Business Investment Companies (SBICs) and are a mix of public and private funding specifically targeted at UK businesses seeking investments of £250,000 to £2 million which was identified as the most problematic range to secure funding.

There are high hopes that Enterprise Capital Funds will be as successful here as they have been in the US where they account for up to 60% of funding in this investment range.

Enterprise Capital Funds are only the latest addition to a massive infrastructure of funding support that has been put in place by the Government. Some of the main ones include Regional Development Agencies which oversee funds such as Regional Venture Capital Funds of which the largest is London’s £50m Capital Fund.

Other Sources of Finance

Other sources of help include the Grant for Research & Development, R&D Tax Credits, the Enterprise Investment Scheme (EIS) and Small Firms Loan guarantee scheme.

There are also organisations such as NESTA – the National Endowment for Science, Technology and the Arts – which has received more than £300 million of funds from the National Lottery and uses the income to promote innovative companies.

On the private investor side is the business angel network and also commercial investment companies with their own funds that are on the look-out for companies with good profits prospects.

While it is true that there has been a huge push to address the problems early-stage businesses have finding funding to commercialise their good ideas, the fact remains that nobody is giving away ‘free money’. In order to tap into these sources, companies must be able to provide strong evidence of future commercial success.

Getting Your Business 'Investment-Ready'

The ‘equity gap’ may have been identified and addressed to some extent, but that still leaves the ‘investment-readiness gap’.

Businesses often make the mistake of believing that because they believe they are in need of outside funding to release the potential of their business, they are somehow investment ready. The truth is that to become investment ready requires aligning the interests of the business as closely as possible with the interests of those potential investors.

Entrepreneurs seeking funds need an armoury full of weapons to attract investors. A good idea for a product or service is one weapon, but they also need to be backed up by a strong management team and business plan with credible but impressive sales and profits figures, good knowledge of their chosen market, along with a clearly defined exit route that will deliver the returns investors expect.

One of the best moves an ambitious company can make is to become involved with the network of advice and support available in their region at an early stage and seek guidance through the often confusing maze of options available.

Organisations such as gateway2investment, the London Development Agency backed consortium that supports early stage technology companies in the capital, can easily make the difference between business success and failure. Most early stage companies simply do not have the skills and experience needed to make it on their own but g2i is there to help them fill in the gaps.

Those undergoing the g2i programme are tutored by experienced professionals from the delivery consortium of Grant Thornton, Library House, E-Synergy, Quotec and the Innovatory on important areas such as finding funding sources, delivering successful investor presentations and explanations of complex areas such as product licensing.

It allows entrepreneurs not only to go over their own business ideas in detail, to build on their strengths and address their weaknesses and to liaise with like-minded individuals, but it also gives access to networking opportunities with relevant organisations, companies and investors that can help drive an idea forward to become a future commercial success.

In the majority of cases, the time and effort spent hooking into a network and drawing on its guidance and resources will be by far the best investment an entrepreneur can make.

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