Mary Erb from leading corporate law firm Heatons, explains how to set about raising funds to turn your business ambitions into profitable reality – the search for venture capital.

There are times in the lives of most business people when a compelling opportunity presents itself, often in circumstances where you least expect it.

Perhaps an important existing customer asks you to quote for an order that wildly exceeds current capacity or a synergistic competitor’s business comes up for sale.

Maybe a business that has clearly proved its viability in one area demonstrates the potential to be replicated in a half a dozen demographically similar regions or countries.

Years of work that has gone into an agency or franchise might be rewarded by the offer of a major expansion opportunity from the prime manufacturer.

It may be that an invention or technical development within your business shows unmistakable promise, if only you had the funds to expose it to a wider national or international market or develop and exploit it fully.

It may simply be that you find yourself in a situation where natural succession, a change in ownership or shift in the parent company’s management focus opens up an opportunity for you to mount a management but-out.

“What heights I might reach”, you ask yourself, “if only I knew where to find the funds”.

The first point to dwell upon is that a business operating in a recognised format such as a limited liability company is more likely to be taken seriously.

Ideas, plans and ambitions are all very well but start-ups do not usually fare well unless proposed by someone with a recognised track record of success and a formal structure on which to build.

How much?

If, by funds, you mean sums measured in some hundreds of thousands of pounds, it’s possible that you (or your colleagues, family or partners) will have sufficient personal or business assets to act as security for a conventional loan arrangement with your bank.

The assets of a corporate acquisition you wish to make may themselves constitute part of the collateral base, rather like taking out a mortgage on a house you wish to buy.

Ask your bank if there are existing financial products available that would release sufficient cash from your business to make outside funding unnecessary from gearing up on assets or cashflow.

If, on the other hand, your plan needs sums measured in millions, beyond the reach of your available security, what you will need is an injection of equity alongside the bank funding. Suddenly, you’ll find yourself thrust into the heady realms of corporate finance.

For many business people this is uncharted territory. Unless you have a background in accountancy, law or business administration it may well be that you have no experience of this subject.

Many directors of small to medium-sized businesses have achieved their positions by virtue of years of hard work in the sales, technical or general management arena and they have neither indepth knowledge of the workings of the corporate finance field nor the connections with those who do.

It’s not in the least unusual for family concerns to flourish without the services of a dedicated professional financial director. So, when you need to raise equity (otherwise referred to as risk capital) to whom do you turn?

Although there are exceptions, the provision of risk capital is by and large the province of institutions specifically geared to this market.

The people who provide this type of backing are known variously as private equity houses, venture capitalists or institutional investors.

Alternatively, if risk capital is provided by privately-owned companies or private individuals, usually successful business people in their own right with a keen eye and deep pockets, they may be known as business angels.

They are usually contacted through your circle of business connections or perhaps under advice from a firm of accountants.

If you elect to move outside the recognised boundaries of the market in this way, it is advisable to take professional advice before committing yourself to any arrangement.

When we’re enjoying a buoyant business climate numerous other options can come into the picture.

These other options include mainly overseas banks, investment syndicates, acquisitive plcs and conglomerates eager to diversify into tempting new pastures. In less benign times these peripheral players tend to draw in their horns, leaving the market to the truly committed.

But before you start flicking through Yellow Pages in search of a few million pounds to prop up your business overdraft, it’s worth remembering that the banking and corporate finance industry is not new.

It’s highly unlikely that your proposal will seem as exciting and novel to a corporate financier as it might to you. Those of us in the sector spend our working lives sifting through proposals of every imaginable kind.

Expert

Of course, it’s impossible for us to be experts in every sort of business and we certainly won’t claim to be omniscient.

What we do have is a firm grasp of the essential mechanics of any business. Is turnover growth achievable? Can margins be sustained and the overhead cost base controlled? Is the level of capital expenditure adequate and are the working capital assumptions realistic?

Your proposal should provide clear, succinct answers to the essential questions, and forecasts should be realistic and pragmatic.

There is no point in hiding anything in an array of impressive looking figures. If the proposition is flawed, you can be sure it will be detected. Venture capitalists and bankers don’t like shocks and surprises. They go to great lengths to make sure that you won’t be able to spring any on them.

So, make your proposal straightforward and accurate. Ultimately, the success of the application will rest on how much they trust the contents.

You will find that neither experienced institutional investors nor business angels are keen to part with substantial sums unless they gain a measure of control of the business they are investing in.

At the very least, they will want to put themselves in a position where they can keep a very close eye on their money.

It’s very easy to end up as a minority shareholder in what was formerly your own business and it may prove very difficult to regain majority control again after it becomes successful.

