Does your business need external finance. We chat to investment fund manager Iain Nairn about the different sources of funding. In particular look at the business models that are suited to attracting venture capital investment and what you need to do to secure those funds.
About Iain Nairn
Iain Nairn hails from Chester-le-Street in the North East of England. He works as an investment manager for Northstar Ventures who provide venture capital to businesses in North East England. Iain has spent a career as an insolvency practitioner. He has run his own small business. He helps small businesses get on the growth path.
Iain is a captain of an English cricket team…….Iain had his leg amputated at 16. He pursued his passion for cricket. Iain has captained the England Physically Disabled Team for 2 years or more. He won the inaugural multinational cricket tournament for people with disabilities. Iain is also a frustrated Sunderland AFC supporter and golf player.
When is Venture Capital right for your business?
Traditional routes of funding have taken a knock since the financial crisis in 2008, and other ways of funding are becoming more common.
If you are starting to look for money from a venture capital providing business, Iain starts by asking what you are looking to do with your business and the sector you are in. Check the other options before heading down the venture capital route. Look for those websites that direct you at start-up loans, especially for a lifestyle loans – £25k per director. A source of comfort. A lot of these are personal loans, so do you have the confidence and can you repay that loan over 4 or 5 years?
Depending on the fund you are looking for a venture capital business tends to look at businesses less than 7 years of age.
For start-up businesses, particularly in the first 2 years there may be funding available. So, look for those grants, but also get the right advisors to help you. Don’t miss out on opportunities.
Where are you setting up? Look for grants and investments specifically aimed at your locale.
Grants – enabling grants. They don’t necessarily need to be paid back. Grant is a broad term. It might be a capital contribution.
Advice – find the right people to help you in your area.
Crowdfunding is a new and exciting opportunity. The kick-starter for B2C. The funds can help you start-up. These seem less successful for B2B. Investors are not on those platforms looking to buy things. Look out for SEIS and EIS schemes for High Net Worth individuals willing to offset investments for what otherwise be taxation.
Is crowdfunding a good way to find finance? It can be. Everything comes down to the risk appetite with those risking their money. People have a varying risk appetite. Often that will be about trust in the individual. In B2C, a new product Kick-starter is a good idea. You can see whether people like and will buy your product.
The Funding Circle letters. Kevin and Graham regularly get pre-approved offers by mail. They are a venture capital provider backed by a Govt underwritten insurance scheme. They are source of funding.
What do Venture Capitalists look for?
High Net Worth (HNW) individuals are not getting returns from banks, so they invest against their otherwise tax bill.
If you are an SME, and they are looking for venture capital, what are the questions they ask you?
- They want an understanding of your business. Who is your team. They rarely invest in sole founder businesses. They are looking at the strength of all skill sets within or around the business to get growth.
- What traction do you have? Existing customers, a good pipeline, who knows about you? Helps the Venture Capital company to have confidence in you.
- Your marketplace – sell directly, through a channel, distributors etc. All have different levels of challenge.
- Don’t fall into the trying to perfect your product/service and selling it.
- Some form of innovation. One fund Iain offers is an innovation fund, which can be several forms of innovation. Not a lifestyle business, but a business that can go global. VCs are looking for growth and how they get their money back plus some in a few years’ time.
The EIS and SEIS schemes encourage HNWs to invest. If you have a new clothing line, could you get a personality or wealthy individual investor that can add value in terms of access to market, not necessarily in business deals.
Venture Capitalists are likely to do more co-invested deals going forward. It’s not just about the Venture Capital company’s money, it might be about joining up HNW and more than one VC company.
What happens next? You are Investment Ready…
- Is the business scalable? If no, then you’ll get a prompt NO. If you are, the business might not be in the right shape – so here’s some HOMEWORK. Here are people we’d recommend. Go away and come back. Some companies work with the VC for 2 years prior to getting money. The yes might be a YES, BUT. The VC will develop the conversation over several meetings. The VC challenges the founders.
- Northstar for example, has invested in 200 businesses in the North East. That understanding from advising all those businesses, helps companies do a better job.
- The form of the loan. It could be equity or debt. Or a convertible loan. It’s about giving the business the greatest chance of success.
- Northstar has a social investment fund is aimed at charities and social enterprises an opportunity to develop a secure future for their businesses. E.g. A nursery operating from a rented property. A good business. So, the funds helped them buy the property from the landlord. It secured their future.
- Funds vary. Low-carbon, female founders, environment. It is all about opportunity. Each fund has their own criteria. What returns, whether you are more debt focused or equity focused.
- VCs want to see every possible deal. Don’t sit with the first Venture Capital company. If you have a pitch deck. Use it with more than one VC.
- There are a variety of pitch deck Don’t be overly concerned with the style, be focused on the information. Iain observed sometimes the pitch deck success stores are inverse correlation to the style. The best-looking presentations are often bereft of the best information and understanding. Remember, you need to tick all the question boxes above.
- The VCs filter and funnel your presentation to get to an understanding of their must have criteria.
The pitch itself might not happen for 2 years. If it’s a great idea, get all the parts sorted before your presentation. The VCs want you to succeed.
How do Venture Capitalists support you?
Dragons Den/Shark Tank. They are often looking for the expertise of the Dragon as well as the money. To what extent do the VCs get involved? Answer, right through to point of exit. They look for monthly accounts, annual accounts on time, not 9 monthly delayed. They use their experience to avoid foreseeable errors.
Venture capitalists use their experience. They attend board meetings. VCs use their in-house teams experience to help companies. They help with Non-Executive Directors. It’s about providing you with access to a network with your own.
Investors want the same as you want. So, everyone is trying to pull in the same direction.
Northstar Ventures: 0191 229 2770