Searching for funding might seem to be a pointless quest at the moment. However, with the right plan and a strong team behind you, there is still investment to be found
Growing the 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.
STRATEGY AND PLANNINGIrrespective 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.
