The following article was written by Stephen Campbell and appeared in Business 7 magazine.
Ten years ago, if you were looking to raise equity for your company, there were a wide range of options available to you. Now it’s a very different story.
NatWest Ventures. Royal Bank Development Capital. Clydesdale Bank Equity. Barclays Ventures. A decade ago they were major sources of finance for growing businesses after £1-10million of equity. Now they’ve either disappeared, stopped investing or morphed into other organisations.
New rules mean that banks need to commit significantly more capital for equity-type investments.
And capital is scarce so they’re not likely to return to this market any time soon. Look over the pond and it’s a similar story: US legislation is forcing banks to dissolve their private equity operations.
So the banks no longer provide equity to growing companies. Who does? The answer used to be 3i. In1997, 3i invested over £900m in 600 UK businesses. That’s an average of £1.5m per company.
In the year to March 2010, however, 3i Growth Capital made only one new investment in Europe, for £21m. From 600 investments to one investment. From £1.5m per company to £21m per company. The old market leader is in a very different place and there has been no 3i replacement.
If you are a growing business that needs development capital to expand quicker, make acquisitions, move into new markets or even just bolster your capital base by reducing debt, where can you go? The answer is that there is still equity available, you just have to look harder to find it. Where to go depends on how much you need.
I need £500,000 – your best route is friends and business angels. The level of input into your business will vary.
A friend may leave you alone and trust you whereas a business angel will want to know every detail of your business and how you are investing his money.
On the positive side, they often bring valuable experience as well as money. Just remember not to put your brain in neutral.
As in any walk of life, there is good and there is bad. Bad angels have as much entrepreneurial sense as your budgie so choose carefully. You can find business angel networks by visiting the British Business Angel Association website (www.bbaa.org.uk).
I need £1m – look at venture capital trusts (VCTs). The increase in top rate tax to 50 per cent will make investing in VCTsmuch moreattractive to individuals.
This means in turn that VCTs will have more money to invest in growing businesses. There are restrictions on sectors and sizes of company that aVCT can invest in.
To find out if you can apply, websites like www.angelnews.com carry information on both angel networks and active VCTs.
Ineed £2m – too big for the business angels and too small for the likes of 3i. This is where you should look at enterprise capital funds.
ECFs invest exclusively in UK SMEs that need between £500,000 and £2m and are based on a successful US model that provided early stage equity to star companies such as Fedex, Intel and Apple.
There are nine of these with the most recent, largest and only Scottish based one being Panoramic Growth Equity (www.pgequity.com).
We look for established businesses with good management that need development capital to grow their business to the next level.
I need £10m – welcome to the National Growth Fund. The Government recently outlined plans to establish a ‘new 3i’.
This will invest in companies that need between £2m and £10m. While the detail of the fund is still being decided, it is likely to be of most interest to established companies with over £20m in sales.
We think this is a positive development which will get the economy back to where there is an active (and competitive) market for the provision of equity to SMEs as thereused to be with the bank owned equity funds and 3i.
The only question mark is timing. The need is now but, despite a lot of noise, we’ve yet to see the fund up and running.
Regardless of what level of investment you are looking for, here are some rules about pitching your company: Don’t frighten investors with an unrealistic valuation. You won’t get in the door. The world has changed and we’re not in dotcom Kansas any more.The valuation you received in 2007 is no longer relevant!
Always make sure your presentation is kept updated. If the date on the front page is six months ago, we will know that you’ve been pitching it round (unsuccessfully).
Know who your competition is and talk knowledgeably about why you’re better. Everyone has a competitor.
It’s a two-way process. Question the VC, ask for references from companies they have invested in. If you don’t have any questions, it can look like you’redesperate for money.
For the right companies, there is development capital out there.
It’s not extinct and it does exist. You just need to look in new places for it.