Business Money by Business Leader magazine

A special publication by Business Leader Magazine

The Business Leader guide to funding growth in your business businessleader.co.uk

FROM THE EDITOR

Funding for specialist builds John Hughes, Relationship Manager – Shawbrook Bank

With the biggest increase in the over 55-population expected in the south of England, and the cost of arranging suitable housing for this sector estimated at nearly £20bn by 2041, more developers are turning their attention to building these specialist homes.

Funders like Shawbrook have seen this first hand with a recent finance solution provided for property development company, Oceanview Carbis Bay Ltd, to complete the construction of 36 new apartments in Cornwall. Owned by Derrington Group, Oceanview Carbis Bay were looking to buy a former 1960s hotel located on the north Cornish coast between the villages of Hayle and St Ives and build 36 apartments for the over 55 market.

John Hughes and the specialist team at Shawbrook were introduced to Oceanview Carbis Bay through Platinum Operations. The Shawbrook team worked closely with James Simpson and the Derrington Group to understand and accommodate the complexities both on and off-site to deliver a £16.2m funding facility that will make the plans a reality by 2021. James Simpson, Managing Director at Derrington Group, commented: “What really appealed to us about working with Shawbrook was the level of gearing that they proposed, their common-sense approach to doing business as well as their proven ability to deliver.” John Hughes, Relationship Manager at Shawbrook Bank, added: “We have really enjoyed getting to know James and his property ambitions over the past 11 months. The development will not only be a great success for Oceanview Carbis Bay, but it will also add significant value to the local people, providing them with more options of quality housing.” Shawbrook’s Development Finance team provide development loans and subordinated funding loans for projects including residential builds, mixed-use schemes, construction of student accommodation, refurbishments and conversions of commercial properties into residential units.

To find out more about our facilities and how we can help with your property development projects, contact our Development Finance team on 0330 123 0487.

Advertise with Business Leader today by calling 020 3096 0020 | businessleader.co.uk

FUNDING NEWS

Record £5.52bn global investment in UK tech firms

New figures released by Tech Nation and Dealroom have revealed that UK tech firms have received record foreign investment of £5.52bn for the first seven months of 2019. This total is already larger than the entire total of investment in 2018. UK-based tech firms received this funding between January and July this year, with more than 55% of it coming from either Asia or the USA. What makes this total even more impressive for the UK tech scene is that is has overtaken its US equivalent for total foreign investment – and is also rapidly closing in on China’s total. The report also revealed that the top 30 UK tech firms that have received this type of funding have created over 5000 jobs across the country. Some of the biggest drivers of foreign investment this year have included Checkout.com, which received £190m in Series A funding from New York-based Insight Partners; supply chain finance company Greensill, who received £660m from Japan’s Softbank; Londonheadquartered Deliveroo’s £475m Series G round led by Amazon and Fidelity; and Bristol-based OVO Energy’s £180m raise from Tokyo’s Mitsubishi Corporation.

UK fintech firm Curve fastest start-up ever to reach £4m crowdfunding on Crowdcube

Banking platform, Curve, which consolidates multiple cards and accounts into a smart card and app, has raised £4m just minutes after launching its first-ever crowdfunding campaign – making it the fastest start-up to reach the figure in history. Recently, Curve announced plans to launch a seven figure crowdfunding campaign for early September, with plans to raise £1m. However, just 42 minutes after launching to pre-registered customers, Curve had raised four times that figure, breaking records in the process. The current overfunding amount stands at £5m. Curve has also broken records for the number of investors investing in a campaign through the Crowdcube platform, beating the previous recordholder Chip who had around 6,500 investors. Shachar Bialick, Founder and CEO of Curve said: “Curve customers are the beating heart of Curve and the unprecedented success of our first ever funding round demonstrates their faith in the business and shows the world that people are ready for a revolution in finance. We have been blown away by this record breaking investment from the Curve community and we are delighted to welcome them on board our mission to move banking to the cloud and change the world of finance forever.” Luke Lang, co-founder of Crowdcube, said: “Curve has brilliantly inspired its community with its vision to create a better financial world, its innovative product and ambitious team. The impressive level of investment underlines the strong bond Curve has with its community, who clearly believe in the company and I’m sure will help supercharge its next phase of growth.”

