Just back from giving a business plan workshop to a group of MBA students, many of whom were keen to start their own business. So naturally the subject of how to fund a business came up.

One of the areas that regularly seems to cause confusion with the students is the difference between Private Equity, Business Angels and Venture Capital.

At first glance they may all look the same. But there are differences and which you use varies with situation.

Firstly let’s clear up the term Private Equity. Although it’s a generic name for having a company owned by a person or group of people where the shares are not in the public domain (ie not on the stock market). Private Equity in investment terms tends to mean those large investment companies that buy up the majority of shares in a significant sized established business.

Most entrepreneurs will be more interested in Business Angels and Venture Capital companies where they both invest in younger businesses and don’t generally take the majority of shares.

The main difference between these is that Venture Capital firms are investing money gathered from other people who have bought into a Venture Capital fund. Whereas Business Angels are investing their own money.

This is an important difference because it means that Venture Capital firms have to invest in less risky opportunities. Hardly ever do they invest in start-ups, preferring to be involved after the business has proved itself and is ready for high growth. To cover their overheads these also tend to be larger opportunities.

Since Business Angel investors are using their own money, they will be prepared to take slightly more risk, start-ups and early stage companies are more suited to these individual investors. Occasionally in order to share risk or to be involved in larger deals Business Angels will form a consortium, generally headed by a lead investor.

Business Angel Investor’s names and contacts are not in a “yellow pages” of investors, otherwise they would have people camping on their doorsteps, never mind the security issues, they tend to use intermediaries to act as gatekeepers and screens.

Some of these intermediaries are expensive to use, which is why Company Partners set itself up as a “members site”. For a small monthly membership you have access to a full database of Business Angels.

As promised the chancellor has confirmed in his March budget documents that there will be a Seed Enterprise Investment Scheme (SEIS) starting from 6th April 2012, although it didn’t get a mention in his actual speech.

Just to clarify for anyone confused by the similarity of SEIS with an existing scheme, there is already an Enterprise Investment Scheme (EIS) which targets larger businesses rather than start-ups.

This big brother to the SEIS also received good news in the budget, with the qualifying size of a company moving from a maximum gross asset size of £7 million with 50 employees, to £15 million with 250 employees. This means later stage investment prospects will now qualify for EIS (see EIS for more information).

The basic information that I covered on my last blog on the SEIS remains unchanged, so I won’t go over that again. Suffice to say it is worth ensuring that your new business qualifies (not all industries do – eg. Property development and financial services) and publicise to potential Investors that they can get tax relief by investing in your business.

Clearly for Investors it’s a no-brainer that you should utilise this new scheme for your investments.

So how do you make use of it?

Luckily those nice people at HMRC have put together a fairly comprehensive web-page that explains the SEIS and how to apply for it. See http://www.hmrc.gov.uk/seedeis/index.htm

They are careful to say that although the scheme starts on the 6th April, until the budget gets Royal Assent (around July) it isn’t set in stone, but it’s unlikely to alter in my view.

The HMRC web-pages have a section on how to get advance assurance that your business and the shares that you are going to issue to an Investor will qualify. It can be useful to do this in making your opportunity attractive.

SEIS (Seed Enterprise Investment Scheme) is a new government incentive to help UK start-ups and young companies.

It starts in just a few weeks on April 6th, so now is a good time to start building this into your funding plan for your start-up. Or if you are an Investor, have a look to see if this will be applicable to the businesses into which you are investing.

There has been a similar incentive around for some time now (see EIS) but the SEIS is specifically targeting new companies.

The details will come out in the Chancellors budget speech next week (21st March), but these are the basic points:

• The business must be new, or 2 years old or less, with fewer than 25 employees. It must have less than £200,000 of gross assets and not quoted on a stock market.
• Directors or executives cannot use the scheme to invest in their own companies.
• You can raise up to £150,000 of funding through the SEIS, but mustn’t have already raised any money under EIS or venture capital trust (VCT) schemes. This is in total not per year.

