Raising Finance

1. Raising Finance

2. Raising Finance Often the hardest part of starting a business is raising the money to get going. The entrepreneur might have a great idea and clear idea of how to turn it into a successful business.  However, if sufficient finance can’t be raised, it is unlikely that the business will get off the ground.

3. Entrepreneur need to consider How much finance is required? When and how long the finance is needed for? What security (if any) can be provided? Whether the entrepreneur is prepared to give up some control (ownership) of the start-up in return for investment

4. Financing a start-up needs take into account Set-up costs (the costs that are incurred before the business starts to trade) Starting investment in capacity (the fixed assets that the business needs before it can begin to trade) Working capital (the stocks needed by the business –e.g. r raw materials + allowance for amounts that will be owed by customers once sales begin) Growth and development (e.g. extra investment in capacity)

5. Financing stages Seed Money: Low level financing needed to prove a new idea, often provided by angel investors. Crowd funding is also emerging as an option for seed funding. Start-up: Early stage firms that need funding for expenses associated with marketing and product development First-Round (Series A round): Early sales and manufacturing funds Second-Round: Working capital for early stage companies that are selling product, but not yet turning a profit Third-Round: Also called Mezzanine financing, this is expansion money for a newly profitable company Fourth-Round: Also called bridge financing, 4th round is intended to finance the "going public" process

6. Sources of finance Internal sources Personal sources Retained Profits Share capital External sources Bank loan/ bank overdraft Grant support from government sources Business angels Seed capital funds Venture capital funds Corporates venturing Public listing

7. Personal sources Most start-ups make use of the personal financial arrangements of the founder. This can be personal savings or other cash balances that have been accumulated.  It can be personal debt facilities which are made available to the business.  It can also simply be the found working for nothing!

8. Personal Sources Savings Re-mortgaging Borrowing from friends or family Credit cards

9. Savings An entrepreneur will often invest personal cash balances into a start-up.  This is a cheap form of finance and it is readily available. Often the decision to start a business is prompted by a change in the personal circumstances of the entrepreneur – e.g. redundancy or an inheritance.  Investing personal savings maximises the control the entrepreneur keeps over the business.  It is also a strong signal of commitment to outside investors or providers of finance

10. Re-mortgaging Re-mortgaging is the most popular way of raising loan-related capital for a start-up.  The entrepreneur takes out a second or larger mortgage on a private property and then invests some or all of this money into the business.  The use of mortgaging like this provides access to relatively low-cost finance, although the risk is that, if the business fails, then the property will be lost too

11. Borrowing from friends or family  Friends and family who are supportive of the business idea provide money either directly to the entrepreneur or into the business.  This can be quicker and cheaper to arrange (certainly compared with a standard bank loan) and the interest and repayment terms may be more flexible than a bank loan.  However, borrowing in this way can add to the stress faced by an entrepreneur, particularly if the business gets into difficulties.

12. Credit cards Each month, the entrepreneur pays for various business-related expenses on a credit card.  15 days later the credit card statement is sent in the post and the balance is paid by the business within the credit-free period.  The effect is that the business gets access to a free credit period of aroung 30-45 days

13. Retained Profits This is the cash that is generated by the business when it trades profitably – another important source of finance for any business, large or small. Retained profits can generate cash the moment trading has begun.  Retained profits have several major advantages: They are cheap (though not free) – effectively the “cost of capital” of retained profits is the opportunity cost for shareholders of leaving profits in the business (i.e. the return they could have obtained elsewhere) They are very flexible – management have complete control over how they are reinvested and what proportion is kept rather than paid as dividends They do not dilute the ownership of the company

14. Share capital The founding entrepreneur may decide to invest in the share capital of a company, founded for the purpose of forming the start-up.  This is a common method of financing a start-up.  The founder provides all the share capital of the company, retaining 100% control over the business. The key point to note here is that the entrepreneur may be using a variety of personal sources to invest in the shares.  Once the investment has been made, it is the company that owns the money provided.  The shareholder obtains a return on this investment through dividends (payments out of profits) and/or the value of the business when it is eventually sold.

15. Bank Loan A bank loan is an amount of money borrowed for a set period within an agreed repayment schedule. The repayment amount will depend on the size and duration of the loan and the rate of interest.   Many businesses use bank loans as a suitable part of their financial structure.  Bank loans tend to be more available for well-established and growing businesses rather than start-up businesses.  The reason for this is risk – banks prefer to loan to businesses with an established track record of profitability, which makes them more likely to be able to repay the loan and interest.