Oaknorth Bank provides multi-million-pound loan to Red Oak Taverns OakNorth Bank has provided acquisition funding to Red Oak Taverns, the leading tenanted pub provider. Red Oak Taverns tapped into the £10m Acquisition Facility arranged with OakNorth last year (£42m) as part of a wider refinance of the Red Oak Taverns business. The finance from OakNorth will be used to acquire 18 pubs from Wadworth Brewery, the Wiltshire-based brewery company founded in 1875 which is famous for its 6x and Swordfish brands. Business Money - A special publication by Business Leader Magazine

FUNDING NEWS

Equity or debt finance? Your business is ready to take that next step, but needs extra capital to make it happen. The most common ways to inject cash into a business are through equity and debt - but which is right for you? Equity finance Investors provide funding in return for shares in the business and a return on investment through exit (usually a business sale or listing) within a relatively short period – commonly 3-5 years. • Advantages: It may be suitable when the investment is seen as too risky by banks or where cash flow cannot cover loan interest repayments. Investors can bring key skills, contacts and access to new markets. • Disadvantages: You will surrender a degree of power in decisionmaking and equity investors will often seek higher returns than banks. Debt finance Lenders provide capital in return for repayment with interest through

products such as a term loan or invoice discounting facility. • Advantages: Monies are generally available for the term and interest fixed throughout, so you can budget appropriately. Repayment ‘holidays’ and overpayments can be negotiated. • Disadvantages: Loans typically contain financial and other targets and are often secured against business or personal assets (even your home). Getting ready Identify investors you feel are suited to your business and prepare a thoroughly researched business plan and realistic valuation. Getting the right legal and financial experts on board early is vital for the success of the business and its shareholders. Contact Mike Tomlin, head of Banking & Finance at commercial law firm Thrings to discuss securing your business’ capital needs. mtomlin@thrings.com / 0117 930 9590

Evolution money receive £100m senior debt facility from NatWest Evolution Money have announced a new threeyear £100m senior debt facility with NatWest, securing capital requirements for the business over the coming years. This facility will allow Evolution Money to continue delivering its growth plans whilst capitalising upon new product opportunities. Commenting on the facility, Steve Brilus, CEO of Evolution Money, said: “I am delighted that we are continuing our partnership with NatWest who have supported Evolution Money since 2013. “This sizeable commitment reflects our strong working relationship with the NatWest team, their confidence in our business and a shared vision of the future opportunities that exist in our sector.”

Upgrade Pack hits £3.4m private investment and appoints new chairman UK fintech scale-up Upgrade Pack has announced a new £1.3m private investment round, bringing total funds raised for its exclusive travel upgrades platform to £3.4m since launching 12 months ago. The raise continues the company’s strategy of growth through private investment rather than venture capital as it looks to transform the market for flight and hotel upgrades. Delivered as an app, Upgrade Pack connects directly to airline and hotel APIs, enabling users to access live, premium seat and room upgrades at a typical saving of 15% to 35% through its closed online marketplace. 2

September - October 2019

FUNDING NEWS

Vaping giant JUUL secures further £269m funding despite ongoing controversy Global e-cigarette and vaping giant Juul has secured £269m in new funding, despite ongoing controversy around healthcare issues and new legal action in the US. The latest round of funding will be used to help the company’s global expansion. Currently, the business is 35% owned by Altria, but there have been claims in

The Protein Works announce £6m MBO

the US that the company is targetting children with their vape pens. There are several ongoing legal claims across America regarding the impact Juul has had on young people’s lives.

YFM Equity Partners, the specialist private equity fund manager has backed the MBO of The Protein Works from B&B Investment Partners.

Juul recently launched its products in South Korea, the Philippines and Indonesia, and has had an increased marketing presence in the UK.

Dan Freed and Andy Thomas lead the investment for YFM, and this announcement marks the 8th investment from YFM’s Buyout Fund I, taking it past 70% invested.

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BLOCKCHAIN

AGENDA

HOW IS BLOCKCHAIN CHANGING THE WAY BUSINESSES RAISE FUNDS? WHAT DO YOU SEE AS THE BARRIERS TO ACHIEVING THIS GROWTH? There is still a hangover from some of the malpractice carried out by other companies operating in this space. There were examples of people going out with offerings that just couldn’t be justified; and there is of course the misconception around Blockchain and cryptocurrencies. But this is changing and it is regulated. It’s a case of re-building the reputation and that just takes time. Another barrier is integrating the more traditional investors into the network; and ensuring they understand fully how we operate and how it can benefit them to engage with us.

okenmarket is an investment platform powered by Blockchain, which provides businesses with an alternative way of raising capital. BLM spoke with its Managing Director Ryan Hanley, to find out more.

