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4. Sources of Finance. ….getting the money you need to get started. Different types of finance. Grants Loans Investments finance Revenues from sales Steal it. Grants. Sources of grants: DBIS NESTA Carbon Trust Pro’s and con’s of grants Information sources Getting advice on grants

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4 sources of finance

4. Sources of Finance

….getting the money you need to get started


Different types of finance
Different types of finance

  • Grants

  • Loans

  • Investments finance

  • Revenues from sales

  • Steal it


Grants
Grants

  • Sources of grants:

    • DBIS

    • NESTA

    • Carbon Trust

  • Pro’s and con’s of grants

  • Information sources

  • Getting advice on grants

  • Writing and preparing a grant application – how to ensure success


Loans
Loans

  • Sources of loans:

    • Capital North East

    • RELF

    • Project North East

    • Banks

  • Pro’s and con’s of loans

  • Where to get advice and information on loans

  • What the bank (etc) wants in return

  • When does a loan make sense?


Investment finance
Investment finance

  • Sources of investment finance:

    • Rivers Capital Partners

    • NorthStar; NEL; IP Group

    • NE Business Angels – Hotspur; BIG

  • Pro’s and con’s of investment finance

  • Sources of information on investment finance

  • Where should I use ‘investment finance’?

  • How do I meet investors?

  • What do they want to know?


What investors want
What investors want

  • Their money back

  • A lot more money in addition

  • A clear understanding of WHEN they will get their money back

  • An understanding of the risks involved

  • An understanding that YOU know what the risks are and have plans to reduce the risks

  • An understanding that you know how to get your product to the market


What investors want 2
What investors want (2)

7. Clarity on how much money you want

8. Clarity on what you are going to use the money for

9. Comfort that you have enough money

10. Mechanisms to report on progress

11. Mechanisms to intervene (if things go horribly wrong)


There are different types of money
There are different types of money

£

50 mio

10 mio

1 mio

500 k

100 k

10 k

3 F’s/

grants

series B

VC

seedfunds

you

series A

VC

angels

series C VC/

private equity


Different types of money have different characteristics
Different types of money have different characteristics

  • Your money is quite precious

  • 3F money is often very expensive

  • Angel money brings angels – can be +

  • Seed-funds are hard to find these days – unless you are based in the North East!!

  • VC money = rocket fuel


Angels
Angels

What are they:

  • High net worth people who want to invest in early stage businesses

  • They do it (mostly) because they believe they know enough to make the right decisions

  • In fact they want to play with your company


Angels1
Angels

Advantages:

  • They will invest for ordinary shares

  • They will invest at an early stage of the business

  • Investment rounds can be achieved relatively fast

  • They can help with advice


Angels2
Angels

Problems:

  • More common some places than others

  • Need to find them

  • Often want to interfere with your business – can be an issue

  • Make shareholder list more complex

  • Get crucified by venture capitalists – getting more cautious


Angels3
Angels

What to do about them:

  • Look for ‘bands of angels’

  • Don’t do ‘different deals’

  • Treat them nicely and they may help again


Seed funds
Seed funds

What are they?:

  • Investment funds that focus on £50k – £800k range

  • Some are commercial; most are supported by RDAs or other govt bodies

  • They will want a commercial deal – and their money back

  • They may invest for ordinary shares


Seed funds1
Seed funds

Advantages:

  • One investor for deals in the £50k to £800k range

  • Sometimes, the only source of mid-range investment

  • May have links to follow-on funding


Seed funds2
Seed funds

Problems:

  • Dying out in most of UK (but not the North east)

  • Valuations

  • Usually can’t do follow-on investment

  • Get washed-out by VC’s on second round

  • Can take a lot of time to raise a little money


Seed funds3
Seed funds

What to do about it:

  • Get an introduction

  • Make sure your business plan shows a commercial return

  • Find a seed-fund linked to a larger fund for follow-on finance


Venture capital
Venture capital

What are they:

