Partner Article

Raising finance? Plenty of choice

Jonathan Gold, director of Rivers Capital Partners, looks at the options for raising finance in the North East.

Is it a good time to start a business? That has to be up to you; however, for the unprepared it’s a tough time to raise finance as the competition is strong from other businesses seeking cash. Yes you are in competition when raising cash!

Actually, there are probably more sources of cash for business, start-up, growing or just existing businesses than ever before in history. Just search the net they are everywhere! Please don’t tell me you can’t find Funds or investors, all the main ones have websites and there are a number of great portals such as North East Access to Finance www.nea2f.co.uk right here in the North East of England.

So what’s the problem? Well there might not be one, if you take the time to consider a simple fact, not all cash is the same. The source of finance matters more than just how easy it might or might not seem to be to get access to it in the first place. It’s what conditions, help and return required that come with it that is so crucial and often ignored until it’s too late.

Let’s take a step back and consider what’s caused the growth in sources of finance. Government has been intervening in the start-up and growth capital for almost 30 years and you can in fact trace the term “equity gap “back to the 1930’s as a subject discussed in high places.

There are still of course the traditional venture capital Fund Managers investing although with a few exceptions the only Funds investing in startups and early stage are Funds containing intervention cash from the Government of the EU, see above. In any event there are only some 160 such venture firms in the country and, according to the BVCA (British Venture Capital Association) they invested in 489 businesses in 2011 with £492m of capital.

Another source of activity has been the growth in Business Angel investor, or individual rich person looking for a high return that can be had from a small number of high growth businesses. Estimates vary but the figure of 2000 to 5000 Angels in the UK seems a plausible estimate, at least according to NESTA and the BBAA. The amount of capital they invest is also not well known, estimates from the two above organisations range from around £1bn down to around £100m annually. To be clear, the smaller number in each case is from the BBAA (British Business Angels Association) which is of course a membership group and the numbers come from their members only, or a sample of the total market.

So why am I saying cash is more available than ever? Well, perhaps I just need to cover the banks at this point. At the risk of being unpopular, but realistic, the banks are not risk capital providers and should not be. That’s what got them into trouble in the first place. All finance is a risk verses return equation and if as a bank you are only charging a small interest rate you can’t take a high risk. So banks are not by definition suitable for startups, never were really.

That does not mean banks should not lend to small business. People forget that although the banks are not lending as much as they were to business the UK bank lending market is still huge by comparison with an additional £70bn being made available by the Government to boost lending from Bank. Which, if you look at my points above puts the equity capital, venture funds and Angels into context.

The relatively small vc market is also a natural result of the simple fact that only a small percentage of start-up businesses have the potential for true high growth. Many more small businesses will start and grow but won’t be able to make the returns needed by venture investors. The reality is that, according to a recent US survey, only around 10% of software and Internet starts ever turn over more than $100,000 a year. So of course the small business sector needs bank lending instead as it only expects a small interest type return.

So what’s changed then? Where has the growth in finance come from? In part it’s caused by the poor interest and other returns available to richer investors and Angels which has resulted in people seeking alternative investments. However, I feel it’s the Internet and the ease at which information, email, websites and now funding platforms on the web can carry information on potential opportunities and businesses that would never have reached an investor.

This is far wider and more significant than crowdfunding and Peer-to-Peer lending itself which is new and growing too. Any individual with an idea can now transmit this in great detail to anyone and receive an assessment, meetings request or even investment decision rapidly. Over the last 20 years entrepreneurs have become more visible to a greater number of potential investors resulting in more cash being available.

Now the ultimate expression of this is crowdfunding and similar web based platforms where anyone can pitch up an idea to investors. Once again estimates are varied but Crowdfunding platforms are growing to the level of Angel activity at least. One example is “Crowcube” which reported £5.6m invested from a total 30,000 investors on its platform which by February this year had funded 39 businesses. Not a lot really but impressive none the less. Oh, and in case you’re wondering the average investment in a single business was around £139,000. A recent survey in 2012 identified 452 crowd-source finance platforms worldwide, although I would stick to UK or USA sites unless you get a reference from someone.

Interestingly, that compares with my own VC company, Rivers Capital which has invested £4.5m alongside a further £2.5m from other investors into 34 businesses in roughly the same period. In the North East we are one of 5 vc investors, the rest can be found via the North East Finance website www.northeastfinance.org or many other signposting sites.

So back to my theme; in looking for investment it’s not the ease of access to the cash that should be your priority. Rather where it comes from should be your focus and concern or more to the point what conditions and help or otherwise that comes with it and what the investors want.

Venture Capital managers are professional investors who have a client of their own, they look after someone else’s cash for a fee remember, and although they take risks to make a high return they are methodical in their investment process, decisions, conditions and controls they use. This is not all bad. Investment from a VC can still open doors and it is in itself a vote of confidence in your business. Even a rejection is worth having if you learn what was wrong and can improve for the next investor. VC’s can also spend time and give advice and help you build and eventually sell your business, assistance that can be very valuable.

Business Angels too can add a lot to your business. However, they are not managers of money and with notable exceptions are not professional investors. I’ve tried to summarise what’s out there if you’re considering raising money. Do investigate them all as its you who has to live with the terms and investors once the deal is sealed, but there is cash out there for people who know what they need and bother to learn what investors want.

This was posted in Bdaily's Members' News section by Rivers Capital Partners .