Funding your Digital / Creative Business July 2014

1. Funding your Digital / Creative Business • July 2014

2. Contents • Overview • Grants • Creative / Digital specifically • SMEs in general • Tax Credits for Creative Companies • Funding • Creative England • Private Equity • Process

3. Funding your business “If we wait for the moment when everything, absolutely everything is ready, we shall never begin.” Anon

4. High Anticipated Investor Return Low Low High Financial/Operational control Sources of funding Private Equity Private Investors JEREMIE funds Asset finance Bank Financing Internal resources Grantsupport

5. Principal Sources of external financefor SMEs SMEs are most likely to turn to their bank when seeking finance Source: BDRC Continental, SME Finance Monitor, Quarter 2 2013, August 2013

6. The main BIS-led Access to Finance schemes Source: National Audit Office analysis of departmental data

7. Does this apply to you?

8. Sources of Grants “Free money, free money free money” Patti Smith

9. Creative / Digital Specific Funding Creative England Business Support • Film makers: • Emerging Talent awards: short films up to £50,000 • Production Fund: up to £200,000 per project • Digital Creative businesses: • Entertainment on the Move Grant Competition • £25,000 grant • Closes 29 July 2014 • More details on the www.innovateuk.org website • Additional business support can be found at MediaCityUK:

10. Sources of Grants for SMEs • Technology Strategy Board (visit www.innovateuk.org) • Other grant programmes - to fund projects • Other smaller grants – to fund advice South Tyneside Business Feasibility Studies Grant Stockton-on-Tees Business Grant Scheme - Established businesses Stockton-on-Tees Business Grant Scheme - Young Businesses Wear Valley Business Support Programme - Existing Businesses Wear Valley Business Support Programme - New Businesses

11. Eligibility • Duration up to 9 months • Grant up to £25,000 (60% of costs) • To help assess commercial viability • Duration up to 18 months • Grant up to £100,000 (60% of costs) • To assess the technical feasibility /capability of a new technology / product / process • Duration up to 2 years • Grant up to £250,000 (35%-45%) • To assist a technically innovative new service / product / industrial process

12. Let’s Grow Available for SMEs in the North East

13. Skills Investment Fund • What is the Skills Investment Fund? • Fund to support skills in film, high end TV, animationand games • Financial support for skills based training in the Creative Industries • Government co-investing up to £16m to match industry investment, leading to a total of £32m over two years! • How does the SIF work? • For each £1 employers contribute to the SIF, CREATIVE Skillset matches with £1 HM Treasury investment! • Where does the investment go? • Investment raised is spent on training, for example: • Internships for new talent • Subsidised training schemes

14. Growth Vouchers • What can they be used for? • Developing a business plan to assist the accelerated growth of your business • Raising finance • Developing systems and processes • Improving internal business efficiency • Developing strategies to assist you in recruiting and retaining staff • Plus, if you register as a provider you can get your customers to get growth vouchers to buy your services! • In January 2014 the government launched the £30m “Growth Vouchers” programme • Aimed at encouraging small businesses to seek professional advice (like us!)to help address key business issues and support growth!

15. Google Enterprise Nation Marketplace

16. Tax Credits for Creative Companies “This is a key industry of the future and I want Britain to be one of its biggest centres” George Osborne

17. The importance of Tax Credits • The tax man wants to help your business – seriously! • We have had the R&D Tax Credit system for nearly 15 years • The R&D Credits can give up to 32% extra cash funding to companies performing R&D • We now have got specific tax credits for a range of Creative Industries companies which can provide up to 20% cash funding, the tax credits for Creative Industries are: • Video Games Tax Relief • Animation Tax Relief • High End Television Tax Relief • Theatre Tax Relief • Film Tax Relief

18. Video Games Development Relief • Businesses will be able to claim back a cash rebate of up to 20% of qualifying expenditure related to development of a video game • Video games can include apps, online games, games sold on CD/DVD or via a download • Effective from 1st April 2014 • Any company that is responsible for the design, production and testing of that game can qualify (but certain games are excluded, eg betting and online gambling) • Tax relief is available on both pre-production and post-release development but not expenditure on debugging or maintenance of a completed game! • Three conditions to be met……

