Tag Archives: start-up

SEIS Start-up Investment

Business Investment SEIS (Seed Enterprise Investment Scheme) is a new government incentive to help UK start-ups and young companies.

It starts in just a few weeks on April 6th, so now is a good time to start building this into your funding plan for your start-up. Or if you are an Investor, have a look to see if this will be applicable to the businesses into which you are investing.

There has been a similar incentive around for some time now (see EIS) but the SEIS is specifically targeting new companies.

The details will come out in the Chancellors budget speech next week (21st March), but these are the basic points:

The business must be new, or 2 years old or less, with fewer than 25 employees. It must have less than £200,000 of gross assets and not quoted on a stock market.
Directors or executives cannot use the scheme to invest in their own companies.
You can raise up to £150,000 of funding through the SEIS, but mustn’t have already raised any money under EIS or venture capital trust (VCT) schemes. This is in total not per year.

An Investor can have up to 30% of a share in the business under this scheme. The SEIS makes it attractive for an Investor to fund a start-up because of the number of tax reliefs that they would receive:

Investors can claim back income-tax of 50% of the amount invested.
An Investor can have a ‘capital gains tax holiday’. Capital gains tax (CGT) can be avoided on any asset sold during the financial year 2012-2013 as long as they reinvest the proceeds in a SEIS eligible start-up in the same year.
The combined effect of the CGT holiday and the income tax break gives relief of up to 78% in the first year.

There is as you can imagine, a number of detail points that would need to be investigated but this should whet your appetite. It’s well worth while finding out more about the scheme either to make your new business attractive, or to maximise your investment returns.

After the chancellor has given final details next week, I’ll do a summary here and point you towards the required forms that the revenue will need to be completed.

Government Support for Small Business

Small Business support Am I the only one that is getting confused by the increasing number of initiatives that the government is rolling out to encourage entrepreneurship? Or frustrated because they don’t actually seem to make a difference?

We had Business Link, then we didn’t, except it still exists as a “business advice and guidance service portal”.

The Small Firms Loan Guarantee scheme (SFLG) has been around for decades and continues to help companies that need a bank loan. Or it would if the banks fulfilled their part of the deal by releasing the funds.

To encourage them to do so the government set up Project Merlin last year whereby the banks agreed to lend £76B specifically to small firms. However it has been a failure and banks are still holding on to their money. Now Merlin looks like being dumped along with any credibility that the banks could have gained by making good on their promises.

For some time now we’ve had the Enterprise Investment Scheme (EIS) to encourage Investors, by giving them various tax breaks if they help to fund growing businesses.

In addition last year the Chancellor announced the Seed Enterprise Investment Scheme (SEIS) due to come into effect on the 6^th April 2012. This is aimed at small start-ups and gives a 50% tax relief to Investors. I’ll do a write up of that shortly, but it looks promising in motivating Investors.

Enterprise Zones were introduced to mixed response and the jury is out on their long-term effectiveness.

The Government has pushed StartupBritain which they call “a national campaign by entrepreneurs for entrepreneurs, harnessing the expertise and passion of Britain’s leading businesspeople to celebrate, inspire and accelerate enterprise in the UK”. Fine words – but never-the-less just words.

Talking about fine words, recently the latest campaign is “There’s a business in you”, which provides inspiring stories and highlights support available. However most of the highlighted support simply takes you to the Business Link website.

Then there’s talk about cutting Red Tape. There is a “Red Tape Challenge”, where members of the public can suggest red tape to be cut and a “1 in, 1 out” idea that says if a department wants to bring in a piece of legislation, they must first remove one. Latest government news is that there have been 19 in and 33 out, saving small businesses £3.2 B a year. What shall we spend it on?

How about making tax simpler and easier to understand I hear you say. Well there’s a government office called “The office for Tax Simplification”. Yes there really is, let’s hope they are successful.

So is it all spin and gimmicks as some business experts have commented, or a well co-ordinated and ambitious campaign to release the entrepreneurial spirit in us all and make Britain great again?

