Agenda. Lab to Market Raising Finance Session 1. Objectives for Today. Part 1. Funding Basics 6/21/2012

Transcription

1 Agenda Lab to Market Raising Finance Session 1 David Institute for Manufacturing 21 st June The Funding Map: understanding where you fit 2. Business Plans 3. Banks: General Overview 4. Operational Finance 5. Equity Business Angels 6. Grant Funding & Soft Loans 7. Managing the Money & the Process 8. Summary and Review Objectives for Today BY THE END OF TODAY, YOU SHOULD BE ABLE TO: 1. Understand different types of finance for business 2. Understand the risk profiles of different funders 3. Select the most appropriate forms of finance for different business models Part 1. Funding Basics The Funding Map Understanding Where You Fit Sources of Funding Today is the start of a journey 1

2 The Funding Map Why DO You Need Money? Initial Ideas Feasibility Prototyping Commercialisation Own cash; friends, family & fools Grants (Govt, EU, TSB) Bank Loan Business Angels Venture Capital Consultancy or other earned income to live on Every new business needs money to finance it High tech and high growth businesses often need more money than low tech businesses Product based companies often need more money than service based companies More money means you can grow faster Real Sales! Bank balance Different Firms, Different Profiles Time Technology firm Large investment required Late break-even Huge upside (Apple) Services firm Low investment required Early break-even Modest upside Q: Where do web-based firms sit? The Financing Bottom Lines You won t get money just because you need it You must be investment ready Finances must look good: Profit is helpful ( 2007) Revenues are essential in projections Cash is best of all Good ideas are just hot air Go to the right source at the right time with the right story Get a targeted introduction Remember : NEED FOR MONEY INVESTMENT READINESS 2

3 Low risk lenders Risk & Reward for Banks Loan 100,000 Interest margin 5% above cost annual income 5,000 One loan is written off: 20 good loans required for 1 year to finance that loss Risk & Reward - Equity Investors High risk investors High return: >10x money invested Out of 10 investments 3 will fail, 4 will be walking wounded. Of the other 3, only 1 or 2 will star. Banks vs Equity Investors Banks lend to earn money: borrowing needs to be repaid BUT Where do Company Funds Come From? Class exercise And now let s see the latest figures Equity investors own part of your business: different risk, different return 3

4 Sources of Finance as % (Breedon Report 2012) 2. Business Planning Failing to Plan is Planning to Fail Source: 2010 BIS Survey of MidCap Businesses Business Plans Who here has a business plan? Why? Business Plans for Banks 2 page Executive Summary Business background products/market Management team and experience The peak requirement P&L and cash flow with assumptions Competitive position Evidence of ability to service all borrowings in the business and security available. 4

5 Business Plans for Equity Providers An outstanding 2-3 page executive summary The market opportunity Product/technology and competitive analysis The business model The management team Use appendices for bigger items Presenting the Case - Summary Could be a short (1-2pp) summary of the plan, but better one of the standard 10 or 13 slide decks: 10 slides: 13 slides: Think of this as the elevator pitch Exercise During a 5 minute break, prepare your elevator pitch Then volunteers to present to the group Do you have confidentiality issues? Questions? 5

6 3. Banks General Overview Lending to UK Non-Financial Businesses 20.0 Twelve month growth rate (per cent) Q Q Q Sep Oct Nov Bank of England Dec 2011 Lending to SMEs Annual % Change 30.0 Interest Rates % on New SME Variable Facilities Total PNFCs (b) All SMEs(c) Small businesses(d) Smaller SMEs(b) Medium SMEs(c) All SMEs Bank rate Mar 2008 May 2008 Jul 2008 Sep 2008 Nov 2008 Jan 2009 Mar 2009 May 2009 Jul 2009 Sep 2009 Nov 2009 Jan 2010 Mar 2010 May 2010 Jul 2010 Sep 2010 Nov 2010 Jan 2011 Mar 2011 May 2011 Jul Bank of England Oct 2011 Bank of England Oct

7 More of the Same CAMPARI & ICE : The Banker s Maxims Character - respectable & trustworthy Ability - track record, team, potential Margin - % above base rate Purpose - expansion, rescue or buying toys Amount - is this realistic, too much or too little? Repayment pay interest and repay principal Insurance - if required, is there security? BoE Trends in Lending April 2012 [Interest, Commission, Extras] 4. Operational Finance What are the different types? Which one is right for you? Where can you find it? Asset Finance: Bank Lending: Products Leasing Debtor Finance Mortgage Finance Term loan Overdraft Government Schemes: Regional Loans: Enterprise Finance Guarantee Local variations 7