19. The three main criteria • Intention for supply: • The game must have been intended to be released to the public • So…. not an “advertising” game • “British” video game: • The game must pass the cultural test • Minimum EEA expenditure: • At least 25% of the core expenditure on the must be European Economic Area expenditure • Core Expenditure: Expenditure on the design, production and testing of the game. (Cap on sub-contracted expenditure of £1m per game.) • EEA Expenditure: Expenditure on goods that are used or consumed in the EEA.

20. “Culturally British” Cultural Test • The cultural test is based on being awarded points against certain criteria • You need to score at least 16 out of 30 • A summary of the criteria are: • The percentage of the game that is set in the UK (or another country in the EEA) • The number of characters in the game that are from the UK or another country in the EEA • Whether the game is based on a British story or a story relating to another country in the EEA • The percentage of the dialogue that is in English or another regional or minority. • The level of contribution of the game to “the promotion, development or enhancement of British culture” • The amount of work done in the UK • Whether the lead people involved in making of the game are citizens of or ordinarily resident in the EEA!

21. Video Games Development Relief The Benefits Effectively reduces development costs on qualifying video games in the UK meaning: • Companies can compete better with overseas rivals • Improve their access to finance which in turn enable more companies to innovate and develop their own IP! • Encourage global publishers to develop games with a British Character! Overall it is intended that it will result in an increase in jobs, projects and investment in the UK games industry!

22. The importance of R&D tax reliefs • Why are they a key source of funding • Worth £18m a year to the North East economy • Can provide up to 54% total relief for costs of R&D (e.g. 2012/13 year) for profitable companies • Can provide up to 32.6% rebate on costs of R&D for loss making companies • Grant funded companies can now get cash back on grant funded R&D projects • Nationally, the annual value of the R&D tax reliefs mechanisms exceeds the value of all grants provided by the other organisations like Creative England, the Lets Grow fund, the Regional Growth Fund and the Technology Strategy Board combined

23. The importance of R&D tax reliefs

24. Some food for thought…. There are now more routes available to get tax credits for Creative Industries companies!

25. Non-Bank Funding “Bank failures are caused by depositors who don’t deposit enough money to cover losses due to mismanagement” Dan Quayle Bank image slide

26. Creative / Digital Specific Funding Creative England Business Loans • Supporting digital creative companies • Interest-free loans. • Businesses in the North can apply for a loan of £60,000 to £150,000 over 3 years. • First year repayments are minimal followed by 24 equal repayments. • The loan must be matched 50:50 with other finance. • Applications are assessed on a rolling basis.

27. Private Investors • Private Equity (JEREMIE) Funds: up to £1.25m • Business Angels: typically for £50,000 to £250,000 • Crowd sourcing: for up to £50,000

28. JEREMIE funds Managed by Rivers Capital Partners £7.5m fund – all eligible sectors Start-ups and early stage businesses £50K to £150K Managed by Northstar Ventures £15m fund – primarily technology Very early-stage start-ups £50K to £150K Managed by Northstar Ventures £25m fund – all eligible business sectors Early stage business with high growth potential £50K to £750K Managed by IP Group £25m fund Focussed on technology £50K to £1.25m

29. JEREMIE funds Managed by Entrust £5m fund – all eligible business sectors Start ups and established micro and small businesses up to £25K Managed by NEL Fund Managers £23m fund - all eligible business sectors Established businesses requiring development capital - £50K to £750K Managed by FW Capital £17m fund – all eligible business sectors Established businesses requiring development capital £350K to £1.25m

30. How long does it all take?

31. How do I know what I need? What blend of finance works best? • Look at your business first • What do I need funding for? • How much do I think I need? • How much do I really need? • What can I do differently to reduce funding • Will you create jobs and would grants make a difference to whether you go ahead? • What would my banker think? • What is the gap… gap is funded by equity Larger projects need a detailed business plan, forecasts and strategic approach

32. How can I prepare for funding Why do you need the money – select an appropriate funder What will the money help you achieve How much will you need How soon can the funder exit and take their return What level of profitability can a business maintain into the future What is the headroom (i.e. how far can things slip) What is the “Plan B” if things don’t work out Regardless of the funder the questions will be the same If you have good answers to these questions your application is much more likely to succeed. We improve the odds from 3% to 75%.

