Finance for New Ventures Institute of Chartered Accountants 30 th - PowerPoint PPT Presentation

Finance for New Ventures Institute of Chartered Accountants 30 th September 2013 David Gill St John’s Innovation Centre

Development Stages & Funding Prototyping Commercialisation Initial Ideas Feasibility Own cash; friends, family & fans Grants (UK government, EU, Foundations) Bank Loan Business Angels Venture Capital Consultancy or other earned income to live on Real Sales!

Net Lending by UK Banks to SMES 2013 - £bn 14.0 12.0 10.0 8.0 6.0 Gross Lending Repayments Net Lending 4.0 2.0 0.0 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 -2.0 Bank of England – July 2013 -4.0

Risk & Reward – for Banks Low risk lenders 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 Need income to repay capital and service interest

Lending Products Asset Finance: Leasing: tax advantages Debtor Finance: factoring/discounting Mortgage Finance Bank Lending: Term loan Overdraft: control issues Government Schemes: Enterprise Finance Guarantee Regional Loans: Local variations

Enterprise Finance Guarantee (EFG) • 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

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.

BVCA UK Investment by Stage – 2006/12 (£M) 8000 7520 7000 6000 5270 5000 4752 4000 3134 2968 2950 3000 2677 2269 1886 1836 2000 1751 1653 1657 1471 1285 1132 1137 1133 1110 1070 1042 1029 987 947 1000 533 486 454 434 359 347 343 313 304 212 143 0 2006 2007 2008 2009 2010 2011 2012 Early-stage/Venture Expansion Replacement MBO/MBI Other Late Stage

BVCA 10-year Returns to End 2012 - IRR% 24.1 25 20 16.9 16 16 15.7 15.4 15 15 13.2 10 5 0.1 0.1 0

Angel Industry Experience Affects Outcome 60 50 40 % of Exits 30 20 10 0 less than 1X 1X to 5X 5X to 10X 10X to 30X more than 30X No industry experience Some industry experience NESTA 2009

Due Diligence Affects Outcome 60 50 40 % of 30 Exits 20 10 0 less than 1X 1X to 5X 5X to 10X 10X to 30X more than 30X Less than 20 hours More than 20 hours NESTA 2009

Board Involvement Affects Outcome 60 50 40 % of 30 Exits 20 10 0 <1x 1x to 5x 5x to 10x 10x to 30x >30x Not on board On Board NESTA 2009

Enterprise Investment Scheme 82% of angels have used Enterprise Investment Scheme 57% of investments made under the EIS • All shares to be paid in full in cash when issued • Full risk/ordinary shares • Investment directly into company or via an EIS Fund • Income Tax relief of 30% of cost of shares available • Many rules and exclusions • Capital Gains Tax for higher rate tax payers 28% – but can be ZERO under EIS • Approval can be lost if rules are broken later

Seed EIS – Since 2012 • SEIS investors can invest up to £100,000 per year • Spread over several companies • Any one company can raise up to £150,000 in total via SEIS investment • Investors cannot control the company or have more than a 30% stake • Investors can receive up to 50% tax relief in the tax year the investment is made, regardless of their marginal rate

See Also • Corporations with investment funds • Like VCs: ring-fenced activity, strong sector focus • Unlikely to create conflict of interest • Will have clear process and ‘ rules ’ • Venture Capital Trusts • Listed vehicles, tax-effective for investors • Can invest < £1m in a qualifying company • Individual investment < 15% of VCT assets • Gross assets of investee < £7m (£8m post investment) • If investee becomes quoted, 5 years grace

The Pros & Cons of Grant Funding The good things 1. Cash provided often for risky/early endeavours 2. Unlike debt, does not need to be repaid (except in default) 3. Founders 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

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

Patent Box • 2013 on: favourable tax regime for IP profits • Tax rate 10%, phased in over 5 years to 2018 • Company must own/exclusive rights to IP • …be exploiting the IP commercially • Complex, multistage calculations! • For new and existing patents • Include profits up to 6 years before grant • Must have robust accounting systems

Crowd Funding ONCE: 3 rd Sector & Arts, small ticket, debt NOW: commercial, bigger ticket, equity also Variations and derivations from peer-to-peer lending: • Efficient platforms for matching lenders & borrowers • Usually unsecured (but personal guarantee) • ±7-9% margins, ±20% acceptance rate • Exponential growth from low base, hard data elusive • Buyers beware! Regulation from FCA expected in 2014 • US equity market $123M in 2012 ( Daily Crowdsource ) fundingcircle, thincats, syndicateroom ….

Government Business Bank • Announced 9/2012, live 2014 • Not a high street bank, but ± German KfW • Support new debt/equity finance for businesses • Increase supply through new finance providers • Improve provision of long term finance • Bring together existing business finance schemes • Simplifying access for businesses • Increase awareness of available support and advice to high growth businesses

The Financing Bottom Lines • You must minimise unnecessary risk to your investor • 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, sales most persuasive evidence • Go to the right source at the right time with the right story • Use targeted introductions Remember : NEED FOR MONEY ≠ INVESTMENT READINESS

Bargaining Power Based on Time to OOC Highest Relative bargaining power of entrepreneur versus sources of capital Nil -12 -9 -6 -3 OOC Time to Out of Cash (months)

Questions? Exit Capital needs IPO/Trade Sale HIGH RISK Expansion Capital “Real” Venture Capital Co- investment Funds Seed Funds/E CFs Business Angels Friends, Family, Grants LOW RISK Neighbours Maturity/time PRE-SEED SEED START-UP EARLY GROWTH SUSTAINED GROWTH