RSS feedsAt first sight, the so-called equity gap appears to be as wide as ever, despite various well-intended attempts to fill it. Venture capitalists, by and large, won’t look at companies wanting less than £2m. The most common sum invested by business angels is around £50,000. So what do you do if you need a sum that falls somewhere in the middle?
The Small Firms’ Loan Guarantee Scheme is one answer. It covers up to £250,000 and should be used as a first resort. But what happens if you have used up your entitlement, want more than this amount, or simply want to avoid loan finance?
Don’t worry – there are sources of equity finance out there. Except for huge private equity deals, most investment is done locally. If you look around, you’ll find someone in your business community who’s a ‘maven’ – an expert on local sources of finance.
In certain areas, there are ‘soft VCs’ set up to alleviate economic problems that won’t reject six-figure deals. Venture capital trusts are supposed to lend amounts of the size you need. Ask around to see which of them is active in your area. Angel networks – also local – can put together deals, or may come up with ‘archangels’ prepared to lend more.
But supply is not the only problem. Lenders say that many of the people approaching them don’t present a sufficiently convincing case. The businesses do not appear to be investment-ready. But what do the lenders mean by this?
First, applicants for finance don’t understand investment – what investors want and how they can offer it. Anyone taking equity expects a serious plan with an exit in mind in the next few years. Other requirements differ. Angels often want the chance to get involved in a lively, exciting business. Soft VCs will want to see social benefit, such as jobs and contracts given to local suppliers. Ordinary VCs and VCTs simply want growth.
Entrepreneurs are often averse to equity investment, as their desire to retain control holds fast. While they are right to be cautious, they need to be persuaded that the right amount of equity, given to the right investor, will make the business grow. The finance director is the right person to do this persuading.
The second aspect of lenders’ complaints is about the companies themselves. Too many business plans are either not up to scratch, or are presented in such a lacklustre way that investors are put off. No company with an FD should fall into the first category.
You should present your plan with the entrepreneur, letting them enthuse about the business and the team, then step in with the financials at the right moment. Make sure you rehearse the presentation, too. You don’t have to put on a Broadway show, but you do have to be clear, positive, accurate and concise.
This ‘supply-side’ approach to the equity gap is not new. The problem was first identified and addressed in Australia: the State of Victoria’s ‘investment readiness’ programme is still regarded as the model for investee education.
In 2001, Colin Mason from the Hunter Institute and Richard Harrison from Aberdeen University produced an influential paper on the subject that convinced the DTI there should be similar programmes in the UK. Six trials were run by regional development agencies between 2002 and 2004 and they appear to have worked. The programmes should be rolled out around the country soon.
In the meantime, the best thing a small business can do to make itself investment-ready is to have a proper FD – what we refer to as a ‘finance cornerstone’. This person does not have to be full-time – there are a number of businesses offering part-time FDs.
So, the equity gap turns out to be something of a myth. A company with a good business model and business plan, a finance cornerstone in place and which can present their plan in a professional and confident manner, will not find it impossible to access capital.
Chris West is one of the authors of Finance on a Beermat, published by Random House at £14.99
Investment Readiness on a Beermat
• What is the elevator pitch of your business? What benefit do you provide
and why should people buy it from you rather than someone else?
• Has the business got a proper finance director? A part-timer is fine
• How thorough is the business plan? How realistic are your sales forecasts and
roll- out timetables? Too many plans are dreams plus some financials stapled to
the back
• Don’t make the mistake of thinking a long plan is a good one
• How well do you know people in your local investment community?
• What kind of investor are you looking for? An angel/mentor or a ruthless VC?
• Does the entrepreneur understand the different types of finance, and have they
decided which one they want?
• Have you worked out your pitch and rehearsed it?
