2015 Finance in the South West Segment 2 - Equity, Grants and Investment ready - facing reality

Editor's Notes

• #5: Now you may or not agree with the Boris’s criticism of banks - depending on whether you are a banker or not - but it is a fact that certain fund raisings are what bankers called an equity proposition. This list while not comprehensive is a few examples of what is not in the “comfort zone” of bank lending though it is not to say that divisions in banks like for example Santander Growth Fund could fund business with these characteristics in certain situations, but it is more likely to be equity propositions. Ambitious growth – often requires significant up front capital and a degree of risk and so may not be repayable in the short term. Lack of security – ultimately the main stream banking model does not work if they suffer capital losses – the interest rates they charge do not allow it. So if the lending goes wrong they need to cover their capital by selling an asset they have taken security over. Equity lenders normally accept that their security will be minimal. Lack of track record – increasing the risk and therefore the return that an investor requires, moving it into the realm of equity. So you turn to equity funding. But equity funding is not just about the money, the equity money allows you to drive growth and this is the key. Equity funding is risky and to compensate for the risk the funder needs a higher level of reward and in nearly all cases this is generated by growth and allowing the company to achieve its growth potential. It also brings: Mentoring – experienced investors with a track record of growing business: Discipline – you will for example be required to produce monthly management accounts and understand them them. Introductions – connections, sometimes overrated, but often very useful; and Further capital – for both positive and negative reasons.
• #6: Now you may or not agree with the Boris’s criticism of banks - depending on whether you are a banker or not - but it is a fact that certain fund raisings are what bankers called an equity proposition. This list while not comprehensive is a few examples of what is not in the “comfort zone” of bank lending though it is not to say that divisions in banks like for example Santander Growth Fund could fund business with these characteristics in certain situations, but it is more likely to be equity propositions. Ambitious growth – often requires significant up front capital and a degree of risk and so may not be repayable in the short term. Lack of security – ultimately the main stream banking model does not work if they suffer capital losses – the interest rates they charge do not allow it. So if the lending goes wrong they need to cover their capital by selling an asset they have taken security over. Equity lenders normally accept that their security will be minimal. Lack of track record – increasing the risk and therefore the return that an investor requires, moving it into the realm of equity. So you turn to equity funding. But equity funding is not just about the money, the equity money allows you to drive growth and this is the key. Equity funding is risky and to compensate for the risk the funder needs a higher level of reward and in nearly all cases this is generated by growth and allowing the company to achieve its growth potential. It also brings: Mentoring – experienced investors with a track record of growing business: Discipline – you will for example be required to produce monthly management accounts and understand them them. Introductions – connections, sometimes overrated, but often very useful; and Further capital – for both positive and negative reasons.
• #7: So how does equity invest and how do they get their return. Well there is no hard and fast rule and the beauty of equity is its flexibility. However a commonly used structure is for the equity investment to be split into: Shares – normally equity looks to take part ownership though their cash proportion of their investment into shares is low, their anticipated return from their share stake should make up the bulk of their return; and The majority of their investment is into debt that carries an interest rate that would be significantly higher than the bank. To balance the risk of their investment a broad rule of thumb is equity invests if they can see a way of making a return in excess of 20% per annum over the life of their investment. This equates to some three to fives times cash return but the cash returned is driven by the timing of their exit. Equity achieves the vast majority of its anticipated return on exit. Yes they take interest and potentially capital returns on their loan but it is the exit when they sell their shares and have their loan repaid that they see their return. Therefore if the exit after three years then their cash return will be much lower than say 5 years but their annual IRR return would be broadly the same. I have highlighted the equity risk and over a portfolio of investments the fund manager does not expect to achieve a total return of more than 20%. He gets a fat fee if he does but in reality he expects some to go bust, some to wipe their faces and some to give very good returns. He just doesn’t know which one is which on entry but hopes to smooth his average return out.
• #9: Finally sources of funding a very brief overview as some of these are lining up to speak to you. Friends, family and fools. A vital source of start-up in particular. I mention the last as you all seasoned equity investors know – you don’t always back winners and the key to equity investment is a portfolio of investments. You do therefore need to consider before you accept an investment into your latest great idea, where the funds are coming from, the experience of the investor making the investment and their potential reaction should things get “sticky” or you need to bring in other sources of equity.   Virtual networks such as Crowdcube based in Exeter that allow a collection of individuals to invest smaller sums often into a number of investments so spreading their risk, but for the investee companies to access capital at a level that was in the past often very difficult to achieve due to the size of the funds needed. These investments are often EIS qualifying further reducing the investors risk. Angel networks where high net worth individuals invest larger sums of money either jointly or as part of a consortium occasionally with government co funding and look to take a non executive role in the company giving their general business experience and specific business advice. One example is South West Angel and Investors Network a Bristol based network that matches investors and investees by providing advice and guidance to the potential investees before organising regional investment pitches to find backers.   And finally venture capital and private equity investors essentially the same as not many can agree on their differences, who are professional investors investing other peoples money. They are seeking to make larger investments in more developed companies even taking controlling stakes that are seeking to take their proven business model to the next level. Active amongst these in the south west and speaking to you today are, Business Growth Fund and Piper.   Thank you for your attention and I will know hand over to Michael Wilkinson of Crowdcube.