How to get Investors

Business Angel and Investors “How do I get an Investor?” is the question I most get asked by entrepreneurs. Finding an Investor is often a hard and very time-consuming part of growing a business, but thousands of companies manage to do it every year.

Here are my top tips:

Make sure you really need an Investor. On the plus side they will bring contacts, experience and funding that can help your business grow larger, quicker. It may even be the only way in which you can start, or grow your company. However you will have to relinquish some control, give a share of the business in exchange for the finance and have the Investors watching how you spend their money. You must be willing to do that in exchange for the resources.
Prepare your business case. You have to show what your business is about and why the investor should give you their money and time. The business case for investment comes from your plans for the business. Hence business plans are a key part of being prepared. People tend to associate such with lengthy, formal documents. It needn’t be so. It can be quite succinct and practical.

I’ve written a more detailed description on how to write business plans for Business Angels that you may want to look at.

I often get entrepreneurs ring me and say they simply need to be given the chance to talk to an Investor and they will convince him. They don’t feel a business plan does them justice and they haven’t got time to write one anyway. That may be, but an Investor can’t talk to everyone and they have to filter who they do talk to based on some information – that’s why you must have written data to first show them, normally an executive summary of a business plan.
Find investors to approach. There are several ways to do this and you should try all that you can afford and have the time to do. You have to do everything you can and leave no stone unturned.

a. Friends & family. Start-ups often begin by getting help this way and it can be the quickest, but you have to feel comfortable that you are risking their money. The amount is normally fairly small, so usually only suitable for getting a business going.

b. Existing contacts. Beyond immediate friends & family there will perhaps be people you can approach with a business proposal. Your old boss, ex-colleagues who have made good and contacts who may know of potential investors. Spread your net wide.

c. Business Angels. Not to be confused with Venture Capital (see below), these are individuals who are investing their own money in promising opportunities. They generally will only invest in areas that they know about, so as to be able to judge risk and add value.

You may know one, or have a contact who knows one. However, since there isn’t a yellow pages of business angels (they would be constantly pestered, never-mind security), the best place to find them is through a Business Angel Network.

d. Business Angel Networks. You can find many on-line, simply search for “find a business angel” on Google. Be aware that all will charge a fee upfront, with no guarantee of success. You may not like paying upfront and rather only pay if they find an investor, but that is how all the industry works.

To a certain extent it is fair enough, since they have no control on how good you or your opportunity may be, all they can do is make introductions. Nevertheless, some do charge large amounts, from several hundred to several thousands.

The difference being that those that are charging a few hundred use an on-line data base where you enter your proposal and those charging thousands will instead take your proposal and ring round their investors to see if anyone is interested, you pay for it being more hands-on.

If that wasn’t enough, most also charge a “success” fee of 4% to 5 % and some even like to negotiate a small percentage of the final company for themselves as well.

A bit of a plug here for Company Partners – we operate as a member’s site, a bit like a normal “dating site” for entrepreneurs and Investors. We’re certainly the most cost effective and only charge a monthly membership starting at £29.95, with no other fees. See how Company Partners works.

e. Venture Capital. This is provided by a venture capital company who is investing other people’s money. They therefore have to be more careful and are more risk adverse. Seldom investing less than £1m, in established or proven businesses. Management buy-outs, buy-ins and fast growing companies already returning a profit are suitable.

