Public funds plug funding gap

The announcement in March that the Government is to put £100 million into technology-focused enterprise capital funds acknowledged small companies’ biggest problem: the funding gap.

While it has recently become easier for small companies to raise early-stage funding through debt finance and angel investments this is usually only up to amounts of around £200,000.

Companies seeking larger amounts have the option of risk capital, yet for most venture capitalists it doesn’t make business sense to fund less than £1 million.

So for companies seeking finance somewhere between the two, a funding gap exists.

A proven model

Currently set up to help plug the gap are publicly-funded English Regional Venture Capital Funds (RVCFs), which finance growth companies in amounts up to £500,000.

The new Enterprise Capital Funds, such as the IQ Capital Fund will build on the RVCFs, encouraging investors to put money into small businesses.

What venture capitalists want

Public or private or both, venture capitalists invest in companies that will give them a return on their investment: in other words, in well-managed companies with growth potential and a credible business plan.

Geoff Sankey, of London RVCF YFM Venture Finance, says around 50 businesses approach YFM each month from sectors as diverse as retail and IT.

Whatever the sector, investors are looking for a specific combination of factors.

“What’s a good proposition? It’s a combination of managers who know what they’re talking about, the product or service, and the market,” he says.

Money with management

Regional funds offer more than funds; they also offer expertise, often providing non-executive directors with a track record in growing similar companies.

South Yorkshire Investment Fund explicitly works to its slogan: ‘money with management’.

The YFM fund brings in experts as non-executive directors of the firms they invest in. “[They] are our eyes, ears, mouths and hands,” says Sankey.

But he denies that expert participation is close to interference:

“When we come in as investors, we don’t want to be understudies.

“Once we see the right cast in place, we let them get on with it.

“We get the right team and we back it,” says Sankey.

What price equity?

In return for funds and expertise, a fund will take a stake in the firm of anywhere between 10 to 35 per cent.

“Some companies aren’t comfortable giving up an equity stake,” says Suzanne Tinkler, marketing manager for South Yorkshire Investment Fund.

“But the ones that come to us have thought about it.”

In return for equity these funds share risks, as well as rewards.

And their stake gives them a strong interest in making the firm work, rather than recouping their investment through bankruptcy.

Add to this the fact that small businesses don’t have to repay venture capital – unlike bank loans – from their cash flow, leaving them more capital to invest.