Estelle Blanks, deputy director of the Innovation SuperNetwork which delivers FinanceCamp, highlights five key points to consider when embarking on the journey to raise external funds.
Innovation is a survival skill. The most successful companies not only respond to the current needs of their organisation and customers; they also anticipate future trends or demands and design processes, tools, products and services to meet these.
Taking the time to properly consider how best to finance innovation is critical to making the most of the opportunities presented. Financing innovation is a journey rather than a one-off event and different sources and types of funding will be relevant at different stages of that journey.
At each stage you need to ask yourself: What type and source suits your company best? Have you checked out the investor/lender’s criteria? And what do you need to prepare to ensure you secure their investment?
- Why seek external funding?
- What source of funding suits you best?
- What type of finance fits your needs?
- How can you prepare your business to attract the right investor?
- How do you meet potential investors?
Cost: Innovation can be costly, especially if you're doing something that is genuinely disruptive – in other words developing a new way of doing something or creating a brand new need that didn't exist before.
Reducing risk: Looking to outside sources for financial support can help to lower the risk involved in innovation by sharing the responsibility. Naturally, it also means that the rewards must be shared too.
Expertise: Bringing in external funding is also an opportunity to open up your company up to new people, new expertise, intellectual property and opportunities to collaborate. This way of working, referred to as open innovation, means tapping into the resources that exist outside your own organisation rather than relying entirely on what exists within.
Time: Time can be a critical factor in successful innovation, especially in the case of bringing a new product/service to market. Identifying a ready supply of external finance can help accelerate this process and prevent you from missing any opportunities while you find ways to source the cash from internal sources.
Internal funds: Don’t overlook internal sources of finance when going through your options. For example, by using retained earnings (sometimes referred to as plowback), companies can retain a portion of net income rather than distributing this to shareholders as dividends. By using factoring, a business can sell its accounts receivable at a discount to a third-party funding source to raise capital.
Friends and family: On the plus side, they might be more flexible than other lenders but the risk to balanced is how your relationship might be affected by the transaction.
Crowdfunding: A way of raising finance by asking a large number of people each for small amount of money. Crowdfunding brings investors and entrepreneurs together by making use of the vast networks of people connected by social media and specific crowdfunding websites.
Angels: Individuals with personal savings to invest into enterprise with a view to receiving a return on their investment. The UK government provides tax breaks via two schemes to incentivise this type of investment – EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) – and you can prepare your business to make it easier for angels to invest through Advance Assurance. Angels can operate alone or be affiliated to a network such as UKBAA.
Banks: This option is especially suited to scale-up businesses with a healthy cashflow and the financial track record to secure preferential loan rates but banks should not be overlooked for earlier stage innovative projects.
Venture capitalists: Firms or companies with access to funds to invest in business ventures, providing capital for start-up or expansion. Venture capitalists come in groupings of all sizes.
Corporate venturing: The practice where a large company takes an equity stake in a small but innovative or specialist firm. Alternatively, it might enter into a joint venture arrangement with the business. It may also provide management expertise to support the firm and help increase its competitive edge.
Grants/public sector finance: Businesses can apply to funding competitions to develop their innovations. Innovate UK and Research Councils UK are the main sources of public sector finance. Check out the Innovation SuperNetwork's Innovation Challenge for a list of R&D funding opportunities that are available now.
Debt finance: In the case of debt finance your company receives a loan and gives its promise to repay it – with interest. Debt finance includes both secured and unsecured loans, with security involving some kind of collateral that acts as an assurance the money will be repaid. Default on the loan, and the collateral is forfeited to pay off the debt.
Equity finance: With this route you raise money through the sale of shares in your company. Venture capital is one of the more popular forms of equity financing used to fund high risk, scale-up businesses. The amount of equity a venture capitalist will require is dependent on the perceived risk, amount invested and the relationship between the two parties.
Mezzanine finance: This gets its name because it sits partway between debt and equity finance. It gives the lender the right to convert to ownership or equity interest in the company in the event that there is a default in the loan, after venture capital companies and other senior lenders are paid.
Grants: These are non-repayable funds dispersed by government departments, foundations, corporations or trusts. See above for more information on sources. A recent report by market intelligence company Beauhurst reveals that a combination of grants (Innovate UK) and equity have proven to be the most successful to finance innovation.
Understand the financial requirements of your innovation. Why do you need the money? How will you spend it? What timescales are involved? Consider what type of finance is most relevant. If your plans are ambitious and will take a number of years to develop, it could be that one route suits your needs for the beginning of your journey and that you plan to convert to a different type further down the line.
Once you know what you want, consider what an investor will want. Identify which investors are relevant to your business then spend some time understanding what they want to get out of an investment, find out their criteria and consider whether there's a match between what you do and what they do.
Perfect your elevator pitch. Can you explain clearly and succinctly what your innovation is? What is its unique selling point? What problem does it seek to address and how does it offer a new solution? How will you make money from it? Being able to prepare this in a written proposal is one thing, but it's essential you can communicate this face-to-face with an investor. Bear in mind also that investors are usually generalists, who probably don't have specific knowledge in your business sector, so use language that is accessible and appealing. Investors invest in people, this might sound like a cliché, but it is true. Have a good team in place ready to talk through the proposition when you get an investor's attention.
Mentally prepare. Raising finance takes time so plan accordingly. Even the best ideas in the world take time to get off the ground. Doing due diligence in advance of meeting potential investors will speed up the process and raise your chances of securing that final handshake.
FinanceCamp: As detailed in the Beauhurst report mentioned above, there’s a startling disparity in the distribution of funding in the North East compared to London and the South East. We’re working hard to bridge this gap with projects including Entrepreneurs of the North, where we take a delegation of regional businesses to meet out-of-region investors, and FinanceCamp where we attract a wide range of UK investors to the North East. Every year we organise more than 400 face-to-face meetings between businesses and potential investors we have 'matched' to one another. Before delegates meet at a high-energy event, they are given tailored support to prepare their proposition, polish their presentation skills and master their pitch. Sign up for the next camp here.
Make the most of current networks: Many companies turn to their trusted professional services providers, such as lawyers and accountants, for access to connections to investors.
The North East Growth Hub: We carry a comprehensive listing of the different types of finance available to North East businesses, searchable by the type of funding you need, the amount, and your business sector.
Groupings: Organisations such as UKBAA, represent groupings of investors and organise meetings and events to introduce their members to entrepreneurs and businesses that are seeking funds.
FinanceCamp is part of the Innovation SuperNetwork, an organisation which creates competitive advantage for North East businesses though innovation and delivers inspiring events and projects including VentureFest North East, Innovation Challenge and FinanceCamp. It is supported by Innovate UK, the North East LEP, Northumbrian Water Group and the North East BIC, with part funding from the European Regional Development Fund.