Occasionally, high-tech and bio-tech start-up businesses with exceptional potential, that have IP and already gained traction may get funding.
Approaching Investors. First find out all you can about them, what businesses they have invested in before and the industry sectors they are interested in. In Company Partners for instance the Investors will have indicated the sectors that they want to invest in. Approaching investors with a proposal for a market sector that is not of interest will waste everyone’s time.
First contact with the Investor. At the initial stage you are just trying to gain attention and qualifying that the potential investor and your opportunity are well matched. The information you send can be as simple as a brief statement of the market area, general background and some numbers. Ask if you can send an Exec Summary, or business plan with more detail.
If interest is shown, provide the Exec Summary or plan, ensuring that it is written well and looks professional. Do not at any stage over-hype – it turns investors off. If they like what they see, you will be invited to a meeting. It may be informal one-on-one, or a more structured presentation. Some good deals have been done without a stand-up presentation, just by sitting round a table and explaining the plan.
How to present to Investors. If you are asked to do a presentation find out as much as possible about your audience. Who will be there, their backgrounds, how long have you got, what they are expecting to see.
See how to present to Investors.
The deal. There is no simple formula since every situation and business is different. However it generally starts with the valuation of the business. We’ve all seen Dragon’s Den where the presenter is asking for £100k for 10% of a start-up business. This values it at £1m and the company hasn’t started trading yet. Be realistic and if possible show that you have already achieved some sales. It reduces the risk for the investor and justifies a better price. This paper does show some ways to value your business.
The contract. Get this drawn up by a solicitor used to dealing with business angels, ask me if not sure, I know a few. It will need to include the types of shares that you and your investors own, what happens to them if further investment is made (called dilution), what happens if you or the investor wants out and much more.
Persistence. When Innocent drinks were looking for an investor for their fledgling smoothie business they had approached dozens of business angels, with a very well constructed business plan to no avail. They’d contacted everyone they could think of and got nowhere. But they persevered and finally found that one person who liked what they were saying and committed to back them. Try everything – be persistent.

Make IT compulsory – get more start-ups.

Young high-tech start-up businesses I must admit this blog sounds a bit as though I’m standing on a soap-box, but a recent comment by Google’s chairman, Eric Schmidt, rang true with me. He said:

“I was flabbergasted to learn that today computer science isn’t even taught as standard in UK schools,” he said. “Your IT curriculum focuses on teaching how to use software, but gives no insight into how it’s made.”

Yes I thought, he’s right. We teach how to use software, not how to make it.

This made me think, would teaching Information Technology as standard make a difference to our ability to innovate in a high-tech world?

Innovation has always driven the economy. Just look back to the Industrial Revolution and the inventions that abounded, they were that time’s high-tech.

Today’s innovation tends to centre on software, electronics and biotech, all of which require not just a grasp, but actually a fairly good understanding of the principals behind these technologies. The sort of understanding that can then be used to develop new innovative businesses.

However, schools have increasingly concentrated on “soft” subjects and reduced the time spent on what is thought to be more difficult areas such as science, maths & technology.

I know that we are short of science and maths teachers and the need to meet higher and higher pass rates every year means that schools concentrate on courses that are not as exacting.

It doesn’t have to be this way; though it will require government willpower to change.

We’ve seen an enthusiasm for entrepreneurial activity, with programmes like Dragon’s Den and The Apprentice. Nearly all young people have a passion for the uses of technology, with Facebook and iPhone Apps.

So why not put a fresh emphasis on learning why an iPhone works and how to programme an application like Facebook, not just how to use them. Then we may be producing the future innovative entrepreneurs that the economy demands.

To grow a business employ a “great one”.

Whenever I hear advice from successful entrepreneurs the most consistent mantra is “always hire the best people you can afford”.

But how good is “the best”, how do you measure that? Also, if you are in a young company, with very limited resources, how much can you really afford?

Let’s step back for a moment though and examine that advice. Is it really the most important thing that a growing business should do? What about offices, buying equipment and developing the product or service, then there’s marketing, the best product is going nowhere unless people know that it exists.

The answer may be that if you have good people aboard, they will help you get the operating essentials cheaper, faster, and of better quality. When you look at product design the difference between good and average has even more staggering claims.

Mark Zuckerberg, of Facebook, suggests that some programmers and programming teams are 100 times more productive than their more typically talented peers.

This isn’t because they can programme 100 times the number of lines of code, but because they write smarter code. These truly great programmers grasp what is needed quickly and transform that into efficient, supportable, clever instructions that enhance the original concept.

What does this mean for the non IT side of businesses? Well the theory is still valid, if the multiplication factor may be less. Consider the likely results of an inspirational, highly respected and well networked senior figure in any sector of business, such as marketing, PR, raising finance, compared to an industrious but junior practitioner.

Can you measure the impact of the great person against the average worker? The difference may be that you get funding, or not. That you become well known, or not. What is the measure and worth of these?