The venture capital market, proper, is populated with astute, sophisticated and prudent managers who devote their careers to producing acceptable returns on carefully managed funds.

Try to bear in mind that there are plenty of alternative ways in which these funds could be profitably deployed: the stock market, gilts, government bonds, secure investments, property, precious metals, antiques and old masters, to name but a few.

Greater return

It follows that those involved in the risk capital market will be expecting a greater return than they would expect from a more predictable investment.

They will also be extremely practised at analysing the available information about both a proposed venture and those who are managing it (or plan to manage it).

Venture capital professionals do not suffer fools gladly nor channel funds into suspect endeavours. They provide financial tools with which business people can get on with the job of making profits.

The funds they manage are not theirs. They are entrusted with the safe management of capital because they have demonstrated their skill and success in doing so over a period of time.

Having said that, the venture capital market is worth billions of pounds a year in the UK alone.

It is a competitive market-place and if you have a promising proposal, a sound business rationale and good credentials, there should be no shortage of eager equity investors.

Risk

In return for putting their money at risk, these investors will probably expect a significant share in the ownership of the business in question – albeit temporarily.

They will also require various checks and controls to be put in place and quite probably a voice on the company board.

If the equity house itself is not directly represented, they may well nominate a trusted non-executive director to monitor the conduct of the company’s affairs on their behalf.

Most equity investments have a pre-planned exit route built-in. When the venture prospers they will be happy to make a timely withdrawal, relinquish control and profit from the increased value of their shares.

You may be in a position to re-acquire their equity stake but they will certainly want to sell at the best possible market price.

Venture capitalists don’t like bearing the whole burden of risk either. They feel much more comfortable if the management of the business in question is prepared to make an appropriate level of financial commitment to the future success of the enterprise.

The other side of the funding equation is senior debt and working capital. This will invariably be provided by one of the banks, which specialises in this type of sophisticated structured financing.

Sound advice = sound money

So, that’s how it’s done. But how do you go about doing it? As a first step, you need to seek out an introducer.

These intermediaries may be firms of accountants or lawyers with established reputations in the corporate finance sector or corporate finance boutiques.

The high street jobbing solicitor you used to convey your house and write a letter to a noisy neighbour is not the right person for the job.

The right introducer will have a track record of successful corporate finance deals behind him.

The best advice to any company with a funding proposition is to involve accountants and solicitors at an early stage. Companies usually have one chance of obtaining funding and should give it their best shot.

Firstly, professional advisors can bring their wealth of experience to advise on the selection of venture capitalists and other funders most suitable to the proposed investment.

Accountants and solicitors see business plans on a daily basis and their expertise and early input in this area is vital if a plan is to stand the best chance of being favourably received.

Seek out their corporate finance partner and you won’t go far wrong. Needless to say there is a price to pay for us highly skilled professionals!

If you plan to play your hand at the corporate finance table you need the best and most accomplished professional help on your side. It will pay in the long run.

Your introducers will appraise your proposal in detail before putting their reputation behind it, knowing full well that whoever is approached for support will scrutinise the proposal (and you) down to the last detail.

Goodbye

When the cycle of introductions begins, keep a supply of business cards close to hand, say goodbye to your family life for a few weeks and prepare to take the advice your professional team gives you.

The deal process can be long and complex. The equity provider, the bank, the vendor (if there is one) and you will all need to have teams of advisors in place.

By the time the accountants and legal advisors have completed the due diligence process and satisfied the financial backers that everything is in order, the midnight oil will most definitely have been burned and weekends will have been lost.

Don’t expect a six or seven figure cheque to land on your doormat the following morning. It may take weeks or maybe even months to complete the deal.

Your plans for a long break in Barbados will not form part of the due diligence process, however much you think you deserve it at the end of the proceedings.

Remember too, that you will need to adjust to a whole new ethos once you decide to take your own or family-managed business onto the next tier of development.

If you’ve been accustomed to ploughing your own furrow and taking decisions based on your own intuition and judgement, you may have to make a conscious effort to be accountable to your backers.

By involving outside capital, you’ll be entering a world populated by clever, prudent and
committed people whose only role in business life is to provide the fuel that drives industry and commerce: money.

Prove to them that you know exactly where you want to take your business and how you plan to do it and they’ll make sure you have enough venture capital in the tank to get you there.

With a bit of luck, you might even build up a long-term business relationship with your equity and dept providers, which could prove very useful in the future.

If things go well, you may need to rely on them again as more opportunities arise.



Mary Erb advises business in all sectors on deals of all sizes. Recent deal values have ranged from £1million to £320 million. She can be contacted on 07712 899313.