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 Writing and preparing a grant application – how to ensure success

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 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 1.Their money back 2.A lot more money in addition 3.A clear understanding of WHEN they will get their money back 4.An understanding of the risks involved 5.An understanding that YOU know what the risks are and have plans to reduce the risks 6.An understanding that you know how to get your product to the market

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 you 3 F’s/ grants angels series A VC series B VC seedfunds series C VC/ private equity £ 10 k 50 mio 10 mio 1 mio 500 k 100 k

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 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

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

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

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 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 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 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 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 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 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 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 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 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

Banks Advantages: They have a lot of money They can lend money fast They can help with advice on money management (sometimes)

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

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 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

The reality of deals

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

The deal 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 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 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 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 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