An Investor can have up to 30% of a share in the business under this scheme. The SEIS makes it attractive for an Investor to fund a start-up because of the number of tax reliefs that they would receive:

1. Investors can claim back income-tax of 50% of the amount invested.
2. An Investor can have a ‘capital gains tax holiday’. Capital gains tax (CGT) can be avoided on any asset sold during the financial year 2012-2013 as long as they reinvest the proceeds in a SEIS eligible start-up in the same year.
3. The combined effect of the CGT holiday and the income tax break gives relief of up to 78% in the first year.

There is as you can imagine, a number of detail points that would need to be investigated but this should whet your appetite. It’s well worth while finding out more about the scheme either to make your new business attractive, or to maximise your investment returns.

After the chancellor has given final details next week, I’ll do a summary here and point you towards the required forms that the revenue will need to be completed.

Am I the only one that is getting confused by the increasing number of initiatives that the government is rolling out to encourage entrepreneurship? Or frustrated because they don’t actually seem to make a difference?

We had Business Link, then we didn’t, except it still exists as a “business advice and guidance service portal”.

The Small Firms Loan Guarantee scheme (SFLG) has been around for decades and continues to help companies that need a bank loan. Or it would if the banks fulfilled their part of the deal by releasing the funds.

To encourage them to do so the government set up Project Merlin last year whereby the banks agreed to lend £76B specifically to small firms. However it has been a failure and banks are still holding on to their money. Now Merlin looks like being dumped along with any credibility that the banks could have gained by making good on their promises.

For some time now we’ve had the Enterprise Investment Scheme (EIS) to encourage Investors, by giving them various tax breaks if they help to fund growing businesses.

In addition last year the Chancellor announced the Seed Enterprise Investment Scheme (SEIS) due to come into effect on the 6^th April 2012. This is aimed at small start-ups and gives a 50% tax relief to Investors. I’ll do a write up of that shortly, but it looks promising in motivating Investors.

Enterprise Zones were introduced to mixed response and the jury is out on their long-term effectiveness.

The Government has pushed StartupBritain which they call “a national campaign by entrepreneurs for entrepreneurs, harnessing the expertise and passion of Britain’s leading businesspeople to celebrate, inspire and accelerate enterprise in the UK”. Fine words – but never-the-less just words.

Talking about fine words, recently the latest campaign is “There’s a business in you”, which provides inspiring stories and highlights support available. However most of the highlighted support simply takes you to the Business Link website.

Then there’s talk about cutting Red Tape. There is a “Red Tape Challenge”, where members of the public can suggest red tape to be cut and a “1 in, 1 out” idea that says if a department wants to bring in a piece of legislation, they must first remove one. Latest government news is that there have been 19 in and 33 out, saving small businesses £3.2 B a year. What shall we spend it on?

How about making tax simpler and easier to understand I hear you say. Well there’s a government office called “The office for Tax Simplification”. Yes there really is, let’s hope they are successful.

So is it all spin and gimmicks as some business experts have commented, or a well co-ordinated and ambitious campaign to release the entrepreneurial spirit in us all and make Britain great again?

I had a call from a director of a business that I occasionally provide with mentoring to ask me to come round asap. Over the Xmas break he had been having second thoughts about carrying the activity on, even though it was profitable.

There was too much stress and he wasn’t getting on with his business partner. I was a bit surprised because they both contributed well to the company and had good complimentary skills, both were also quite reasonable people.

Delving into the cause of this crisis, it looked a matter of miscommunication between them.   Or to be exact it was one sided communication. The director I was with sent emails explaining his activity, making suggestions for the business and never got any response from his business partner.

His partner just didn’t see the need to respond, he was busy getting on with the job.

Because they worked in different offices there was no day-to-day chats round the coffee machine and because they had distinct responsibilities they had felt it was only required to meet monthly.