CAN YOU TELL ME MORE ABOUT THE PLATFORM? Tokenmarket does two things. It works with ambitious companies to help them raise capital from a wider pool of investors than is traditionally available. It also presents well vetted offerings to investors, allowing them to gain access to businesses at an earlier stage than normal. All of this is powered by Blockchain and we believe it represents the future of investing in early stage companies. HOW MUCH AS BEEN RAISED IN TOTAL VIA THE PLATFORM? In total, Tokenmarket has raised £240m from 31 different token offerings. We currently have 170,000 investors registered with our platform.

WHAT TYPES OF COMPANIES ARE USING THE PLATFORM TO RAISE CAPITAL? Any company can use our platform to raise capital, but we currently receive more interest from software-orientated and innovation-led businesses, that are likely be operating in the technology space. But as mentioned, it’s not all technology companies and we have a broad base of businesses. WHAT TYPE OF INVESTORS ARE USING THE PLATFORM? It’s a wide range and they come from 153 different countries. They are well-vetted and typically quite wealthy private investors. We’re also seeing a trend for VC’s showing an interest in using our platform together with their traditional methods of raising finance. Our platform allows capital to be raised on series B, C and D funding rounds. HOW BIG CAN TOKENMARKET BECOME? We’re building a new universe here and it can become as big as we want our vision to be. Our aim is that a company or investor can come to us at any stage, whether that is for Series D funding or an IPO.

HOW IS TOKENMARKET DEMOCRATISING THE PROCESS FOR INVESTORS? We ensure that nobody is investing more than ten per cent of their net worth for a start, so it’s not a wild west type scenario. But what we allow people to do is go direct and get closer access to the founders. Traditionally, you would get locked into a fund for seven years and it can be a bit blind. With Tokenmarket you can have more control and information; and there are no barriers. It’s a similar concept to JustEat for example, where you don’t need to call somebody and place an order, but you make that decision directly. We’re seeing this across lots of industries because consumers in the UK are very savvy and educated – they want to be able to have control; they want to be able to switch to different platforms and better rates. AND WHAT ABOUT COMPANIES? From the perspective of the company it’s interesting too. Facebook had to wait ten years until they could get a public offering, for example. After six months people knew it was going to change the world, but they didn’t have a chance to invest. With Tokenmarket you can identify these types of companies earlier and allow people to invest.  September - October 2019

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HOW IS THE RISING TIDE OF THE CHALLENGER BANK IMPACTING TRADITIONAL LENDING?

Alexandrea Frean – Starling Bank

BANK LENDING

very month it seems there is a new challenger bank being advertised on the side of a taxi or bus – promising to offer consumers and businesses a totally new way of banking.

To find out how traditional banks are reacting to the proliferation of the challenger, Business Money has brought together a panel of experts.

HOW IS TECHNOLOGY CHANGING THE WAY THAT BUSINESSES RECEIVE BANK FUNDING? Graham Austin: “We’re a digitally driven yet relationship focused bank, with the biggest branch network in the UK, which is where our business bank managers are ideally placed to meet the local needs of clients. “We already have a class-leading mobile app for businesses, with £25k instant lending available to over 100,000 businesses at the touch of a button. Banking though is much more than an app – particularly business banking. When we first went live with these pre-assessed lending limits, we were surprised by what happened. We found that SME customers would only get so far through the online approval process before stopping and wanting to talk to somebody – even though they were one click away from getting their money.

TECHNOLOGY IS CHANGING EVERY ASPECT OF OUR LIFE – THE WAY WE SHOP, THE WAY WE BUY MUSIC AND THE WAY WE BANK. WHEN STARLING WAS FIRST LAUNCHED, BANKS TRIED TO PRETEND TECHNOLOGY HADN’T HAPPENED. BUT IT HAS AND FOR THE BETTER.

Alexandra Frean

“Businesses want to meet people and sit down, which is why Barclays has more relationship managers on the ground in the South West and across England and Wales.” Alexandra Frean: “Technology is changing every aspect of our life – the way we shop, the way we buy music and the way we bank. When Starling was first launched, banks tried to pretend technology hadn’t happened. But it has and for the better. “Open Banking has the potential to bring about a transformation of the sector. Implemented well, it has the potential to level the playing field, open up more financial services and, most importantly, heighten public awareness of new and more streamlined ways of managing personal finance. “We’re already seeing the additional convenience brought to consumers through the Starling Marketplace and through our banking services business. But we’re still some way off from seeing the full impact of Open Banking. “Then there’s artificial intelligence (AI) and machine learning (ML). To date, ML and AI have largely been used by banks for operational efficiency – to automate customer service, or to create risk-based financial models, for example. We’re changing that; we’re taking ML and AI and putting them in the service of the customer to create personalised customer

experiences and tailored recommendations to best meet their individual needs. “The banks that succeed in the future will be technology-driven.”