I think we can all accept that the great person is going to do more for your company than an average worker, the question is what do you give up to be able to afford them?

Do you take out loans, sell your house or divert funds from infrastructure to hire a great employee?

It’s a balancing act, between all the calls upon your limited cash. The advice that successful entrepreneurs have given implies that you do all you can to get these few great people.

If the immensely talented ones can ramp up your business fast, then you can start to readjust the balance so that other areas have cash made available.

It is natural though to hope that even by using a less expensive resource you will still manage to make the break through. The lessons from very successful businesses however seem to speak against that.

Identifying successful businesses

Identifying a successful business start-up
Every experienced Investor develops a sixth sense when looking at potential business opportunities, but even so it can sometimes be difficult to put your finger on what is the key ingredient in making a new venture successful.

Over the years of working with start-ups I’ve seen companies grow rapidly and then fall away, great businesses that not only grew but sustained their position and of course those that never made it.

In all of the great ventures they got 3 basic elements right and I’ve tried to show those essentials on our model of Start-up Success above.

Much of it is common sense, but like many simple things it can often be forgotten and the whole process of identifying a good high growth business made over complicated.

Firstly, yes you guessed it, is the founders of the venture. It’s said many times that the management team is key, but why? It is because they provide the drive, ambition and ultimate quality of the business.

Not only must they have the will to succeed but also the competence to implement the business successfully. The idea is important, but the excellence of implementation of the idea is critical.

Great entrepreneurs have a vision of what they want to achieve based on an insight to a market opportunity and the capability to pull together the resources to address it.

When you as an Investor look at prospects, or perhaps if you are an entrepreneur thinking through options for starting a business, it’s worth remembering the 3 key ingredients and how they interact for sustainable success.

Division to provide business help is launched

Management Consultancy

Company Partners has been a blessing for those businesses who are looking for business partners, mentors and investors, but what if you need to reorganise your business to make it more profitable, or to grow?

I’ve been helping companies that have approached us for a while now, but eventually there is only so much of my time available. Rather than continue to turn down requests, we’ve started a new division dedicated just to helping companies with their consulting needs.

Called, “Company Partners Consulting” – yes maybe a bit of an obvious name – I’ve gathered together the consultants that I most respected and that follow my own ethos of practical advice geared to getting results.

Since it is aimed at this stage at the UK, I’m using our www.companypartners.co.uk address – have a look, I’d be interested in your feedback.

Insights to the Angel Investor world

London-funding-conference I went along to The London Funding Conference at the British Library last night and was again impressed by the Library’s ability to host these events.

In football terms the conference had scored a couple own goals, with over-long sponsor’s talks during the first half, but came storming back to win with truly excellent insights into the minds of Investors during the second half.

Michael Blakey (Angel Investor with Avonmore Developments) and Luke Johnson (Chairman of Risk Capital Partners plus much more) gave very open accounts of the state of the investment market and the key tick boxes for an entrepreneur to gain funding.

Let me give you a flavour of the main points that were covered. I’ve noted them in bullet form so as to get as much information down as possible, I’m sure you’ll forgive my poor prose on this occasion.

Michael Blakey:

Sees 1000 plans a year and 100 go straight into the bin because the sender has not checked his investment criteria (size of deal and preferred stage/industry).
Because VCs are investing other people’s money they have a rigid procedure, Angel Investors are more flexible. Not interested in just “ideas” need to show some revenue.
Sees 350 presentations a year and 50% of them don’t explain what the problem is that they are solving and how they will do in the first 10 minutes. Do so immediately you start.
Lead investors are important. Find one first, they can help you find others. The lead investor can act as a conduit to the others, so not all your time is taken up communicating.
Valuation is the deal breaker 75% of the time. Investors never believe the sales forecasts, cash-flow forecasts are more believable and more controllable. If the valuation is not what you want, work out what would increase it, ie. a CEO joining with an established reputation, or more revenue coming in.
Have a due-diligence pack (IP/Business Plan/Accounts/Professional Contacts/Team CVs etc) ready, it impresses investors.
No surprises. Reveal all issues upfront, it won’t put investors off as much as you think, they’ve seen these before, but if you don’t and they find out it will break the trust and the deal.
Work out what your funding model is likely to be. How much you need now and how much in perhaps 18 months. Not less than 18 months or all your time is spent fund raising and not running the business.
No life-style businesses, no high salaries.
Get your exit strategy. It can drive decisions. As an Investor he wants to know you have thought it through, not just the cliché of an IPO or trade sale.
Michael will not invest if more than 10% goes out in fees. In particular legal fees don’t need to be so high, there are standard documents, the lead Investor can normally help because they’ve done it all before.
Pet hate: don’t use the word “conservative”. Investors don’t believe your sales figures anyway, but do want to see you talking as though you have ambition.