This wasn’t enough interaction to run a business together. Businesses can take all of your time, fire-fighting, dealing with customers and suppliers, so that there doesn’t appear to be the time to “needlessly” be communicating with others in your own business.

But regular physical meetings and prompt electronic communication to each other is vital. It helps team spirit, reduces stress and avoids misunderstandings. The interaction can also generate new ideas that often pop out of the woodwork seemingly just by magic.

Some large companies learnt this early on. I remember going to HP’s office “beer-busts” and Cray’s picnics. IT companies seem to have latched on to ways of informal employee interaction, as well as creating regular occasions for directors to met up.

This can apply also to smaller companies where it may seem that there is no need to plan such activity, since their small size should mean that there are plenty of opportunities to talk. However as was seen, demands on an individual’s time can make that difficult.

Additionally, there can be differing attitudes to communication. One being too verbose, the other too cryptic.

What we did in this case was to meet and thrash out a common attitude and business culture for communication. All agreed that any emails sent should be answered by return if possible, to schedule weekly Skype video calls and fortnightly get-togethers. Some of which could just be an opportunity to brainstorm ideas and ensure all were going in the same direction.

Having an open and friendly approach to internal communication, sharing issues in a no-blame, constructive way has to start at the top.

In small companies there should be far less politics involved than in larger organisations and this good communication and teamwork is an advantage that smaller businesses should have over some of their larger competitors.

After writing the title of this piece I thought what more can I say? That’s it isn’t it? Provide a better service than your competitors and you will win business.

But maybe it’s worth thinking about this a bit deeper. No one actually sets out to deliberately provide a bad service and does it really matter that much?

Increasingly the difference between me choosing one supplier or another is their service. In today’s marketplace most prices are competitive. I can also easily compare prices on-line and I’m getting pretty good at negotiating discounts as well.

But you have to live with the product you buy a long time and if it’s a service you are buying, such as a telephone line, broadband ISP, or consultancy; the ease and quality of service can make your life pleasurable or absolute hell.

Two companies I enjoy dealing with are Amazon and John Lewis. I’ve never had any trouble returning goods with these companies and they have speedy delivery, so I continue to go back to them – even if sometimes their price is higher.

On the other hand who hasn’t been kept waiting ages on a telephone line while trying to get technical support from your Internet Service Provider?

Or had to deal with a call centre where you get passed from one automated menu to another, before talking to someone who clearly didn’t want to be there talking to you.

Large businesses can fall into this trap, because someone has done an efficiency study and calculated that the odd drop-out of customer is compensated by the lower cost of delivering service. Many large faceless organisations, such as Utility companies, and big corporations, just see such service as normal. The stock answer is “there are always complaining customers, but when you think that we deal with millions of people a year the number of complaints are very small”. Does that reassure you?

Smaller businesses may just have lost sight of the importance of service. Running around fire-fighting issues, having to do everything yourself, it can be hard to provide the level of service that you would like to. Whist understandable, it’s a road to disaster. Reputation is hard won and easily lost.

So what should you do?

• Build ease of doing business, friendliness and going beyond the call of duty into your sales strategy and branding.

• Design your systems for ease of customer interaction; IT systems, telephone handling, paperwork, bills, quotes – anything the customer has to deal with.

• Own the problem. If a customer contacts someone at your company with an issue, that person should own the problem – even if the customer has rung the wrong department.

• Make speedy delivery, speedy response, speedy interaction with your company an important factor in how your company operates. Customers are all busy people, the issue that they contacted you about is important to them and so they are impressed when you reply to an email or query within an hour, but not after days of waiting.

• Forget the clichés “the customer is king”, “the customer is always right”, these are meaningless and are a fob to the whole concept, your staff will not respond to such trite. Instead make sure that your staff knows that how the customer perceives you is key to their success and the company’s business.