16. Advantages of bank loans The business is guaranteed the money for a certain period - generally three to ten years (unless it breaches the loan conditions) Loans can be matched to the lifetime of the equipment or other assets the loan is for While interest must be paid on the loan, there is no need to provide the bank with a share in the business Interest rates may be fixed for the term, making it easier to forecast interest payments

17. Disadvantages of bank loans The main disadvantage of a bank loan is the security that usually has to be given to the bank over the assets of the business.  The bank becomes a secured creditor with collateral over the business assets. If the business fails, then the bank has first call on what is left (before the shareholders). Another disadvantage of a bank loan is it’s relatively lack of flexibility.  A growing business might take a loan out for €500,00 but finds it only needed €250,000.  That means that interest is being paid on €250,000 of excess finance.

18. Bank overdfaft Overdraft financing is provided when businesses make payments from their business current account exceeding the available cash balance.  An overdraft facility enables businesses to obtain short-term funding - although in theory the amount loaned is repayable on demand by the bank. The amount of an overdraft at any one time will depend on the cash flows of the business, the timing of receipts and payments, seasonal trends in the sales and so on

19. Overdraft considerations The amount borrowed should not exceed the agreed limit ("facility").  The amount of the facility made available is a matter for negotiation with the bank; -Interest is charged on the amount overdrawn - at a rate that is above the Bank Base Rate.  The bank may also charge an overdraft facility fee; Overdrafts are generally meant to cover short-term financing requirements - they are not generally meant to provide a permanent source of finance Depending on the size of the overdraft facility, the bank may require the SME to provide some security - for example by securing the overdraft against tangible fixed assets, or against personal guarantees provided by the directors

20. Support funding There are various institutions within Ireland that are dedicated to supporting and promoting indigenous business development. These institutions offer a range of business supports in the form of funding, consultation and incubation. There are three main institutions County and City Enterprise Boards Enterprise Ireland InterTradeIreland.

21. County and city enterprise boards The County and City Enterprise Boards are focused on promoting business and entrepreneurial activity within the micro-business sector at a regional basis in Ireland. Funding support is offered for three main business activities: Funding support is offered for three main business activities: 1. Priming Grants - are offered to assist businesses at start up level; 2. Business Expansion Grants - are offered to established businesses seeking to develop or expand their operations and 3. Feasibility Grants - are offered to assist companies in undertaking market research activities.

22. Priming grants The purpose of this grant is aid an enterprise with start up costs within the first eighteen months of trading. This form of grant is offered to Sole Traders, Partnerships and Community or Limited Companies. The maximum grant that can be paid is 50% of the overall investment in the company to an amount no greater than €150,000. Only companies exhibiting a potential to graduate to Enterprise Ireland or to trade internationally will be considered for amounts exceeding €80,000. A maximum of €15,000 per job created will apply in cases where the support is used for employment purposes.

23. Business expansion grants The purpose of this grant is to assist businesses in the next phases of business development i.e. growth. The Business Expansion Grant is designed to assist businesses following the initial eighteen months of development Funding details or similar to priming grants

24. Feasibility grants This grant is designed to assist businesses with conducting market research for a product or service and examining its sustainability. The maximum amount of the Feasibility Grant will be 60% of the total investment or €20,000 whichever is the lesser.

25. Enterprise Ireland Enterprise Ireland is a government body concerned with the development of indigenous businesses within Ireland. Enterprise Ireland offer a number of funding supports for all stages of business development including feasibility and research studies, recruitment supports, innovation supports, consultancy supports and various other support mechanisms.

26. Enterprise Ireland selective list of funding supports Start up funding Research and development fund New market research programme Feasibility study grant Going global fund Job expansion fund Business expansion scheme

27. Start up funding Enterprise Ireland offers the “Innovative HPSU Offer” to new businesses exhibiting a high potential success rate. This offer entails a financial contribution from Enterprise Ireland towards the achievement of the company’s overall business plan i.e. the development of products, services or processes.