Luke Johnson:

Angel Investors will expect to see subsequent rounds. Plan for them.
Investors back teams. Prefer duos or triumvirates. (btw that’s why we started Company Partners, in order to bring partners together to form a business team).
They look for high margins, in the business.
IP (Intellectual Property) is key. You must preferably own your own IP, not using someone else’s.
Understand your market thoroughly (Michael also said this). Be a market expert when presenting to investors, don’t be caught out.
Don’t get worried about valuation. The down side is only that you may give more equity away than you might, if it goes wrong you have actually lost nothing (the investor has lost his money), but if it goes well you have made a lot.

Luke had some tips for Investors also.

Only invest in what you understand.
Focus on the team and the competition.
Add value.
Expect to get references; don’t accept what is said at face value.
Expect failures. 40% may fail completely, 40% may tick along and 10% do very well.
Look for obsessives.
Form a partnership, not “them and us”.
Have patience, poor businesses fail quicker than successful ones become a success (up to 10 years).
Enjoy. You are investing not just for the money, enjoy the business.

The Investment Market

The debt to equity proportions in funding a business have changed. Previously it might have been 25% equity, the rest debt. Now despite what banks are saying, there is less debt available. The proportion of equity is more like 50% to 100% now in many cases.
Floatation is difficult so private equity is increasingly used.
Do all you can to get longer terms from suppliers and quicker cash from customers to make up for less debt available to fund working capital.

Luke revealed some truths about Private Equity.

Private Equity and Venture Capital are not the same. The Private Equity industry is 50 times the size of VC and covers a broader spectrum of industries, VC tends to concentrate on high-tech or bio.
The BVCA (British Venture Capital Assoc) is more Private Equity than VC, but calls itself VC for perception benefits.
Private Equity firms don’t take over operating control of a company, although they do have people on the board.
Private Equity firms sometimes get more from their fees than from the increase in capital valuation of a business.
In 2005 – 2008 half of all Private Equity ever invested was invested then, when money was over abundant and some poor investments may have been made. There is a time-bomb of failures waiting.
Private Equity investment is not easy; it’s hard to find good opportunities.

Why now is a great time to start a business

There is much gloom, but technology is making it easier than ever to start a business. With the Internet you can experiment, try a business on-line and if it doesn’t work, learn from it and try another.
Corporate life is increasingly unappealing. There is no longer any job security and if you are taking a risk of being employed you might as well do that for yourself and start your own business. The personal control and enjoyment is much better.
The world needs entrepreneurs and governments are encouraging people to take this up.
Virtual companies are more common and nearly everything can be outsourced.

Finally

Need to move out of your comfort zone sometimes, remember the worst that you can lose is your equity, but the best is unlimited. Never however give “personal guarantees”, keep the risk to the company.

There we have it, these senior Angel Investors don’t have to come and give advice to groups such as they did last night, but do so out of a real passion for creating businesses. We need more successful entrepreneurs to do so as we continue to develop an entrepreneurial culture.

Will small businesses ever get a slice of government spending?

Government helping small business A few days ago the office of the Prime Minister sent a letter to many small businesses and SME organisations explaining that a new online tool called Contracts Finder has been launched that will show all government tender opportunities.

At the same time he said they would eliminate the prequalification questionnaire (PQQ) for low value orders and standardise it so it was filled in just once for all other procurements.