“BARCLAYS ANNOUNCED A £14BN LENDING FUND IN MARCH AS PART OF A SERIES OF INITIATIVES TO HELP SMES SUCCEED AND FLOURISH THROUGH BREXIT AND BEYOND.”

Graham Austin

Paul Thwaites: “Technology is transforming the banking sector, and customers are seeing the benefits in a number of different ways. At NatWest, we are now able to use data and insight more effectively than before, which allows us to make faster decisions, and provide tailored support when a customer needs it. “Just as technology is enabling new players to enter the personal and small business markets, it is also enabling us to develop new digital propositions such as Bó in the Personal bank, and Mettle in the Business bank. With the advantage of a large existing customer base, we have been September - October 2019

able to gather extensive feedback on our new ventures, allowing us to develop user experience before launching to market.” HOW MUCH IS YOUR BANK LENDING TO BUSINESSES? Graham Austin: “Barclays announced a £14bn lending fund in March as part of a series of initiatives to help SMEs succeed and flourish through Brexit and beyond. In addition, more than 100 SME Brexit clinics and seminars have been run in local communities across the country.” HOW IS THE BANKING SECTOR CONTINUING TO CHANGE IN THE UK? Alexandra Frean: “In 2018, 48% of British adults used mobile banking – up from 41% in the previous year. This demonstrates the huge shift in customer behaviour taking place in the sector. Technology is driving competition and raising customer expectations. “Challenger banks are using technology to make banking simpler, easier, faster and fairer. Since November 2018, we’ve seen growth of 110% in our customer numbers and of 200% in our deposit base. We’ve now got over 775,000 accounts and expect to reach one million this year. “The incumbents are being forced to stand

up and take note of what we’re doing. They know they simply cannot afford to ignore how we are improving our customers’ banking experience and helping them manage their money more efficiently. “Traditional banks are now starting to copy our features, but they can’t copy our cost base or our business model. It will be interesting to see how they continue to respond to this new wave of banking over the next few years, and how many of them will survive in the long term.” Oliver Prill: “We see banks like Tide taking a much greater share of the SME market, which has been traditionally dominated by an oligopoly of four high-street banks, as awareness of alternatives grows. “As part of our commitment to the Banking Competition Remedies (BCR) Alternative Remedies Package we secured in partner in partnership with ClearBank, Tide has stated it will secure 8% of the business banking market by the end of 2023. We need to maintain our current rate of growth to reach this target.” Paul Thwaites: “New competition, regulation, and advancements in technology and digital services, are fundamentally changing the sector. Customers now have far greater choice

Business Money - A special publication by Business Leader Magazine

Paul Thwaites – NatWest

Graham Austin – Barclays

Oliver Prill – Tide

DEBATE

for how they manage their personal and business banking, whether that be applying for a mortgage, starting a new business, or growing their operations. “At NatWest we continue to develop innovative solutions that provide customers with the flexibility to manage their finances in a way that suits them.” HOW ARE THE DEMANDS OF SMES CHANGING HOW THEY EXPECT THEIR BANK TO OPERATE? Alexandra Frean: “Nobody ever started a business to spend more time with their bank manager. Today’s SMEs are looking for a bank that saves them money and time; one that is open 24/7 and can help them get the most out of new technology. “They don’t want to wait weeks for an appointment to open an account or to chat to a bank manager who doesn’t know the first thing about their business. “With the help of a £100m grant, awarded in February, we’ve started a four-year programme of responding to these demands. We’re building a full suite of more than 50 digital banking products that will save time and add value so that our SME customers can get on with what’s important to them – running their businesses.”  7

ASSET BASED LENDING

INTERVIEW

Asset based lending against IP and ideas

usiness Money met with Andrew Rutherford, who is the Commercial Director at Arbuthnot Commercial Asset Based Lending (ABL) division.

IN YOUR OPINION WHY IS THE ASSET BASED LENDING (ABL) MARKET GROWING?

FOR BUSINESS LEADERS THAT MAY NOT KNOW – HOW CAN YOU BEST PREPARE YOUR BUSINESS WHEN APPLYING?

It’s a combination of factors, such as the clearing banks still not providing businesses with enough growth funding. Overdrafts can be difficult to obtain and also keep in place, but you don’t have that issue with ABL.