28. Start up funding – funding criteria The investment amount will be determined by Enterprise Ireland based on an assessment of the company’s business plan under the following criteria: Viability of the business idea; Growth Potential; Potential value to the Irish Economy i.e. number of jobs created and exports generated; Level of associated risk; and Degree of quality and innovation throughout the business plan.

29. Research and development fund Enterprise Ireland’s R&D fund is primarily concerned with providing financial assistance to companies in undertaking research, development and technological innovation and is relevant in all stages of business development. The funding is offered in the form of a grant, the maximum amount of which will not exceed €450,000. The funding is intended to support any activities involved in undertaking R&D or in creating an R&D culture.

30. New market research programme The New Market Research Programme is concerned with providing additional resources to assist companies in researching new market opportunities abroad. The fund is aimed at Enterprise Ireland clients that are currently investigating opportunities and have the capability to deliver results in new markets. The fund is provided by means of a grant to clients, the maximum amount of which is €200,000 over any three year fiscal period.

31. Feasibility study grant This grant is aimed at assisting an individual to assess the viability of manufacturing a new product / process or to develop a new internationally traded service. The study can include the investigation of options such as joint ventures, licensing agreements or the development of entirely new manufacturing facilities. The maximum grant level will be based on the company’s expenditure and is subject to reduction should the company secure alternate finance under the Business Expansion or Seed Capital Schemes. The maximum level of funding will not exceed €150,000.

32. Going global fund The GOING GLOBAL FUND is concerned with assisting successfully established Irish businesses seeking to investigate opportunities to internationalise their business as a route to growth. The maximum level of funding is 50% of all eligible costs not exceeding an amount of €25,000.

33. Job expansion fund The objective of this fund is to help Enterprise Ireland clients to improve the scope of their employment through increased sales and international trade. The support is offered by means of a grant payment, the maximum amount of which will not exceed €150,000.

34. Business expansion scheme The Business Expansion Scheme (BES) is an initiative which allows business investors to obtain tax relief on their investments in each tax year. Enterprise Ireland is responsible for assessing and certifying eligible companies for the BES programme. There are no tax benefits for the business that receives the BES investment however, by qualifying under the scheme; these businesses will find it much easier to attract external investors who will be interested in reduced tax rates for their investments

35. InterTradeIreland InterTradeIreland is a business support agency concerned with promoting cross-border business activity between the Republic of Ireland and Northern Ireland. InterTradeIreland is focused on economic cooperation and the achievement of mutual benefit between both regions. InterTradeIreland offers a number of supports to businesses wishing to explore cross-border opportunities.

36. Business angels Business Angels, also known as “informal private investors”, are private individuals who invest capital in companies during their early stage of development.  In addition, they contribute their know-how or experience in company management and can offer valuable expertise and guidance.   Angels usually seek active participation in the company in which they invest.

37. Business Angels Business Angels can be a substitute for classical bank financing or venture capital which can be difficult to attract at the early stage of a company’s life. They are primarily motivated by return on investment and Business Angel involvement can often help secure access to venture capital or classical bank loans.

38. Business Angels The average initial investment by Business Angels ranges between €50K and €250k individually, or can form syndicates (partnerships with other Business Angels) for investment up to €500k and beyond.  Business Angels generally invest in the region where they live and in areas in which they have greatest expertise/knowledge.   They may not necessarily look to invest in new technologies, although some specialise in providing finance in such areas.

39. Desirable traits in a business angle a strong commercial track record; excellent business credentials; capacity to invest; ability to identify commercial opportunity; time to invest in the creation of a new company; vision to transform new technologies into solid businesses; established links and relevant industry contacts.

40. Seed capital funds Seed capital, like venture capital, is an investment in a company in return for a stake (equity) in that company. It is typically made in early-stage companies who are in the funding gap between business angels and venture capitalists.

41. Desirable traits in a seed capital investor a strong commercial track record excellent business credentials capacity to invest ability to identify commercial opportunity  established links and relevant industry contacts the ability to follow its investment until such time as the company is ready to continue its growth with venture capital and beyond

42. Seed capital funds in Ireland AIB Seed Capital Fund - €53m AIB Start-up Accelerator Fund - €22m Bank of Ireland Early Stage Equity Fund - €32m Bank of Ireland Start-up and Emerging Sectors Equity Fund - €17m

43. Venture capital funds Venture Capital is capital provided by full-time, professional firms (venture capitalists) who invest with management in ambitious, fast-growing companies with the potential to develop into significant businesses. In addition to injecting cash into the company, the venture capitalist is likely to add considerably to the credibility of the company and to supply management expertise, support and access to their contacts.  As part of their mentoring and monitoring of their investment, they are likely to seek board membership.

