The opportunity to create our first business came through a ‘Management Buyout’ which I will talk more about in the next section. It may well be said that this is an easier option than trying to raise cash for starting up a business from scratch. The deal at the time was a relative small one, but despite this we were able to secure funding and financial advice from the largest organisation in the country; this would certainly not be the case now. Commercial pressures have driven the traditional venture capital organisations and advisors further up the food chain where the rewards for a comparable amount of effort are much greater. This is all very well, but it has left the start-up and smaller SME out in the cold when it comes to raising finance, which is why much has been spoken recently about the ‘equity funding gap’. Micro deals require just as much, if not more effort with respect to due diligence than their larger counterpart, but because the deal size is small, the money available for advice and due diligence is proportionately small, which is why the larger VC’s and advisors alike tend to steer a wide berth when it comes to start-up and small company finance.
There is plenty of money around for investment in good business opportunities but increased difficulty in getting this money into high potential new businesses or growing SMEs. However, as with normal market forces, when a gap appears in the market, something emerges to fill it and this is now becoming the case with the funding market.
The government has recognised that this could threaten one of the major wealth generating mechanisms of the economy, i.e. the development of the SME, and it has facilitated the set-up of regional venture capital funds and independent organisations, until recently, through the regional development agencies, to help gain access to these funds and to lower cost financial advice. The smaller independent advisor and intermediary are also having an increasingly more important role to play in this process. It has interesting to see how access to finance for small businesses has changed in recent years; it certainly is not all dome and gloom. However, there is one extremely important point to bear in mind if you are starting up or you are established SME looking for finance; and that is, there are a lot of you out there and getting noticed is key. There two questions that you should ask yourself before you submit any business plan:
– Is your business plan investment ready?
– Is your business plan clear and simple?
The initial assessment of your plan will be made, by whoever sees it, in a frighteningly short space of time, bearing in mind that you are in the numbers game, make sure it is capable of passing the initial go-no go test. If it doesn’t, it will be harder to be taken seriously the second time around. It is very unfortunate, that a large proportion of potentially good business propositions are rejected at the start because they are simply not ready for investment or the plan is so complex that it would take days for somebody to understand business proposition within it, VC, Banks or Business Angels are just are not going to do that.
A few final points on raising finance; once you have your source of finance secured, don’t risk everything you have to support the deal and understand your exit strategy from day one.