• Get an attitude in place that one of the things which your company and the staff are proud of is the way they are viewed by customers, suppliers and others as being friendly and efficient.

• Give staff the respect and trust to make judgement calls on what is needed to “do the right thing” for the customer, rather than “more than my jobs worth” to do anything out of the ordinary.

• Once you have the right procedures in place and have built excellence of service into the core of the business, capitalise on it by using good testimonials in your literature and web site.

One of the reasons I like using Amazon is that apart from their service, I can read reviews of products and companies before buying. Checking reviews on-line is now an important shopping behaviour, so encourage your customers to leave good reviews anywhere they can. There are many opportunities to do so on-line, look for these and build your reputation.

I’ve worked in many corporations that have put measurements in place for customer satisfaction and even made that as part of the pay mechanism, but such measurements can always be massaged. None have worked as well as in companies where the ethos and self-image is all about quality.

Start with your own and your staffs perception of your brand as being one of excellence, ensure the systems allow you to deliver that quality and then customers will go out of their way to choose you rather than your competitors.

“How do I get an Investor?” is the question I most get asked by entrepreneurs. Finding an Investor is often a hard and very time-consuming part of growing a business, but thousands of companies manage to do it every year.

Here are my top tips:

1. Make sure you really need an Investor. On the plus side they will bring contacts, experience and funding that can help your business grow larger, quicker. It may even be the only way in which you can start, or grow your company. However you will have to relinquish some control, give a share of the business in exchange for the finance and have the Investors watching how you spend their money. You must be willing to do that in exchange for the resources.
2. Prepare your business case. You have to show what your business is about and why the investor should give you their money and time. The business case for investment comes from your plans for the business. Hence business plans are a key part of being prepared. People tend to associate such with lengthy, formal documents. It needn’t be so. It can be quite succinct and practical.
   

   I’ve written a more detailed description on how to write business plans for Business Angels that you may want to look at.

   I often get entrepreneurs ring me and say they simply need to be given the chance to talk to an Investor and they will convince him. They don’t feel a business plan does them justice and they haven’t got time to write one anyway. That may be, but an Investor can’t talk to everyone and they have to filter who they do talk to based on some information – that’s why you must have written data to first show them, normally an executive summary of a business plan.

3. Find investors to approach. There are several ways to do this and you should try all that you can afford and have the time to do. You have to do everything you can and leave no stone unturned.

   a. Friends & family. Start-ups often begin by getting help this way and it can be the quickest, but you have to feel comfortable that you are risking their money. The amount is normally fairly small, so usually only suitable for getting a business going.

   b. Existing contacts. Beyond immediate friends & family there will perhaps be people you can approach with a business proposal. Your old boss, ex-colleagues who have made good and contacts who may know of potential investors. Spread your net wide.

   c. Business Angels. Not to be confused with Venture Capital (see below), these are individuals who are investing their own money in promising opportunities. They generally will only invest in areas that they know about, so as to be able to judge risk and add value.

   You may know one, or have a contact who knows one. However, since there isn’t a yellow pages of business angels (they would be constantly pestered, never-mind security), the best place to find them is through a Business Angel Network.

   d. Business Angel Networks. You can find many on-line, simply search for “find a business angel” on Google. Be aware that all will charge a fee upfront, with no guarantee of success. You may not like paying upfront and rather only pay if they find an investor, but that is how all the industry works.

   To a certain extent it is fair enough, since they have no control on how good you or your opportunity may be, all they can do is make introductions. Nevertheless, some do charge large amounts, from several hundred to several thousands.

   The difference being that those that are charging a few hundred use an on-line data base where you enter your proposal and those charging thousands will instead take your proposal and ring round their investors to see if anyone is interested, you pay for it being more hands-on.

   If that wasn’t enough, most also charge a “success” fee of 4% to 5 % and some even like to negotiate a small percentage of the final company for themselves as well.