44. Venture capital funds In contrast to bank finance, venture capitalists are not looking for scheduled repayment, but for a minority of the share capital of your company in return for cash. The venture capitalists will typically look to realise their investment in five years, either through floatation on a public market, a trade sale or for their stake to be bought out by the company.

45. What venture capital funds are looking for Venture Capital funds usually invest in companies that are raising €500k+ in equity. The companies most have be in a fast-growing, attractive sector, with a strong management team and demonstrable skills. The product/service must solve a clearly identified problem

46. Is Venture Capital an option ? Does my company have high growth prospects and is my team ambitious to grow the company rapidly? Does my company have a product or service with a competitive edge or unique selling point? Can it be protected by intellectual property rights? Can I demonstrate relevant industry experience? Does my team have the relevant skills to deliver on the business plan fully? Am I willing to sell some of the company’s shares to a private equity investor? Is there a realistic exit opportunity for all shareholders in order to realise their investment? Am I prepared to accept that my exiting this business may be in the best interest of all of my shareholders?

47. The ideal venture capital investor will have: a strong commercial track record excellent business credentials capacity to invest ability to identify commercial opportunity time to invest in the development of a young company established links and relevant industry contacts a clear exit strategy and ability to follow its money until that point

48. What to consider in a venture capitalist Area of expertise Area of interest  Current availability of capital Risk exposure in the same sector

49. Enterprise Ireland supported venture capital funds AIB Seed Capital Fund - €53m AIB Start-up Accelerator Fund - €22m Atlantic Bridge Venture Fund - €67m Atlantic Bridge Venture Fund II - €75m Bank of Ireland Early Stage Equity Fund - €32m Bank of Ireland Kernel Capital Partners - €51m Bank of Ireland Start-up and Emerging Sectors Equity Fund - €17m Delta Partners - €105m Fountain Healthcare Partners - €73 Seroba Kernel Lifesciences - €75m NCB Ulster Bank Diageo Fund - €75m  

50. Corporate venturing Corporate Venturing is the provision of venture capital from one company to another. Corporate venture capitalists are similar to VCs in the sense that they look for young, promising companies. The key difference is that Corporate VCs tend to be more risk-averse than traditional VCs and also more sector-specific. How the company/product fits with Corporate VC’s own research and development is the lead factor in the investment decision.

51. The decision of eligibility is determined by the Corporate VC, and the key factors are the “fit”, the perceived likelihood of success, the track record of the company directors and the strength of the product.

52. Desirable characteristics in a corporate partner a track record of investing in small businesses; excellent business credentials; capacity to invest; ability to market the product successfully; vision to transform new technologies into solid businesses; established links and relevant industry contacts.

53. Corporate venturing – level of funding Corporate Venturing can span investments from as low as €50k in a very early-stage start-up, all the way through the funding journey up to many millions.

54. Public listing An Initial Public Offering (IPO) is a company’s first sale of stock (shares) to the public typically on a stock exchange, also known as ‘Going Public’. The shares of the company are listed on a public stock exchange and can be bought and sold on that market.

55. Advantages of a public listing Access to New finance – new issue of shares raises money for the company and reduces the company’s dependence on debt finance. Enhanced Company Image and Publicity. Motivating Management and Employees. Cashing in – existing shareholders can sell their shares on a public market thus allowing them realise the value of their shares.

56. Disadvantages of a public listing Costs – direct costs of listing, costs of information disclosure, reduced freedom of action in making business decisions. Loss of control – with increased number of shares in issue the original shareholders control is diluted. Increased public scrutiny

57. Typical stock exchanges that Irish companies have listed on. Irish stock exchange (ISE) AIM - London Stock Exchange - the London Stock Exchange’s International Market for smaller growing companies London Stock Exchange - the London Stock Exchange’s Main Market is the world’s most international market for the listing and trading of equity, debt and other securities. NASDAQ (National Association of Securities Dealer Automated Quotations) system for over-the-counter Stock trading. Founded in 1971, the NASDAQ Exchange is the world’s first electronic stock market