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Routes To Raising Finance Final Hardcopy
1. Topical tips
Routes to raising finance
Source and types of finance
In simple terms, once you have exhausted friends
Introduction and family, there are 3 sources of finance for an
early stage business:
•
•
The bank
Business Angels and Venture Capital
The question of where to find funding to start or • Government grants and incentives
grow a creative digital or innovative technology There are essentially two types of finance: debt and
business is a question we frequently hear at the equity. They are very different and will have
moment, as it’s on the top of the agenda for many contrasting effects on your business as it develops
and grows. Debt relates to money lent to a
entrepreneurs and CEOs. business, which is then repaid with interest over an
agreed period. Equity is finance invested in the
With the political focus firmly on the private sector business in return for a share in the ownership of
the company. Generally speaking the cost of debt is
for generating new jobs, as well as an increasing lower than equity finance, because the risk is
number of entrepreneurs keen to emulate the usually lower.
success of companies such as TweetDeck, Last.fm
Government grants and incentives represent
or Mind Candy, locations such as the Silicon another type of finance that many companies
Roundabout in East London have come to benefit from in their very early days, and are often
prominence. an initial source of funding. It is this type of funding
that the Government is currently keen to promote to
support the growth of new enterprise.
The first challenge is knowing what funding is
available, before addressing the issue of how to go The Bank
about securing it. To make matters more difficult,
sources of funding change over time, and this has Banks lend against predictable revenues and profit
streams, and to demonstrate this, banks will ask for
been particularly the case recently for Government a detailed business plan, setting out in words and
backed funding. numbers the businesses current and forecast
revenues, costs, cashflows, and the detailed
assumptions that have been made.
In this article, we aim to clearly set out the principal
sources of funding available to creative digital or Since there is often a lack of a track record, and
innovative technology businesses, explain some of because there are few assets, especially in a
creative digital business against which to lend
the terminology, and provide some practical against as security, early stage businesses usually
guidance on where to find the different types of struggle to obtain finance from the banks. For their
part, the risky nature of start-ups makes it hard for
funding. banks to lend in the early stages.
2. Routes to raising finance
However, a bank can help in other ways: over 5 years. Often they are entrepreneurs due diligence on the business.
themselves, and bring to the party both
Overdrafts, secured and unsecured loans funding and experience. The process can easily take 3-6 months. They
will be looking for high returns on their
Whilst few start-ups have any assets that A typical amount advanced is in the region investment, usually 3-5 times their
the bank will accept as security, if a of £50,000, although may be as low as investment and an exit route in 3 to 5 years,
business owner is willing to put personal £20,000 but as high as £500,000 or more. maybe to the secondary market.
assets up as security, such as his or her
home, the bank may offer an effective As with an Angel, a Venture Capitalist will be
sized overdraft or a secured loan. looking at the strength and experience of the
Unsecured loans may provide some limited The EFG Scheme facilitates management team, the market potential and
finance up to £25,000, but are expensive. lending that would not the scalability of the platform. Owning unique
IP, or being first to market is also very
The Enterprise Finance Guarantee
otherwise be available. attractive. At this stage, the VC will anticipate
Scheme that its funding will be required to enable the
Every angel is different in terms of risk, product to be tweaked, additional staff and
In the UK, it’s worth being aware that return, involvement or expertise, so it’s resource to be hired, and further marketing.
banks can make use of the Enterprise about finding the right angels to work with By the end of the investment period there
Guarantee Scheme (EFG). This is a and ones that work in the Technology & should be a business which can stand on its
targeted measure intended to facilitate Media sector. Asking your industry contacts own.
additional commercial lending by the banks and advisors is a starting point, attending
to viable Small & Medium sized Enterprises industry presentations, seminars and This type of funding is often called “Series A”
(SMEs) unable to obtain a normal networking events will also help. funding. Further funding, known as “Series
commercial loan due to having no or B” and often in excess of £5m, would enable
insufficient security. Since Angels are investing their own the business to scale up, and may well
money, they can be more cautious, but it require a change in management as the
The EFG Scheme facilitates lending that does mean they can move quickly with a business matures, since growing a business
would not otherwise be available providing minimum of process and due diligence. is a very different skill from starting a
lenders with a partial Government However, still expect to have a 3 year business.
