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 BVC

seedfundsseries 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

BanksWhat 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

BanksAdvantages:

• They have a lot of money

• They can lend money fast

• They can help with advice on money

management (sometimes)

BanksProblems:

• 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