• #37: Thank you, it’s great to be here What I’d like to talk about today is crowdfunding, and in particular equity crowdfunding and what crowdcube is about
• #38: Leading equity crowdfunding platform Headlines- why cc exits Solve problem – early stage companies access to business – SME – companies that the majority wrk for Hot bed of innovation – being starved of finance to allow growth and innovation
• #39: In simplest terms, we allow everyone to act as an armchair dragon 1 bloke put in £100k, why not 10,000 people invest £10 All familiar with dragons den – dramatization Designed to compliment to financial ecosystem – not a replacement.
• #40: As long as can prove you can understand the risks – you can invest – set £10 minimum to make accessible If you have a network as most of us too, probably runs into the 100’s, maybe 1000’s– know you and interested in your business to get involved for £10 – great way to raise finance For more mature businesses, brands we offer retailmini bonds. Historicall john lewis have been a big fan of these as a way of raising money for expansion. We’ve worked with the eden project, river cottage café as well as the burrito restaurant chilango and taylor st barrista – a london coffee chain Venture fund – don’t necessary have time or inclination to research/choose investments. Venture fund – braveheart ventures – well known fund manager Mini-bond – debt investment – slightly lower risk, designed for larger more mature companies. Can offer return on set rate of interest over pre-determined time period.
• #41: This is what investors see when they come onto a pitch Key thing – interaction. Mechanism to raise capital, and also awareness. Conversation between investors and entrepreneur=key Click invest but don’t have to accept terms. Typically balance of power is in the favour of the investors Here we believe a more level playing field exists- allow offer of ‘x if you drop val to y’ creates a more exciting and dynamic round Summary details of pitch & q&a – forum – debate, buzz – Pitch video = tip of the spear – used as a gauge of whether analyse further Sitting behind pitch – terms of inv. Important from the business perspective. Keep things fair, clear and not misleading- all shares rank equally a class – voting and pre-emption, b shares to those who do not Some docs on request, some accessible to all. Business plan – on request – opportunity to engage
• #42: Need to be able to prove to our satisfaction that they can service a level of debt which is typically in excess of £1m Typically 6-10% - can be as store credit
• #43: Crowdfunding is in essence a mixture of marketing & promotion and fundraising. It means that comparatively small companies gain access to much greater press exposure than normal Crowdcubes marketing capacity. World class team. Forefront of the industry means that we get a lot of media coverage. But the entrepeneurs are the stories, the focus is on the businesses raising funds on the platform.
• #44: I won’t go into the numbers in detail But – take a look at the spread between the stage of gowth and the categories. Typically investment in the main markets is less focused on the areas that do so well in crowd funding – investors typically invest in businesses they can enagge with, they understand
• #45: Hab housing – kevin mccloud - tv architect Rightous – Gem – salad dressing – in waitrose etc Escape the city – dom &rob – community of people wanting to change their lives
• #46: What I’d like to do in brief detail – crowdcube as a company and some of the success we have to date
• #47: We can confidently say that we are the market leader in equity crowdfunding, Lot of success – as vindicated by beauhurst’s research Humbled by our entrepreneurs Reliant on quality and calibre of entrepreneurs that come to us Companies with great product and services do come to us
• #48: So why do investors love us – apart of some the reasons outlined – it’s accessible. Anyone with £10 can get involved. Not purely for financial return - Psychologial and social aspect It’s exciting, something people could not do before. Investors can have a meaningful impact- can make the difference between a company existing and not existing – to walk down the street and being able to say ”I own shares in that company- I helped them come into being” is a pretty great feeling
• #49: Commercial motivations behind crowdfunding -need access to capital – have the highest success rate in the sector - more than that, companies have come to us who do not need finance from us – they recognise the value of crowdfunding – every investor becomes a walking talking piece of marketing collateral. They can obtain 100, 200, maybe 1000 brand advocates invested in their success Gain experts/board members. Cc itself have picked up two board members and several members of staff though raising equity Small businesses have picked up international customers through crowdfunding and the contacts they obtain through their investors open some pretty impressive doors
• #50: In summary, We’ve helped more businesses raise more money from more people than any other Equity crowdfunding platform No 1 seed investor Partnered with braveheart ventures – a leading investment house Even the UK government is investing via crowdcube. Our purpose is to democratise investment and to help early stage companies raise capital to allow them to grow their brand. We’d love for you to be a part of our journey be that as an investor or as an entrepreneur looking to raise finance Thank you for your time and does anybody have any questions?
• #88: However, this decline has been greatly exaggerated by the press and, despite the cries that the bank lending has, for want of a better phrase, died a death; In December 2012 lending to UK non-financial corporate businesses was at £475bn; With the Treasury estimating that the Top 5 high street banks accounted for some 92% of this. This does represent a decline of around 23% since the peak of 2008, but I think that the majority of us would agree that the levels of debt we saw back then were unsustainable.
• #97: Why we can speak from authority… Reviewing proposals for grant awarding bodies Credit committee for a bank Equity house investment panel Within minutes we will usually find an error of some form in the projections.
• #99: Not just small companies – surprisingly common
• #100: Cold review - with our experience of seeing proposals from the other side of the fence, we can increase the chances of you successfully raising the finance that you need
• #101: Have the correct box’s been ticked? Records stand up to scrutiny? IP in correct co or still in entrepreneurs name? has IP been registered? Licences correctly executed and legal – do some informal arrangements need to be formalised?
• #102: Licences correctly executed and legal – do some informal arrangements need to be formalised?