Start ups
Finance
"Facing the Financing Challenge - How to obtain the Right Finance at the Right Time"
Janet Ashworth, Head of Technology Sector Group, The Royal Bank of Scotland Group
On average 400,000 businesses are launched each year in all sectors. Most rely on founders, families and friends for the money required to start-up. But around 5% need significant sums to exploit the opportunities presented by their new technologies or products.
For these businesses, raising finance is one of the most challenging issues facing them, especially in the embattled technology sector. Marketing and management failures are often the root causes of company failure, but under-capitalisation - the lack of sufficient or appropriate finance - can also severely affect business survival.
But, there is no lack of finance in the UK for good propositions. The barriers lie in complex issues of equity and expertise gaps and with the failure of businesses to seek out appropriate funding at an early stage in their life cycle.
The Equity Gap
A market gap does exist in the provision of equity investment up to c.£1m - exactly the range of investment many technology start-ups require. Why?
- Venture capital is difficult to access - few firms provide this type of money because costs and risks are high.
- " Banks remain the major financiers to SMEs - but they are providers of low risk, low return working capital, predominantly via debt finance. Revenue and cash flow are crucial to our assessment - the Banks are not high risk financiers.
The Expertise Gap
Entrepreneurs are often ill equipped to seek external finance:-
- Poor planning means failing to set long-term plans and objectives. The choice of funding may meet immediate, critical needs, but rarely fits longer term aspirations.
- Misunderstanding of the criteria and motivation of financiers. The key Risk -v- Reward equation is not appreciated - high risk levels mean Banks do not provide finance for initial R&D and Equity investors require higher returns to compensate for the higher risks.
- The business will constantly change, it may require different types of finance at different stages of growth. Instead, entrepreneurs tend to focus on finding one, simple source of finance that will answer all their needs.
Bridging these gaps, and making entrepreneurs aware of the range of finance sources available, is essential to ensure businesses access the most appropriate finance.
The challenge lies in matching the right financing solution with the stage of business development to enable it to grow. The RBS solution is based on "Packaged Finance"- finance built up from a range of funding elements - Public ( Grants - e.g Smart Awards, NESTA ) / Private ( Founders money, Business Angels, Corporate alliances ) and Institutional ( Venture Capital, Banks, Ofex / AIM ). Each part of the package is essential to the success of the enterprise, individual elements in isolation may not meet the needs of the business. By assisting in delivering the funding package, RBS can more closely meet the company's present and future needs.
Tips for Achieving the Right Finance :-
Finance is available for the strong proposition!! The entrepreneur must -
- Consider all sources of finance and link appropriateness to the stage of business development.
- Equity investment is not 'giving away' control - it is 'bringing in' resources to achieve objectives and share risk.
- Funding goes to the strongest business propositions. Seek assistance in key areas of management and marketing. If an investor declines a proposition because he has no confidence in it - don't shoot the messenger, change the message!
- Start early - many financing decisions are made under duress. Funds are exhausted and the window of opportunity is closing. Make early contact with potential investors, when aspirations not survival determine the choice.
- Take advice - make sure you have a good professional service team that can support you in presenting your case to the right financiers.
- Have clear long-term objectives and aspirations for the business. Aims and aspirations impact on funding decisions - and the type of financing chosen can dictate whether your aspirations are ever achieved.
For more information on the RBS Group's support for technology based businesses, contact Janet Ashworth, Head of Technology Sector Group - tel - 020 7672 1843/2, fax - 020 7672 1940, e-mail - janet.ashworth@rbs.co.uk