guarantee for 75% of the loan value. The business plan.
lender is still responsible for the decision As with Business Angels, there are lots of
as to whether or not to lend, and can ask Usually they will want to see a great VC’s around, and your advisor should be able
for a personal guarantee for the remaining management team with a strong track to help identify those VCs that have a
25%, although not as security over a home. record and specific expertise. Whilst they particular interest in investing in your size
There is of course a cost, with a premium do not necessarily expect to see a finished and type of business.
of approximately 2% payable per annum product or game, or revenues, they will
over and above what the lender charges want to see there is clear vision and Super Seed, VC Seed, Private Equity
which is payable to Department for strategy. Their money typically will often
Business, Innovation and Skills (BIS). help develop the product for market, help Other terms often heard are VC Seed and
strengthen the team and help attract VC Super Seed, and these plug the gap between
Invoice financing funding down the line. Seed and VC.
Banks also use what is known as invoice London Business Angels Private Equity is for larger amounts still, and
financing. If you can show the bank you (www.lbangels.co.uk) is one example of a is simply VC funding on a grander scale.
have a regular and predictable cash flow, Business Angel syndicate, offering Blackstone and Apollo are two well know
for example from a particular contract, they £100,000 to £1million to high growth, examples.
may offer you a percentage of that cash innovative and scaleable businesses from
flow as an overdraft facility. across the UK for a 3-5 year period. They Large corporate (and some smaller
have a particular focus on technology (web, corporates)
mobile, software, medtech, cleantech), and
Business Angels and Venture businesses have to be registered for EIS to
Capital Another source are investment funds set up
be of interest (see further details below). by large corporates – these are really a form
Other networks can be found through the or seed or VC funding. For example, both
Family and friends fill in the gap at the British Business Angel Association Google and Orange have established such
lower end of the funding equation, typically, (www.bbaa.org.uk/member-directory). operations.
before business angels, VC’s or banks are
involved. Venture Capital Google Ventures, which was founded in
March 2009, is broadly interested in start-
Business Angels and Seed capital Venture capital represents a step up, and is ups in industries including the consumer
a subset of Private Equity. Amounts internet, software, hardware, clean-tech, bio-
Business angels are private, high net-worth advanced typically range between tech, health care and others. They invest
individuals who are prepared to invest their £500,000 and several million, where the amounts ranging from tens of thousand of
own funds in private companies for VC provides funding in return for equity dollars to tens of millions of dollars,
convertible debt or an equity stake in a and/or loan capital. depending on the stage of the opportunity
business. Sometimes they will operate as
and the company’s need for capital.
part of a syndicate and often are members Venture capitalists are investing the money
of a network to get access to potential of others and on behalf of the VC firm, and Similarly, Orange’s Innovacom invests
deals. Since the risk is high at this early therefore prior to any investment they will between €2 million and €10 million over
stage, they may expect 10 times returns perform legal, commercial and accounting several rounds, usually starting to work with
3. Routes to raising finance
a start up during the first round of funding. Although it is winding down in its current and must hold an investment for at least 3
One notable and interesting source is US form in line with the Regional Development years.
mobile game developer, TinyCo, which has Agencies, from March 2012 Business Link
recently set up a $5 million fund devoted to will be an online based advice platform, This means an immediate investment of
finding, funding and marketing promising supported by a call centre. £100,000 attracts an income tax deduction
games for iOS and Android, providing up to of £30,000 for the investor. There are also
$500,000 for approved projects. The Technology Strategy Board, which is reliefs for losses, capital gains and
www.tinyco.com/tinyfund. sponsored by BIS, is a further source of inheritance tax. For these reasons, it will
funding. It runs various national and help a company attract investment if it
Business Growth Fund international competitions for funding at qualifies and is registered for EIS.
This is a recently launched £2.5 billion fund any point in time, such as the competition
supported by 5 of the largest UK banks, entitled the “Internet of things” offering For Venture Capital Trusts (VCT), the
and offers equity investment finance of £2- £5m of funding, and the Tech City qualification criteria is the same as for EIS.