It’s fundamentally basic financial information that you need in order to apply, and most established SMEs will find that pretty straightforward. Some key points include ensuring that you have accounting software systems in place, aged debtor reports and a detailed breakdown of assets.

The beauty of Asset Based Lending (ABL) is that it provides businesses with certainty and can’t be withdrawn overnight, unlike an overdraft, for example. It supports businesses through their growth cycle and is also a good source of additional funding in scenarios where a business might look for a suite of options, such as building stock levels, making acquisitions and extending their product lines and services. CAN YOU NOW LEND AGAINST IP AND IDEAS? Traditionally, we have always lent against physical assets such as debtors, stock and plant & machinery, for example. But what is happening in the USA – and the UK tends to follow market trends there – is that IP is being valued as an asset that we can lend against. This is not mainstream yet in the UK but it’s exciting and could fuel further growth in the market. 8

WHAT TRENDS ARE YOU SEEING IN THE MARKET? Asset based lending (ABL) in the UK is still geared primarily towards more traditional industries such as manufacturing, business services, wholesale and distribution; and we’re seeing major growth from these sectors, with businesses actively applying for funding. Lending numbers are up across the board and we’re also seeing trends for more enquiries pegged to this period of uncertainty. This is because businesses require certainty around their funding when times are challenging. We’re also seeing ABL being used as a lever to fund business sales, MBOs and other corporate transactions, which underlines

the versatility of the solution. We’ve lent to 27 businesses since last May and 40% by size have been transactions, including MBOs, MBIs and Private Equity sponsored acquisitions. CAN YOU TELL READERS ABOUT YOUR BACKGROUND? I previously worked at GE Capital and left in 2007 with colleagues to set up a private equity-backed business called Centric Commercial Finance. We grew that to a decent size, before selling it to Shawbrook Bank in 2014. I then joined Arbuthnot Latham in 2018. HOW HAS YOUR YEAR BEEN AT ARBUTHNOT LATHAM? It’s been great. I’m working with a close-knit and very experienced team. The bank was established in 1833 and has a very strong heritage. We’re coming up to our first anniversary for the ABL division and our first year has been even better than we anticipated. We’re ahead of plan and ready to support more entrepreneurs from across the UK in growing their businesses and helping them to realise their ambitions.

September - October 2019

Arbuthnot Commercial ABL provides full asset based lending facilities plus cash flow loans in support of acquisition, refinancing, cash-out and turnaround scenarios for SMEs and lower mid-market corporates.

SINCE LAUNCHING LAST YEAR WE’VE FUNDED...

52%

£106m

PRIVATE EQUITY BACKED

FACILITIES PROVIDED

SECTORS SUPPORTED

CLIENTS FINANCED

ACQUISITIONS

GROWTH

REFINANCES

To discuss your funding requirements in confidence, contact ABL@arbuthnot.co.uk +44 (0)20 7012 2500 / www.arbuthnotlatham.co.uk Registered in England and Wales No. 10915339. Registered Address: Arbuthnot House, 7 Wilson Street, London, EC2M 2SN.

EQUITY INVESTMENT

WHAT ARE THE CURRENT EQUITY INVESTMENT TRENDS IN THE UK?

LM teamed up with Beauhurst to give readers an overview of equity investment trends in the UK, including regional comparisons.

Equity investment is a hugely important and popular method of growth for ambitious, private companies looking to scale. The deployment of capital into the market acts as a vote of confidence in both the recipient company and the economy as a whole: investors will only risk losing their money if there is a strong chance of making a significant return. So in the face of macro-economic uncertainty, such as we are currently experiencing, they may well delay investment or look to other destinations to complete deals (if their thesis permits). However, this seems to not have been the case in the first half of 2019. In the first six months of the year there has been an 18% increase in the total amount of equity investment received by the UK’s startups and scaleups, growing from £3.9bn in H2 2018 to £4.6bn. Instead of falling victim to uncertainty, this period has proved the best first half on record, putting 2019 on track to be the best year of funding yet, having already secured a higher amount than in the whole of 2016. There has also been a 13% increase in the number of deals being completed, with the majority of the increase taking place at the seed stage – an asset class which had been experiencing a decline in activity since the beginning of 2017. It’s reassuring to see the 10

number of seed stage deals finally return to a more normal level for this investment stage. Growth stage companies We’ve also seen an increase in both the number of deals and the amount invested into growth stage companies, with the average deal size at this stage of evolution climbing from £16m to £17m. This growth has been buoyed by megadeals – equity investments that are worth over £50m. These once rare, high-value capital injections, are now a permanent fixture of the funding landscape, with 14 of these deals announced over H1. Meanwhile, at the other end of the spectrum, we’ve noticed the average deal size for earlier stage companies slightly drop. Hence, there’s an increasing chasm between the size of investments made into start-ups and those secured by scaling businesses.