   A bit of a plug here for Company Partners – we operate as a member’s site, a bit like a normal “dating site” for entrepreneurs and Investors. We’re certainly the most cost effective and only charge a monthly membership starting at £29.95, with no other fees. See how Company Partners works.

   e. Venture Capital. This is provided by a venture capital company who is investing other people’s money. They therefore have to be more careful and are more risk adverse. Seldom investing less than £1m, in established or proven businesses. Management buy-outs, buy-ins and fast growing companies already returning a profit are suitable.

   Occasionally, high-tech and bio-tech start-up businesses with exceptional potential, that have IP and already gained traction may get funding.

4. Approaching Investors. First find out all you can about them, what businesses they have invested in before and the industry sectors they are interested in. In Company Partners for instance the Investors will have indicated the sectors that they want to invest in. Approaching investors with a proposal for a market sector that is not of interest will waste everyone’s time.
5. First contact with the Investor. At the initial stage you are just trying to gain attention and qualifying that the potential investor and your opportunity are well matched. The information you send can be as simple as a brief statement of the market area, general background and some numbers. Ask if you can send an Exec Summary, or business plan with more detail.
6. If interest is shown, provide the Exec Summary or plan, ensuring that it is written well and looks professional. Do not at any stage over-hype – it turns investors off. If they like what they see, you will be invited to a meeting. It may be informal one-on-one, or a more structured presentation. Some good deals have been done without a stand-up presentation, just by sitting round a table and explaining the plan.
7. How to present to Investors. If you are asked to do a presentation find out as much as possible about your audience. Who will be there, their backgrounds, how long have you got, what they are expecting to see.
   See how to present to Investors.
8. The deal. There is no simple formula since every situation and business is different. However it generally starts with the valuation of the business. We’ve all seen Dragon’s Den where the presenter is asking for £100k for 10% of a start-up business. This values it at £1m and the company hasn’t started trading yet. Be realistic and if possible show that you have already achieved some sales. It reduces the risk for the investor and justifies a better price. This paper does show some ways to value your business.
9. The contract. Get this drawn up by a solicitor used to dealing with business angels, ask me if not sure, I know a few. It will need to include the types of shares that you and your investors own, what happens to them if further investment is made (called dilution), what happens if you or the investor wants out and much more.
10. Persistence. When Innocent drinks were looking for an investor for their fledgling smoothie business they had approached dozens of business angels, with a very well constructed business plan to no avail. They’d contacted everyone they could think of and got nowhere. But they persevered and finally found that one person who liked what they were saying and committed to back them. Try everything – be persistent.

 

I must admit this blog sounds a bit as though I’m standing on a soap-box, but a recent comment by Google’s chairman, Eric Schmidt, rang true with me. He said:

“I was flabbergasted to learn that today computer science isn’t even taught as standard in UK schools,” he said. “Your IT curriculum focuses on teaching how to use software, but gives no insight into how it’s made.”

Yes I thought, he’s right. We teach how to use software, not how to make it.

This made me think, would teaching Information Technology as standard make a difference to our ability to innovate in a high-tech world?

Innovation has always driven the economy. Just look back to the Industrial Revolution and the inventions that abounded, they were that time’s high-tech.

Today’s innovation tends to centre on software, electronics and biotech, all of which require not just a grasp, but actually a fairly good understanding of the principals behind these technologies. The sort of understanding that can then be used to develop new innovative businesses.

However, schools have increasingly concentrated on “soft” subjects and reduced the time spent on what is thought to be more difficult areas such as science, maths & technology.

I know that we are short of science and maths teachers and the need to meet higher and higher pass rates every year means that schools concentrate on courses that are not as exacting.

It doesn’t have to be this way; though it will require government willpower to change.

We’ve seen an enthusiasm for entrepreneurial activity, with programmes like Dragon’s Den and The Apprentice. Nearly all young people have a passion for the uses of technology, with Facebook and iPhone Apps.