33. Conclusion Funding your business is more complex than before Specialist funds are available Start early and be prepared Banks do still lend but you need to be better prepared and think of alternatives Approach the right funders, research and check that the funder is right for you Funders invest in management teams Businesses with strong management with quality information are more likely to be successful Have a business plan and forecast that explains your project, the risks and your Plan B Be prepared to back your business Professional advisors are here to help

34. VC Investment: What Investors Are Looking For? Alex Buchan Investment Manager

35. Who we are • Equity investors in the North East since 2004 • Based in Newcastle • Currently investing from 2 funds • North East Accelerator Fund • North East Proof of Concept Fund • Team of 14 of whom 8 actively invest funds and manage the portfolio

36. Accelerator Fund • £25m Fund • Initial investments generally in the range of £150k-£750k • No sector bias, looking for scalable innovative businesses • Primarily equity but some debt investments as well

37. Proof of Concept Fund • £15m Fund • Investing in early stage technology businesses • Broad definition of technology • Initial investment generally £100k convertible loan • Ability to follow to a maximum of £170k without co-investment • Can follow further with 50/50 match with other investors

38. Core Investment Requirement • When looking to raise funds, management has a number of options of which equity is one • Raising money by this route needs to make sense for both management and investors • In broad terms, equity is the best route to grow a scalable business quickly with the intention of reaching a liquidity event within an agreed time frame

39. Equity – For and Against • For: • Provides capital for growth • No interest costs • Strengthens the balance sheet • Investors and management shareholders aligned • Against: • Requires sale of part of the company to an outside interest • In addition equity investment can help a company: • Improve governance • Bring outside expertise to the board • Focus management on building value

40. What investors look for • Strong team • Scalable proposition • Large market potential • Protectable market position • Sensible route to exit

41. Team • Single most important issue for investors, who will look at: • Individual attributes – track records • Balance of skills • Team dynamic • Enthusiasm • Ambition • Chemistry between managers and investors • They will also look for any gaps which need to be filled at the point of investment and as the company grows

42. Scalable Proposition • The ability to develop a product/service where increasing revenue is not directly dependent on increasing overheads • Key factors: • Products • Routes to market • Manufacturing processes • Customer acquisition

43. Market • What is the market you are trying to address? • How big is it now? • What is the potential? • Routes to market? • Is there genuine market need? • What are the costs of entry? • Who are the competitors? • What gives you the edge? • What traction do you already have from the market?

44. Protectable market position • How do you build and maintain a strong position in a market and defend it against inevitable competition? • Formal IP – patents, trademarks etc. • First mover advantage • Branding • Price and positioning • Routes to market • Quality of product / service

45. Exit • Funds do not invest cash forever, they have to return funds to their shareholders • Typically a venture fund has a 10 year life so needs to have exited all investments by that time • Investors need to be convinced that management will work alongside them to build value to achieve an exit (i.e. no lifestyle businesses) • This is a process which management should be mindful of from the beginning and clear planning as to timing and target value is vital

46. Exit • Typical routes to exit are: • Trade sale • IPO • Sale to another investor (this is likely to involve management remaining with the company)

47. What returns a VC looks for • The theory is that of every 10 investments 2 will pay for the rest • 4 will go under and 4 will plod along without any great return • VC investors need to be convinced that any investment they make has the potential to be one of the two successes typically returning more than 10x cash invested

48. VC and Management • A VC investment is the start of a long relationship so it is critical that: • There is good chemistry between investors and management • Interests are aligned at the start • Both sides stand to gain substantially from success

49. My contact details are alex@northstarventures.co.uk 07802 482739

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