RSS feedsGraham Apperley, Horwath Clark Whitehill
Before considering sources of funding and the issue of giving up equity, a company must devote time to developing a strategy. If the company has a clear idea of what it wants to achieve, and where it wants to be in the market, the issue of working capital will become clearer. When and how much money is needed, where the money should be spent, and what are the expected returns are all issues that should be addressed.
The plan should also incorporate profit and cash flow forecasts. These will enable the company to approach banks and other commercial lenders for finance. If Alfie has assets to guarantee a loan, or could raise some capital himself, then a commercial loan possibly through the small loans guarantee scheme may be available.
Once these channels have been exhausted, an outside investor could be an option. Any potential investor should ideally bring more than just capital to the venture. A genuine belief in the business and broad agreement on the direction the business should take are important.
Experience and skills are also valuable attributes in any potential investor. Finally, there needs to be an investor exit route.
While using an outside investor may not be immediately attractive, if it helps the business grow more successfully, then it may be the best way forward.
David Blacher, Baker Tilly
First are the basics right? Alfie should address issues such as VAT registration, payroll setup, PAYE and NIC registration, and accurate monthly management accounts. Appoint an accountant who understands startup businesses and can guide him through these issues.
Debt is the cheapest way to raise money and should be the first avenue to explore as it avoids giving away valuable equity. Find a bank that understands what the business is about – he should be able to secure £50K through an overdraft/
loan combination, possibly without personally secured guarantees if his business has assets against which borrowings could be secured.
If further finance is required, consider the equity route, but don’t give shares lightly, or part with them too cheaply. Investigate whether the company qualifies for tax EIS relief. If so, Moblog would be an attractive investment to external investors, who can benefit from tax reliefs when investing, selling or even losing money on the business. Obtaining EIS relief can be complicated.
Friends and family may also be willing to invest. This could help avoid intrusive third parties. Failing that, it should be possible to obtain business angel or private equity house backing. However, they will want a return on their investment and will be monitoring the business closely. Get an investor prepared to contribute cash and time – someone with sector expertise, who will provide good strategic advice.
If this business has the potential Alfie thinks it has, consider taking it to market via an AIM float. All will depend on its track record over the next few years, the management team and whether the market recognises the growth potential that additional funding would bring.
Charles Simpson, Saffery Champness
It is not clear whether the company’s technology is, or can be, protected. If not, it is important that Alfie moves quickly to exploit the ‘first-mover’ advantage he currently possesses. The presence of an already active online community is perhaps his biggest asset, but barriers to market entry for potential competitors may be low, and he must move quickly to build, enhance and propagate the Moblog brand name before rivals emerge and catch up.
Alfie has taken some initial risk out of the equation through the revenue streams that have been created by licensing Moblog’s technology, but he now needs to drive traffic to the site and tap into more sources of advertising revenue.
Alfie has identified the need to implement a vigorous marketing campaign and he should consider appointing an experienced marketeer to oversee this, as well as further investment in the company’s brand. He may also need to strengthen his management team in other areas and may need to offer a share in the success of the business to bring quality people on board.
All this costs money, but in his approach to financiers, Alfie has a reasonable growth story – Moblog is already profitable and his business model potentially lucrative.
He should consider approaching an equity provider such as a business angel, particularly one with a track record of helping build startup companies. As well as finance, the right shareholder can potentially provide invaluable expertise, support and the contacts to help Alfie grow the business.
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