So why not put a fresh emphasis on learning why an iPhone works and how to programme an application like Facebook, not just how to use them. Then we may be producing the future innovative entrepreneurs that the economy demands.

Enterprise Zones are the latest government incentive to get businesses growing. Within the Enterprise Zone you can get superfast broadband, lower rates & taxes, and low levels of regulation & planning controls.

That can only be a good thing – right? A great encouragement for younger companies who may otherwise struggle to reach critical mass.

Maybe, however there is considerable criticism of this approach also. Firstly it’s not new. Maggie Thatcher tried exactly this in the 1980’s. They provided a boost at the time that wasn’t able to be sustained.

Critics argue that all the Enterprise Zones do is to displace jobs from one area to another, with up to 80% of the jobs they create taken from other places.

Also that they are expensive, with estimates ranging from £23,000 to £50,000 per job created.

Having said that, if you are looking to expand your business (the zones will be most useful for businesses that have been going for two or three years, and are looking to expand and inhabit their first business premises), is there a benefit to doing so in a Enterprise Zone rather than elsewhere?

Probably yes. One of the main benefits that the zones will offer is a business rate discount worth up to £275,000, or enhanced capital allowances for plant and machinery where there is a strong focus on manufacturing, over a five year period. That coupled with the other advantages of infrastructure and support can make it attractive.

So where are these Zones? They are not all in areas needing regeneration, another criticism, but are areas with the most potential for growth and those which could attract inward investment from abroad. The government has announced the following areas will get an Enterprise Zone:

Bristol;
Liverpool;
Birmingham;
the Black Country;
the Tees Valley;
the West of England;
the North East;
London;
Manchester;
Derby;
Nottingham;
Humber Estuary Renewable Energy Super Cluster;
Daresbury Science Campus in Warrington;
Newquay AeroHub in Cornwall;
The Solent Enterprise Zone at Daedalus Airfield in Gosport;
MIRA Technology Park in Hinckley, Leicestershire;
Rotherwas Enterprise Zone in Hereford;
Discovery Park in Sandwich, Kent, and Enterprise West Essex in Harlow;
Science Vale UK in Oxfordshire;
Northampton Waterside;
Alconbury Airfield, near Huntingdon in Cambridgeshire;
Great Yarmouth in Norfolk, and Lowestoft in Suffolk.

Interestingly, it is difficult to then get further detail on each and how to apply to be in one. These are being managed by each Local Enterprise Partnership (LEP), so the first step is to contact one of these. You don’t have to already be working or living in the area, if you are prepared to move your business there.

Resources that may help:

Map of the Local Enterprise Partnerships (LEP).

Contact details for the Local Enterprise Partnerships (LEP).

Almost all businesses now days have to have a web site. Even if you don’t sell over the web, your customers will expect to be able to find you on it.

If they know your name and it’s fairly unique then you are likely to be found. That’s good, you can give your customers contact details, support information and reassure them that you have a web presence.

But what if you not only want to be found by people that know you, but also by new customers? Then you have to be found by the type of product or service that you sell. These in web terms are keywords.

Given that all of your competitors also want to be found for those terms, it’s not easy to get to the first page of Google (hardly anyone looks beyond the first page).

If, like me, you get continued spam from people claiming that they can get you on that first page, you’ll be pretty jaded by now. There are some good SEO (search engine optimisation) companies out there but they are difficult to identify from the poor ones and do tend to charge quite a bit.

Also, the good companies do not send out spam, I’d never respond to unsolicited SEO mails, but actually SEO is something that you can take control of yourself.

We used a tool that we down-loaded, it looked at the top ten websites for our keywords and worked out what it was that made those particular sites rank higher than others. We then altered our site to match the recommendations.

All the recent spam I’ve had on SEO reminded me that we’ve had questions on this before and have written a resource on the subject (along with a plug for the tool we used – well worth getting !). Have a look at How to get people to your business web site