How to raise business funding in a recession
Searching for funding might seem to be a pointless quest at the moment. However, with the right business plan and a strong team behind you, there is still investment to be found
Growing a business is not on everyone’s ‘to do’ list at the moment. Survival is the name of the game for many companies, and cashflow remedies rather than expansion capital are what most entrepreneurs are looking for. But if you’re at a stage in the lifecycle of your business where you need additional finance, what should you do at a time when securing funding is a big problem? The government’s £1.3bn Enterprise Finance Guarantee scheme is yet to make an impact, if indeed it ever will, so no joy there. Similarly, the initial public offering market is depressingly quiet – AIM has fallen to its lowest level for years, with 1,524 companies now listed on it, down from a peak of about 1,700. Venture capitalists (VCs) and angel investors are also likely to be more cautious this year. A report by the British Venture Capital Association found that many firms are going to have difficulty getting fresh capital. However, there does appear to be some activity. A number of new funds have emerged, and anecdotal evidence suggests that private investors see little point in keeping their money in the bank. However, the funding environment is different and you must be aware of which buttons to push when talking to the money men.
Business strategy and planning
Irrespective of sector or life cycle, there is one thing pre-occupying investors at the moment: the recession. They all want to hear entrepreneurs explain how they plan to grow and develop their business while the economy retracts. Business plans that show a company isn’t going to be hit by the recession, or that it can actually take advantage of a shrinking economy, are music to investors’ ears. Ian Shields is an investment manager at gateway2investment, which helps prepare businesses for funding through workshops, seminars and advice. He’s telling businesses to consider the economy when producing their business plans, so investors can see how they will prosper during the recession. “I think if you can identify for an investor how you are going to operate through an economic downturn, and then take advantage when you come out at the other end, then that will be pretty interesting to them,” Shields says. “There are advantages to operating in a downturn, so if your business has that potential, then an investor is far more likely to take notice.”A good example of a business doing just that is Humyo, a rapidly growing file storage company, which gained $1.15m (£790,000) from private investors in January. The business promotes itself as a cost-saver for companies, since it allows them to reduce their IT and hardware requirements and take advantage of the growing trend for Software as a Service products. Founder Dan Conlon believes that this helped him convince investors that his business was a good one to back. “The recession puts an onus on companies to look at their costs, so anything that delivers a saving is going to grow,” he says.Certain sectors or businesses with the right type of customers are doing better than others at the moment. If you sell to the public sector, you might be viewed as more stable, as the government isn’t likely to stop buying. If you are in the healthcare industry or produce something connected with our ageing demographic, then you have a strong market to talk to investors about. Bio-detection company Stratophase ticks both of these boxes and recently attracted investment from the Boston-based investor East Hill Management. The company is developing devices that will be able to detect fatal viruses without the need for a laboratory. This means they could be very useful in medical settings, although it is currently working with the Ministry of Defence to produce products that could combat germ warfare. Chief executive Richard Williams warns business owners to ensure they fully understand what their investors are seeking before agreeing to a deal. “You’ve got to pitch your business plan according to what your investor is looking for,” he says. His business could have opted to go for the medical market where there are potentially huge profits. Instead, it’s pursuing markets where there are faster returns, looking to move into medicine later. “The medical market has big potential, but high risk,” says Williams. “Our approach is to adapt a lower risk model, although there are still considerable opportunities in this field.”