Which sectors are most active when it comes to equity investment? Many sectors secured a higher number of deals than in the previous half, including VR, Blockchain and adtech – which saw its first increase in deal numbers since H1 2016. This half has been especially fruitful for artificial intelligence (AI), the only sector that has achieved a record number of equity deals. Despite this, the amount invested into AI companies fell to £355m, failing to reach the £439m record set in H2 2018. The major winner of the half is, perhaps unsurprisingly, fintech. Deal numbers remained level, but when it comes to amount invested, this half has absolutely blown it out of the water. £1.7bn was invested into UK fintech companies over the past six months, surpassing the amount met in 2018 as a whole. In the UK’s high-growth scene, fintech irrefutably remains king. September - October 2019

REPORT

In association with Beauhurst, the research and database company tracking the UK’s fastest-growing start-ups and scale-ups.

Which regions are doing particularly well? As expected, London maintains its spot as the top location for equity investment in the UK, securing 45% of deals over the half. This position is further galvanized by playing host to 75% of the country’s high-growth fintech firms and earning a reputation as the European capital of the most well-funded start-up sector. Outside of the capital, the East of England was one of the few regions to secure a record number of equity deals. Recipients include location mapping software what3words, who raised £1.56m at a £114m pre-money valuation, and Cambridge-based cancer screening company Inivata, who raised £39.9m to fund further research and development. The South West region is also doing very well, with a record number of deals and amount invested in the half, in no small part

IN THE FIRST SIX MONTHS OF THE YEAR THERE HAS BEEN AN 18% INCREASE IN THE TOTAL AMOUNT OF EQUITY INVESTMENT RECEIVED BY THE UK’S STARTUPS AND SCALEUPS, GROWING FROM £3.9BN IN H2 2018 TO £4.6BN.

down to OVO Energy’s £200m raise backed by Mitsubishi Corporation. Where is investment coming from? Despite ongoing political confusion, the appetite of foreign investors for ambitious British companies remains strong. American funds are the biggest contributors to this influx of foreign investment, having completed 97 deals worth £2.5bn, and participating in half of the megadeals completed in the first six months of the year.

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Conclusion Perhaps investors are simply throwing caution to the wind, tiring of the uncertainty and making an effort to carry out business as usual. On the other hand, this increase in investment may be an effort to stockpile capital in order to weather the full impact of the Brexit storm ahead. Whatever the reasons, the result is ultimately the same, increased financial support and a vote of confidence for some of the most exciting and ambitious businesses in the UK.  11

DEBT VS EQUITY

What’s the best funding option for your business? Debt or equity?

Andrew Priest Partner, Inflexion

Stuart Andrews Head of Corporate, finnCap

or this feature, Business Money asks some of the UK’s leading experts – what’s the better lever to help you fund growth in your business, debt or equity?

THE PRIVATE EQUITY PERSPECTIVE With £1bn of recently raised capital and £3.5bn of firepower to back ambitious businesses, Andrew Priest from Inflexion shares his views on why private equity is the best partner for companies to looking to scale and fund growth. He says: “Banks may be able to provide loans to facilitate finance without equity dilution. If, however, you are looking for a solution which provides more than pure funding and includes expertise, private equity could be a better partner. “Just as no two businesses are alike, private equity firms come in different shapes and sizes. The right private equity backer will have experience in the type of development you’re looking to pursue, for example if you’re looking to expand by way of acquisition, it’s best to seek out a firm which has relevant experience in this complex exercise. “They can typically help with everything 12

Angus Grierson Managing Director, LGB Coporate Finance

Paul Swaddle Founder, Pocket App

from sourcing and approaching targets, to negotiating with them, to introducing banks where funding beyond our equity was required, and to then integrating the businesses post-deal. Giving away equity to a credible partner also could mean they help you with elements in your business such a recruitment, digital enhancement and strategy.” Stuart Andrews from finnCap comments: “Debt must be repaid, whereas equity finance provides the business owner with a greater degree of flexibility, albeit at the cost of giving up some control of the business. The contractual nature of the repayments obligations of debt finance will also by definition limit what a business owner may be able to do, whereas equity finance is, at least in theory, limitless.” Andrew Ferguson from Maven Capital Partners says that flexibility is one of the main advantages: “The biggest advantage of using equity to fund growth is of course that companies are not subject to fixed repayments. In turn, businesses have more flexibility to manage and allocate capital in the short term.” THE DEBT PERSPECTIVE Giving away equity in your business won’t work for everybody; and for some it simply