8 Leasing Debtor Finance Finance for fixed assets Can be arranged quickly Assets owned by the lessor Can remove the need of large down payment Business rents the asset: payments are tax deductible (agreement in writing for more than 1 year) Finance lease may give opportunity to purchase at end of lease Factoring factor takes over the sales ledger and the debtors. This is not a loan. Invoice discounting discounter lends against the security of the debtor. In both cases the quality of the debtors is key. Both are good facilities to support growing businesses why? Debtors have to be clean and collectable. Banks Loans vs Overdrafts Enterprise Finance Guarantee (EFG) Loans term flexible, capital holiday, fixed or floating interest Covenants, eg interest cover, loan to value Security debenture plus personal support Overdrafts banks now prefer debtor finance Repayable on demand Fees on renewal as well as interest Banks are suppliers 1,000 to 1million as principal Turnover below 25million for borrower 3 months to 10 years for term Banks receive 75% guarantee from government Can fit with businesses where contractual obligations put invoice discounting off 8

9 Questions BREAK 5. Equity Saved by the Angels Definition of a Business Angel BVCA UK Investment by Stage ( M) An individual, acting alone or in a formal or informal syndicate, who invests his or her own money directly in an unquoted business in which there is no family connection and who, after making the investment, takes an active involvement in the business, for example, as an advisor or member of the board of directors Prof Colin Mason and Prof Richard Harrison, Angels currently investing >2x more in early-stage than VCs BVCA RIA Early stage/venture Expansion Replacement MBO/MBI Other Late Stage 9

10 BVCA/PwC Performance Survey 10 Years to STOP PRESS! Latest BVCA figures just out: 10 9 Report on Investment Activity: Performance Measurement Survey: Survey_2011.pdf 5 BVCA 2010 IRR% 2009 NESTA Research: Angel Returns Industry Experience Affects Outcome less than 1X 1X to 5X 5X to 10X 10X to 30X more than 30X 0 less than 1X 1X to 5X 5X to 10X 10X to 30X more than 30X UK US No industry experience Some industry experience 10

11 Due Diligence Affects Outcome Board Involvement Affects Outcome less than 1X 1X to 5X 5X to 10X 10X to 30X more than 30X Less than 20 hours More than 20 hours 0 <1x 1x to 5x 5x to 10x 10x to 30x >30x Not on board On Board What Angels Are Looking For What Angels Might Invest Team, Product, Market, Sector, Profits, Exit Investors back people, range of abilities; fill gaps Exceptional growth prospects? Sector, timing Protection not just IP! Know-how, first-mover gains Stage: more than just an idea; prove yourself first Explain business model: where you fit, how you make Investment readiness of business and people Valuation now and at exit What happens when you need more money?? More substantial business plan than for a bank Amount: Rules of thumb Individuals 10,000 to 50,000 First round syndicate: 250, ,000 over 3 rounds, EXCEPTIONALLY 1M in total Issues for later funding rounds Stand-off with venture funds (crush-down) Angels running short of fire power Few exits for 3 years Need to look after existing portfolio (3-4 rounds) 11

12 How to Find Angels Obstacle course or initiative test NOT like grants, debt So, how do YOU find angels? How to Find Angels Your own contacts: people who know investors Identify and attend networking events Possibly appoint an adviser; beware of upfront payments Track down investor clubs may need several to invest Care over IP before using websites, sending out summaries Align your proposal with investor interests, motivation BBAA membership; code of conduct; FSA regulation Remember 57% of Angel Deals Use EIS Enterprise Investment Scheme headlines since 6 April 2011: Shares must be 'full-risk' ordinary shares, max 30% per individual Investment directly into the company, or through an EIS Fund Income tax relief available to individuals who subscribe for shares in EIS qualifying company (limits on employees, net assets, trades) Relief = 30% of the cost of the shares, to be set against income tax Relief can be claimed up to a maximum of 1,000,000 invested, giving a maximum tax reduction in any one year of 300,000 Questions? 12