Minus into plus
There is some wisdom in the idea that there have been remarkable businesses formed during recessions. Companies launched in tougher times learn good habits and are more creative with their resources and cash. Ben Holmes is a partner at Index Ventures, which has recently opened a new €350m fund for early-stage companies. What Index is looking for in this environment is similar to what it is always interested in: viable technology businesses with good plans and management. “When we invest in companies, we are looking at team, traction and technology. They have to be very strong on a least one of these,” Holmes says.However, there have been some subtle, but important, shifts in the business plans that are getting investment, and Holmes recommends that entrepreneurs think more creatively when formulating their strategies. “People are having to re-draw their business plans to take into account the fact that cash is hard to come by. Be very productive in how you use your cash, and try to make as few mistakes as possible,” he advises.Following a period of land grabbing by technology entrepreneurs, Holmes suggests that some business trajectories are being redefined, as appetite for risk lessens. “There has been a switch from winning market share to gaining profitability,” he says.So investors may be looking for earlier returns or more evidence of sales, and businesses should be aiming to use their investment as efficiently as possible. However, don’t fall into the trap of asking for less money than you actually need, but make sure it is spent wisely. For many companies, their biggest cost is the people they employ. But one of the hallmarks of this recession is the availability of highly skilled people. With meltdown in the financial sector, there are some excellent staff out there looking for work – people who can join your management team to improve your standing with investors, as well as good technicians who can give your business an edge. Some will, of course, have strong financial skills, but there’s a whole host of other talents that were once tied up in the banks and financial institutions that have now been set free. Humyo is aiming to take advantage of the collapse of the industry. “A lot of programmers have come onto the market, because the financial sector used to take the best people. They have no allegiance to the financial sector, but could earn three times more working there,” says Conlon.
Go in strong
While it is heartening to see funds such as Index coming out and bullishly backing early-stage businesses, there appears to be an overall shift by investors to later-stage propositions. However, the actual age of a business is less significant than where it is in its life cycle. Essentially, investors are more interested in backing projects that are already producing cash, as opposed to those that are at the pre-revenue or beta stage. Shields says he is advising some clients to get themselves further along the line before looking for investment. “What we are telling some companies is that if you are in beta, then you will have to convert some of your customers before an investor will look at you,” he says.The problem, though, is how to get there if you really need investment. As mentioned previously, the banks are not lending much at the moment. However, the government is trying to inject some life into the economy, so it is worth heading over to Business Link and asking what grants are available. The main issue with grants is that they tend to take a long time to access, and you have to match the funding. However, sometimes you can get away with putting in ‘sweat equity’, so money can be replaced by sheer hard work.
Attract your business partner
The climate might be tough, but don’t blend into the malaise. Remember that investors are human beings and want a bit of excitement. There may be more caution, but no one is saying that you can’t be sexy. On top of the basics of how you’re going to cope in a recession and ensuring you have a good team, don’t forget to add flair. Some good PR and effective branding are good investments, and can be carried out at a relatively low-cost. Jason Purcell is the chief executive officer of First Capital, a boutique bank that advises businesses and helps them get funding from private equity houses. He provides some insight into the mindset of VCs. “Generating a buzz around yourself and your company helps to create a sense of the opportunity being hot,” he says. “VCs are very competitive with each other. Each one wants to be the first to see a hot deal. No one wants to miss out. In fact, it’s embarrassing for a sector specialist to admit to partners that they aren’t seeing all the deals in their sector and getting a shot at participating.”However, Purcell also advises that although you need to put yourself about a bit, don’t overdo it. “No VC wants to feel that they are the last to see a deal that has been shopped around the market, and that everyone else has declined. A long drawn out process not only saps your resources and energy, but also reduces your attractiveness as an investment opportunity, and makes the eventual outcome less likely to be successful.”
There’s certainly money out there and businesses with the right plans can convince investors to part with it. There are some good people on the market, and this means you can bring together a strong team. You must also adjust your offering for the current climate, and if you can convince investors that you are one to back, there’s a good chance you will sail through this recession and emerge on the other side with a really strong business. However, don’t make the mistake of thinking that funding is the Holy Grail and accepting investment at any cost. Investors know that some business owners are getting desperate and valuations won’t necessarily be in your favour. Remember, equity is always the most expensive form of investment, and be careful whose money you pick up. “Try not to give away too much of your company too early on,” says Shields. “If you have a good idea and can get money from family and friends to help you get on, then do so.”Funding is likely to be a long, hard search. However, here are some places that may prove receptive to your demands:
Bucking the trend, it has opened a new €350m fund for seed and early-stage ventures in the technology, cleantech and biotech spaces
Currently raising a €100m fund for later-stage, “recession proof” companies with technology offerings
Beer and Partners
One of the oldest and most respectable angel networks in the UK, which currently has opportunities for entrepreneurs and investors
The famous networking group, where name badges for entrepreneurs are green, suppliers amber and investors red