For every successful start-up, umpteen entrepreneurs will fail - despite having brilliant ideas. Many of these failures will be down to one major problem that faces new businesses anywhere in the world: finding finance.
For every successful start-up, umpteen entrepreneurs will fail – despite having brilliant ideas. Many of these failures will be down to one major problem that faces new businesses anywhere in the world: finding finance.
One solution, with added potency in a time of reduced bank lending, is Venture Capital (VC) – finance provided to early-stage companies, usually through dedicated management funds in return for an equity stake in the business.
But securing VC funding is not as simple as turning up and asking for a blank cheque. Funds have no end of potential suitors. For example, Mercia Fund Management, a multi-million UK-based VC fund, estimates that it receives 50 full business plans and as many as 200 website enquiries each month but only does 10-15 major investments each year.
The most important part of getting noticed is doing the initial research. There are many funds out there specialising in different sectors or geographical areas and it is a matter of finding the best fit for a business rather than attempting to blanket the market with proposals and applications.
Mercia, for example, is mostly interested in UK-based businesses involved in sectors such as medical research, disruptive technology, financial technology and e-commerce. Mercia is particularly interested in businesses that do not require a significant capital investment before producing revenue, says Mark Payton, managing director of Mercia Fund Management. For instance, this means it prefers to invest in companies that offer services to the medical research industry as opposed to those involved directly in drug discovery, which can be a capital intensive enterprise.
“We love a business that can offer a tweak of services to the pharmaceutical industry and get into revenue quickly,” Payton adds. “Cash generation and growth are important. We don’t want it to be capital intensive just for it to prove its point.”
The VC fund finds universities to be a rich seam of potential. Mercia has partnerships with eight UK universities located in the West Midlands – the University of Birmingham; Aston University; Staffordshire University; Coventry University; The University of Warwick; Birmingham City University; Keele University; and the University of Wolverhampton.
These partnerships form the basis for the fund’s early-stage entrepreneurial investments, using funds garnered through the UK’s Seed Investment Scheme (SEIS) – a government scheme giving significant tax relief to private investors that back early-stage entrepreneurship. For example, an investor can claim back all but 14p from every £1 invested through tax relief if a business was to fail, says Payton. And if it was to succeed, the investment would be exempt from capital gains taxation, he adds.
This has given Mercia more money than ever before to play with and means that the fund managers can spend more time evaluating businesses instead of running around looking for new sources of capital. “The founders aren’t scrambling around looking for money,” he says. “They’re looking at businesses that will start earning.”
But Mercia also looks further afield when trying to find more established businesses. It uses a network of contacts and experts to find and evaluate a variety of start-ups from many different sectors. For example, it invested in Canary Care, through a later-stage equity crowd-funding site called Syndicate Room.
Mercia is also looking to expand its investments in the digital sector. In August, it is raising a new fund that will run alongside its pre-existing growth funds and co-invest specifically in businesses operating in this area. Other funds in other parts of the world are also quite excited about new ideas in the digital sphere. This is especially true in still-developing markets where businesses are springing up to cater to a middle class that is growing in wealth and technological familiarity.
For example, in Latin America another VC fund called Kaszek is snapping up stakes in start-ups involved in areas such as mobile technology, driven by growth in smart-phone and internet use. “Mobile is where we’re seeing acceleration and we’re seeing opportunities,” says Nicolás Szekasy, Kaszek partner. “In general access and quality of broadband and penetration of smart-phones is growing a significant tail-wind for certain businesses, creating a regional opportunity.”
Kaszek has invested in mobile- and internet-based companies such as Restorando, an online reservation service, Safertaxi, a cab booking app and Comparaonline, a financial comparison website.
But it too is heavily subscribed. The fund has done around 24 investments but has looked at more than 2,000 companies in order to do so, says Szekasy. “We get a lot of in-bound interest. Most entrepreneurs in Latin America are in the technology sector and in most cases know us from Mercado Libre.” (A Latin American auction site like eBay where a number of the Kaszek founders got started)
The VC fund continues to look for companies that have a strong entrepreneurial and technological team in place and operate in areas where a virtual marketplace can be created. One of the newest and most interesting of these is online education services, he adds.
“Typically when you have a platform that a company develops and needs to attract supply and demand to – buyers and sellers of goods – you’ve got something worth investing in,” says Szekasy. Kazek has invested in many ideas such as this including OpenEnglish, in the online education sector and VivaReal in real estate.
In the end every VC fund will be looking for different things. But the one thing they will have in common is a desire for a clearly thought out business plan. A start-up must have a commercially viable idea. But it also needs to be able to find the fund that matches it best and then present its idea in a clear and concise manner.
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