UK: The Fickle World Of Corporate Finance

Adam Beard, CEO of corporate development consultants, VenturePlanit, takes a brief look at the state of the corporate finance market and concludes that now may be a good time to seek investment.

If ‘Swiss Tony’, that immortal character from the ‘Fast Show’, were to describe corporate finance he would liken it to a ‘beautiful woman’. Because, like a beautiful woman, it’s mysterious, to gain acceptance could be very rewarding but just when you think you understand what’s expected of you, everything changes!

The last 36 months have been the most turbulent in the relatively short history of corporate finance thanks to the dot-com boom and bust. As a result, an area that most entrepreneurs and management teams have found daunting at best and inaccessible at worst has become even more confusing.

Chequebooks were being kept firmly in pockets for much of 2001 and the early part of this year. Some deals were being done but volumes were very low (a recent estimate suggests investment levels globally are at a tenth of what they were in 2000). Most deals were further investments into existing portfolio companies.

The investment community were still receiving reasonable volumes of plans throughout last year and into the first quarter of this year but they were finding very little of interest. Confidence levels were low, investors risk averse, the ‘good idea’ no longer being funded. Investment had never been so hard to obtain and for start-ups, virtually impossible.

But, like Swiss Tony’s beautiful woman, corporate finance is a fickle creature. Investors have started to stick their heads above the parapet again looking for opportunities. And here is the real irony. Deal flow has dried up.

September 11^th, Enron and other financial scandals plus stock market turbulence have affected business confidence. Currently very few businesses are submitting plans to the investment community. They’ve got money, they want to invest but good opportunities are just not there. And yet a further irony, they are expecting valuations to soften so won’t pay the price for deals that do interest them.

So who are the investors, what is driving them and what are they looking for? We’ll look at three of the main investment groups; Venture Capitalists, Angel Investors and the Government. Each has different investment criteria and motivations.

Firstly, the Venture Capitalist (VC). To understand the VC you must first understand how they make their money. VC’s raise their investment funds from city institutions, pension funds, business, local government and private individuals - it is easy to forget that most VC’s have investors of their own to provide returns for and answer to. These funds generally have set life spans and the VC must show a return greater than open market rates to its investors within the life of the fund. The VCs earn their money through running yield on the investment and a carried interest in the capital gain. Bare in mind, VCs are always raising more money for new funds based on their historic performance against industry norms. Therefore, the stage their fund has reached (how much has been invested and how old the fund), the performance of that fund to date as well as the state of the economy and the performance of individual market sectors will all contribute to the investment policies of a VC.

Currently, the VC community has money and has not been investing. They need to invest and some, due to the stage of their fund, are under real pressure to invest. But don’t think that that will make investment simple to obtain – silly season ended in 2000.

Currently, start-ups are finding funding very hard to achieve. Even start-up’s with experienced management teams are struggling. VC’s are looking to invest in existing businesses. Most want established businesses, trading for 3 years plus which are profitable or have the potential to be profitable within a 12 month period (£1m gross profit potential is the commonly quoted figure). Mergers and acquisitions are currently front-of-mind as many market sectors, particularly in technology, are considered ready for consolidation.

As always, management teams are the fundamental element for any investment so any company considering seeking investment needs to make an honest appraisal of its team and make plans to address any weaknesses. Lets make one thing clear. Investor back people first, businesses second and good ideas last. This applies to all investors, but particularly VC’s.

Angel investors are a different animal. Angels are high net worth individuals who choose to back businesses and business concepts. They are looking for a return as all investors do but some are often after something more.

Many Angels have made their money in business and are looking for an opportunity that will enable them to apply their learning and skills, as well as their cash, to help develop other businesses. They are looking for a role in the company as well as a stake. Whether this is a positive thing or not depends entirely upon the individual concerned. An Angel with the right experience, contacts and the attitude can be invaluable. An Angel whose business acumen is not as good as they believe it is or who considers their cash buys them the right to dictate can be very destructive. If you are after an Angel investor make sure that you select the person first and their money second.

Not all Angels want a role however. Some are simply after good returns and the interest provided through watching the company’s development at arms length. Some of these will use intermediaries to find, negotiate and invest on their behalf. The amount Angels invest will vary. Typically Angels, either individually or in syndicates, invest between £50k and £250k. However, some Angels have hundreds of thousand to invest and, very occasionally, millions. And Angels, generally, are early stage investors. Here is where the start-up will get its seed capital although they may pay a disproportionate price for it.

Currently Angels find themselves in the same boat as the VC’s. I was recently approached by the representative of an Angel syndicate who was wondering if we could provide them with some additional deal flow. When investors start chasing you, you know the market place is quiet. With share prices low and unstable, corporate finance, despite it recent problems, is looking more and more attractive. They just need the opportunities.

Our final investor is the Government who invests primarily via the various manifestations of the DTI. Government loans and grants are numerous and confusing. Each scheme has its own particular criteria and objective. The theory behind most is to be applauded but the mechanics of such schemes leaves much to be desired. Poorly communicated, a bureaucratic nightmare to apply for and strict acceptance criteria means that many Government funds remain relatively untapped. They want to give you money, they just don’t know how to do it!

But, one initiative may change some of that. The DTI, via the Regional Development Authorities, have launched Regional Venture Capital Funds. There are nine in all, one for each Authority and they are being administered by professional fund managers appointed by those authority’s. In other words, they will operate and invest in the same way as a VC does but within criteria laid down by the DTI. Their focus is primarily early stage and university spin-outs. Some of these funds are still seeking additional investment before they open, each must match the Governments contribution with equal amount of private funds, but all should be functioning soon. These funds should represent a more commercially focussed and accessible form of investment.

The market is changing and assuming the worst of the recent economic storm is over, as I believe it is, now could be a good time to polish up those business plans and look for the investor whose input could transform your business. Don’t be shy, the beautiful woman might just say yes!