Additionally there would be “Dragons Den” type surgeries where people with innovative products and services will be able to come and pitch to government – rather than waiting for the right tender to be issued.

All good news generally. For years the conditions set by procurements have excluded, or been unfairly weighed against smaller businesses applying for tenders. The cost of doing so is also proportionally higher for a small company than a large one.

Some people have commented that they are worried that eliminating the PQQ will create a “free for all” and that companies that stood no chance would waste their time bidding.

Well in an open market that can happen, but if in fact getting rid of the PQQ doesn’t change at all the size of company winning a tender, what was the point? There probably is still a culture in government procurement that only larger companies should win and just getting rid of prequalifying is not enough, attitudes must also change. I’ll wait and see on this one.

However, the Contracts Finder could be very good news indeed. There are some government tender sites out there (a couple charge for their use), but having one simple and easy to use central site for all tenders is a godsend. Much saving of time and hopefully it will make sure we don’t miss any relevant opportunities ever again.

Now on to the “Dragons Den” surgeries. They are not quite as the description implies, because you are not pitching for investment or funds, but for the chance to sell your innovative product or service.

The surgeries are going to be managed by Stephen Allott as a new Crown Commercial Representative (CCR) for SMEs. You will pitch to “a panel of senior procurement and operational professionals from central government and the wider public sector”.

I like this idea a lot, but the proof will be how many get taken up and what hoops they will have to jump through.

In the early days of Company Partners I approached a government figure to offer our business partner matching service to assist people who wanted to start a business. You would think that encouraging new start-ups by finding them a like minded partner to start up with was an obvious benefit to the economy.

The feedback was positive, but I would have to talk to the regional development agency, they in turn insisted I talk to a local Business Link and so it died. They also wanted me to trial it locally for 2 years and if it was successful they would put it out to tender.

Herein lays a problem. If at one of these surgeries, a young company puts forward an innovative idea for a service, will the government support them and place an order, or will there be endless jumping through hoops, or worse (in order of course to be fair and impartial) they put the service suggested up to open tender, effectively stealing the small company’s idea and giving it to someone else?

There is optimism for the general direction that the government is going on this, but let’s see if it actually produces a change.

Who needs a business partner?

Spot Bill Gates There’s a common misconception of the typical entrepreneur being a charismatic individual business person, not needing or wanting a partner’s help in driving forward his all conquering venture.

Think Richard Branson, Bill Gates, or the latest film idol, Mark Zuckerberg of Facebook fame.

Yes they were the front men and there’s no doubt that they steered the ship, but each started their businesses with partners that had complimentary skills.

Branson always had a partner for each business he began. In the earliest years it was Jonny Gems (Student magazine), then Nik Powell (Student magazine and Virgin) adding Simon Draper (Virgin) for his music knowledge. These were share holding partners, not employees, although Branson certainly surrounded himself with a very capable workforce.

Bill Gates and Paul Allen started Microsoft together, while Zuckerberg’s Facebook was founded with his original partner Eduardo Saverin (now the subject of a film – The Social Network).

There must be exceptions, anyone aware of one; I’d be interested to know? As far as I can find out, almost every successful company had a partner helping it to grow.

Why? Well, it is almost impossible for one person to have all the capabilities and characteristics needed to develop a business. One may have the technical skills, the other the sales or business knowledge.

Between them they start to handle the PR and soon it’s clear that one is more comfortable in that environment and they agree that he will act as the front man.

Taking on the world yourself, with no one to bounce ideas off and to give mutual motivation is quite daunting. A strong team of employees will help fill out any skills or experience that the business needs and a mentor can be very helpful in acting as a sounding board, but there’s nothing as good as having a partner with the same skin and commitment in the game as you.

Of course choosing a partner must be done with open eyes and it is absolutely important to get the right legal and partnership agreements in place. See my guide to healthy partnerships: Business Partnerships .

It was to provide a “dating site” for people to find business partners that we started Company Partners, so I guess I am a bit prejudiced in favour of not going it alone. But it’s a hard old world by yourself.

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