Rob Shand Co-founder, Tots to Travel

may not be possible due to previous investments. So, how may taking on debt be the best option for your business? Stuart Andrews: “One of the key advantages of taking on debt to fund growth for a business owner is they do not have to dilute the equity in their business. That also means there is no claim from lenders on future profits over and above repayments on the debt obligations. It’s also an unobtrusive form of business funding. “Meanwhile, there are tax advantages to borrowing rather than raising funds by giving up equity. Interest on debt financing is tax deductible whereas dividends to shareholders must be paid after tax so ultimately cost the business more. “The Capital costs are lower too compared with equity loans.” Andrew Ferguson: “There are many advantages to taking on debt to fund growth. Taking on debt can be cheap, utilising low interest rates and a wide-range of lenders that can provide debt financing, in turn making it easier to find a suitable agreement.” Angus Grierson, from LGB Corporate Finance, comments: “Debt finance is relatively cheap now. If your business is September - October 2019

REPORT

EQUITY DEBT

generating cash and profits, it is worth considering as it generally does not involve giving up any ownership in a business and in the long term it can therefore be more efficient for entrepreneurs.

Rob Shand, co-founder of Tots to Travel says: “Debt was a good route initially, when smaller sums were required and in shorter time frames. We found the non-traditional route to be far more compelling than secured bank lending, which was essentially unavailable. The banks have such a long way to go and are being left behind. To that end, we used crowdfunding through Funding Circle twice which was simple and quick.

It is typically easier and quicker to raise debt than equity, but if used inappropriately it can be damaging.” THE BUSINESS PERSPECTIVE No doubt many businesses will use both levers throughout their lifecycle and it’s interesting to hear what company owners themselves think about both options. Paul Swaddle, who is the Founder of Pocket App, comments: “When we started, we initially took some equity from friends and family. This was to get us going because at that stage we didn’t have the capital to launch the company. “Later in our journey we also looked at debt financing to help the company grow and we undertook a round of a crowdfunding finance which we found surprisingly easy. However, that did come with the normal constraints of requiring personal guarantees from the directors.

“At a later stage we also utilised a bank facility that was underwritten by the government and that enabled us to access money that otherwise the bank would not have offered. But the course still came with personal guarantees. “The last round of funding, two years ago, was equity and carried out via Seedrs. While the process was not without its problems, it did offer us a route to finance but also gave us 400 shareholders who can become advocates and Ambassadors for Pocket App.”

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“Experiencing rapid growth, we needed a more significant capital injection and arranged a seven-figure equity raise from a large Venture Capital (VC) team based in Berlin. The deciding factors were the size of the capital required and the shared vision for rapid international growth. “They understood what we were trying to achieve, were relatively light on duediligence, kept the deal simple and have since stood back and let us get on with it without interference. So for a VC-backed deal, it has been the right path for us. “Next stage deciding factors are now all about fit with our vision and brand and who can help us take the next step up in revenue and growth – all the way to exit.”  13

Toto Wolff

Baroness Karren Brady

Deborah Meaden

Sir Richard Brandson

Jack Ma

Elon Musk

THE INVESTOR PERSPECTIVE F

or many growth businesses looking to fund a new property, acquisition or new appointment at some point in its lifecyle, an injection of capital from an investor or investment house may be the most likely avenue. But, what are investors actually looking for? And what investment trends should business owners be aware of? Business Money investigates.

HOW DO WE GET MORE FUNDING FOR FEMALE TECH FOUNDERS? Patricia Keating – who is Executive Director at Tech Manchester – believes that closing the funding gap for female tech entrepreneurs is one of the most important current trends. And now may not be a good time for female entrepreneurs looking for funding. 14

Only 5% of pitch decks that reach Venture Capital (VC) firms are from all-female founded teams.

in. Belief in something requires a level of understanding and the empathy that comes with shared experiences. How can we expect investment boards to see the ventures of women and the ventures of men equally without equal representation of genders on these teams?

Only a further 20% of investment is won by mixed-gender founding teams. This results in just one pence of every pound of equity funding raised for tech startups going to an all-female founded team. There are many contributing factors to these depressing stats, including the small percentage (18%) of females in professional tech roles and the small number of women in investment teams. Female-led companies don’t need special treatment, but they do need to approach the topic of investment in a different way. We have a huge challenge to overcome in the tech sector. So, what can we do as two closely intertwined industries – tech and investment – to address the imbalance? 1. Gender diversity in investment boards We invest in companies that we believe

Time has shown again and again that female VC advisors are more likely to be able to identify promising female companies than male VC advisors.