13 The Pros & Cons of Grant Funding 6. Grants, Crowd Funding & Others Sources Complex but useful The good things 1.It s money 2.You don t have to give it back (except in default) 3.You don t have to surrender equity The not so good things 1.Most schemes won t suit you 2.Applying takes time and effort (and money!) 3.Only available for future activities, not past ones 4.Cost reimbursement only likely to be 50% or so Knowledge Transfer Partnerships Graduate placement scheme, part-financed by a Government grant 1. Graduate Associate (NVQ level 3 or above) is employed by the knowledge base partner but works in your company. 2. Typically two thirds funding for an SME, 50% for a large company. Average annual contribution by an SME 20k 3. Classic KTP typically 1-3 years 4. Short KTP typically weeks Proof of Market - market research, intellectual property issues up to 25,000 for up to 60% of total project costs project max duration nine months Proof of Concept - feasibility studies, prototyping, testing up to 100,000 up to 60% of total project cost project max duration 18 months Development of Prototype - demonstration models, protect intellectual property up to 250,000 up to 35% of the total project cost for mid-size firms up to 45% for small businesses max duration two years SMART Awards 13

14 R&D Tax Credits Not a grant scheme but corporation tax relief For all companies with qualifying R&D revenue expenditure (no min) Allows 225% (SMEs) or 130% (large companies) of R&D expenditure to be deducted for tax purposes. Some SMEs not in profit can surrender R&D tax losses for cash State aid or subsidies can reduce the amount of eligible R&D expenditure or deduction percentage, sometimes to zero For capital R&D expenditure 100% capital allowance may be allowed Regional Loans Small loans for business Foundation East Have to have been refused by traditional source (e.g. bank) 500 to 50,000 6 months to 10 years Fee 2% and interest rate circa 19% Expensive? BUT: Open to poor or no track record Lack of security not a barrier Robust assessment - so good proposal required Regional Loans Finance East Loan Management Ltd 50,000 to 200,000 over 3 to 5 years Minimum T/O 500,000 Growth potential and financing need Fee 2%, annual fee 1%, interest 5-9% over base Plus levy on turnover of up to 1% possible Crowd Funding 3 rd Sector & Arts, Operational, Equity Operational: Up to 100,000 Unsecured (but personal guarantee) 1 or 3 Years 7-9% margin 20% Acceptance rate Examples BUT buyer beware!

15 See Also.. Low Carbon Innovation Fund For East of England based firms only ERDF supported venture fund available until end-2015 For SMEs with low carbon products/services Also covers low carbon operational changes Early-stage investments, restrictions apply 50,000 to 500,000 on 40/60 basis with private match funding Managed by Turquoise Associates Planning Exercise Individually/in teams review your funding concerns Do you still think you need the same Amount? Type? Length of time? Do you have/need collateral? Are you ready to go? What else do you need? ONE minute presentations to the room What has changed? What do you need to do next? Any other types of funding?? Feedback and discussion Questions? 7. Managing the Money Bringing it All Together 15

16 What Can Go Wrong? Well, what CAN go wrong? What Can Go Wrong? Plan was over optimistic Issues not disclosed Cash not carefully managed Delays finding customers Teams don t settle into clear roles Investor directors treated as the enemy Complex deals can create conflicts Remember everybody is on the same side Two Crucial Management Tools 1. Cash Flow Forecast 1. Weekly or monthly 2. Rolling 3-month 3. Performance against plan 4. Analysis of variance, control of burn rate 5. Pinchpoints identified when are you out of cash? 2. Management Accounts 1. P&L, including accruals, work in progress 2. Balance Sheet understanding your assets 3. Produce within 1 week of each month end 4. Identify problems early Time to Close (TTC) How long does it take to close the deal? Debt - Secured/Unsecured (weeks) Equity - Formal/Informal (months) Fixed grant application procedures (varies) Hofstadter's Law: It always takes longer than you expect, even when you take into account Hofstadter's Law. 16

17 Crossing the Chasm 8. Summary & Review Relative % of customers The Chasm From: Geoffrey A Moore (1991) If you only remember this Early adopters, visionaries Early majority, pragmatists Late majority, conservatives Laggards, skeptics Innovators, technology enthusiasts Customers want technology and performance Customers want solutions and convenience Time Money is Power & Cash is King Until cash flows from sales, try equity or grants Always easier to raise money when you don t need it: negotiate facilities when the need is not urgent Raising money always takes longer than you think plan accordingly Rarely get all the money you require to begin with Nearly always underestimate how much you need Getting your sums wrong does kills confidence Summary Several sources of finance many asset based MUST understand what providers are looking for Preparation is key Have someone to take an objective look at your proposal before seeking finance If you have a good case be tenacious Today was the start of a journey 17

18 Objectives for Today Questions? BY NOW, YOU SHOULD BE ABLE TO: 1. Understand different types of finance for business 2. Understand the risk profiles of different funders 3. Select the most appropriate forms of finance for different business models Today was the start of a journey 18