10 million for small and medium sized Launchpad, offering £1m to creative and However there are a number of criteria that
businesses with revenues of between £10 digital businesses in East London. differ, such as there being a maximum
million and £100 million investment of £200,000 per annum, and a
www.businessgrowthfund.co.uk. Trade bodies can also help provide 5 year holding period.
direction. At Kingston Smith we are
Government grants and tax members of numerous trade bodies, Notably since the March 2011 Budget the
incentives including Intellect, the Internet Advertising rate of income tax relief for both EIS and
Bureau and the Design Business VCT is now the same (previously it had been
The Government has a wide array of
Association. Membership is often available 20% for EIS), meaning one of the principal
different grants and incentives available.
at a very reasonable price for a start up or advantages of VCT has disappeared.
Whilst it is keen to promote these to show
small business.
its support for new starts ups and young
Research & Development (R&D) Tax
entrepreneurial businesses, half the battle
is knowing what the options are and where Tax incentives Credits are a further source of tax benefit.
to find them. This is made all the more There are various forms of tax relief in the R&D is a key driver for productivity growth,
difficult because this is in a state of flux as UK available to an investor and investee. and for this reason the Government is keen
the Government reorganises its The most common reliefs are those to encourage greater investment in
departments itself and closes various available to investors in companies innovation. Whilst the greatest value of tax
quangos as part of its austerity measures. registered under the Enterprise Investment credits benefit the pharmaceutical industry
Scheme (EIS) and Venture Capital Trusts in the UK, many technology companies also
(VCT). For the investee companies, benefit.
The primary reason for Government grants
Research and Development (R&D) tax
and incentives are job creation and tax
credits are available if they incur qualifying R&D is defined to take place where there is
revenue generation. Secondary reasons
R&D spend. a project with activities that directly
are to foster innovation and build the UK as
contribute to achieving an advance in
a global centre for creative enterprise, and
science or technology though the resolution
ensure growth is evenly spread across the
of scientific or technological uncertainty.
country through development zones. Some To qualify for investment
may well argue how effective this is right
now, however that is another discussion. under EIS, a company must In order to qualify, until 31 March 2012,
the expenditure must be on qualifying
have fewer than 50 projects and be of a revenue nature, with
Government help can be broadly broken
down into grants and incentives, and tax
employees and its gross spend of at least £10,000 in an accounting
assets (before investment) period. This can include qualifying
reliefs, and these are discussed below. It
employee costs, consumables and utilities.
can also provide other advice, support and must not exceed £7million.
training, and of course is keen to ensure
The scheme allows for qualifying R&D costs
information is available on line.
The Enterprise Investment Scheme (EIS) is to be enhanced for corporation tax
a series of reliefs designed to encourage purposes. So for an SME (broadly a
However, it is important to understand that
investments in small unlisted companies. company or group with less than 500 staff,
because a business has been given
By registering, which is relatively straight and either revenues of less than €100
Government funding, it does not mean it
forward, a company is increasing the million or balance sheet gross assets of
has a better chance of subsequently finding
likelihood of securing an investment, since less than €86m), this means for every
Seed or VC funding. It might also not be a
an investor will benefit from the tax reliefs £100 spent on qualifying R&D costs, 200%
surprise to hear that government incentives
available. For many investors, they often is allowable as a deduction for corporation
tend to take longer to materialise, so an
require a business to be registered before tax purposes, i.e. a deduction of £200. This
entrepreneur should be prepared for a wait.
they will make an investment. increases to 225% or £225 from 1 April
Grants and government incentives 2012. Alternatively, a company may
To qualify for investment under EIS, a choose to claim a payable R&D tax credit
Grants are aimed at stimulating regional
company must have fewer than 50 through its corporation tax return for an
investment, to encourage early-stage
employees and its gross assets (before immediate cashing inflow.
research and development or to achieve
investment) must not exceed £7million.
specific policy objectives.
These limits increase to 250 employees Other proposals for enhancing the relief
Investors can benefit from a 30% income effective from 1 April 2012 are currently
To identify sources of funding, a good place
tax relief for investments up to £500,000 the subject of a consultation.
to start is the Business Support Finder
per annum (post 6 April 2012, £1million),
service at Business Link.