  • Financiers that will invest in high risk ventures

  • Tend to focus on a size of investment and often a business sector

  • Want a high level of return on their investment

  • Will require a preference share deal

  • Will require an exit in 5 years (or 7 at a maximum)


Venture capital1
Venture capital

Advantages:

  • The only place to go for funding for a high risk (or even medium risk) business

  • Can invest significant sums of money you can’t get elsewhere

  • Often are specialised in their sector

  • £50 - £100 million can be raised

  • Are very good at helping you to get an exit


Venture capital2
Venture capital

Problems:

  • They will take a lot of money out of your business

  • Many moving further up stream to bigger deals

  • Getting to see the right one – then getting to a deal

  • Valuations that both sides can live with

  • Often focus the business towards an early exit

  • Time taken in negotiations


Venture capital3
Venture capital

What to do about it:

  • Get an introductions

  • Run several in parallel

  • Focus on the right VC’s for your sector and stage

  • If you are profitable, more chance of success

  • Remember, they need to deal as much as you do


Banks
Banks

What are they:

  • Financial institutions that will look after your money

  • VERY low risk profile

  • Will manage your ‘transaction processing’

  • They will provide loans (overdrafts) to businesses when they are sure that there is security


Banks1
Banks

Advantages:

  • They have a lot of money

  • They can lend money fast

  • They can help with advice on money management (sometimes)


Banks2
Banks

Problems:

  • Sometimes won’t lend you money when you think you need it

  • Different concept/acceptance of risk

  • Possibly inappropriate for new venture financing

  • OK for on-going business activities & support


Banks3
Banks

What you need to do:

  • Develop good personal relationships

  • Keep them informed – even bad news – no surprises

  • Meet regularly to update on progress

  • Understand competitive banking offerings


The financing bottom lines
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 good

    • Revenues are very valuable

    • Good ideas are just ‘hot air’

  • Go to the right source at the right time with the right story

  • Get an introduction



Angel funding

Toric Ltd is a new business with a patented technology to reduce ‘jitter’ in computer chips

Toric needed about £500k funding for development and launch (we thought!)

Planned to raise a first ‘tranche’ from the business angels in GEIF

Made presentation and angels funded about £375k

Angel funding


The deal
The deal reduce ‘jitter’ in computer chips

  • We showed a business plan that had us:

    • Develop our technology for a number of products and markets

    • License the technology to a number of chip makers

    • Start earning revenues in about 18 months

    • Very profitable by year 4 -5

    • Sale or equivalent of business for about £20 million in year 5 or 6

    • Pre-money valuation of about £2.0 million

    • Investors could expect about a x10 multiple


Questions issues the angels had
Questions/issues the angels had reduce ‘jitter’ in computer chips

  • Will the technology work in these applications?

  • Will the chip companies license the technology?

  • Will they pay the royalty planned ( 4c per channel)

  • Are the sales forecast realistic?

  • Does the management team have the necessary experience?

  • Don’t do follow-on VC round – keep with ‘angels’


The reality
The reality reduce ‘jitter’ in computer chips

  • Everything took much longer and cost more than expected:

    • Technology development

    • Sale of licences

    • Development of applications

    • Entry to market

  • As a result:

    • The directors had to ask for 6 further rounds of funding

    • Competitive technologies have developed

    • In the end we offered shareholders the option: more funding or we close

    • January this year the business was ‘de-listed’


  • Vc financing
    VC financing reduce ‘jitter’ in computer chips

    • Alphamosaic was set up in 2001 – video processing chip technology

    • Initial angel funding of about £1.5 million – plan for later round VC financing

    • In 2004 a big deal possible with Samsung but need investment for product development

    • VC firm invests £8 million in the firm

    • Term-sheet negotiated

    • Deal – they plan to sell Alphamosaic soon


    The exit
    The exit reduce ‘jitter’ in computer chips

    • Alphamosaic sold in 2005 to Broadcom for $123 million

    • VC firm takes about $112 million out of the deal

    • The angels get about x2 their investment in 5 years

    • The VC firm gets x9 their investment in 1 year

    • The founders get ‘a mill or so’ each


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