2. Greater female representation in larger funding rounds Grassroots research shows that the vast majority of female VCs are involved primarily in early-stage, seed and series A funding. The truth is that for femalefounded companies to achieve series B or growth investment, there must be female VCs involved at these stages. 3. Collaboration with incubators Investment teams must engage more with early-stage incubators during the September - October 2019

Theo Paphitis

Bill Gates

Warren Buffett

AGENDA

INVESTMENT

How can you best package your business to received funding?

Lara Morgan

Baroness Michelle Mone

pre-funding stages of tech start-ups. Get yourself involved in a mentoring capacity to help support, encourage and instill aspiration in female founders. Both men and women working with female founders can help to do this. 4. More effective communication Traditional VC funds should employ better communication training from female-led communications agencies. This will enable an enhanced understanding of the language that must be used to encourage more females to pursue investment and the impact that changing communication styles has when speaking to different genders. 5. Provide investment education Provide funding workshops specifically for women, delivered by both men and women from VC funds. This will achieve greater balance by raising awareness amongst women of the different investment routes and guidance on how to win funding. 6. Share ‘women in tech’ experiences Roundtables with female founders who have been on the VC circuit are a great tool. These enable the sharing of firsthand experiences, which investment and tech professionals alike can use to identify patterns of experiences and obstacles. Only then can we begin addressing the issues in full. 

Mark Pearson is the founder of investment fund Fuel Ventures, which specialises in early-stage companies and offers a London-based incubation studio to its start-ups. He previously sold Markco Media (parent company of My Voucher Codes) to the publicly listed mobile payments firm Monitise plc in a reported £55m deal. Here are his top tips for getting your business ready for funding. 1. Understand your market. Before you start thinking about the actual investment, you’ve got to know your market like the back of your hand. Who are you selling to? Are people going to buy your product or service for the foreseeable future? And who benefits the most from your product or service? Quality market data is essential for research into current and future trends, who you are reaching and where, the extent of your market, the value of your market and the demand for your sector. Good businesses will also know their competition almost as well as they know their own company and will be able to clearly demonstrate their competitive advantage. 2. Know your numbers As an investor, I’m looking for scalable business models – I’m not going to give you money because you have a great idea, or because I like you as a person, although that helps. I need to know I’m in for a strong return on my investment and proving this means that you need to have your books in order. You instantly become more investable if you can demonstrate a strong track record of performance and realistic

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targets for the future. Trading to date, gross and net margins and the state of your balance sheet are all numbers that you should know inside and out. 3. Prove your worth Actions certainly speak louder than words, and having sales under your belt will speak volumes to a potential investor. Nothing proves that your product or service will sell better than existing clients or customers. 4. Have a strategy in place More often than not, entrepreneurs are enthusiastic to fundraise, but the strategy to actually grow their business postinvestment is unclear. Investors want to know that you have the strategy to deliver the vision you’re passionate about, which means having a rock-solid plan in place. 5. Build the right team “One of the best things you can do in life is to surround yourself with people who are better than you.” Warren Buffett wasn’t wrong – as a business leader, you should surround yourself with people who have skills and experience you don’t have yourself. 6. Establish your end goal There are a few important questions you need to ask yourself when considering investment. What kind of relationship would you expect to have with an investor? Are you looking for a cash injection or do you want a business partner? How much equity are you looking to give away? Where do you want to be in five years’ time? Investors will be expecting answers to these questions, so it’s important to have a clear vision for the future of your business before you start the fundraising process. 15

INVESTOR PERSPECTIVE

MARKETS

Why are investors looking at Mixed Martial Arts (MMA)?

f you’re an investor or fund manager, you will always be on the lookout for exciting new markets. What’s the next big thing? Which sectors are growing? In its latest market analysis segment, we look at the world of MMA and why it’s fast-becoming an unavoidable opportunity.

By Simon Calton, CEO of the Carlton James Group

If I’d known when I’d started my career in finance and investing over 15 years ago that I’d be sitting here opining on the opportunity to invest in the sport of two grownups beating the living daylights out of each other, I’d have called you crazy. But here we are. In a world of rising inflation, lowering interest rates, global equities hinging on a government leader’s tweets, and constant uncertainty stemming from trade wars – investing in alternative asset classes is a must for any investor, retail or institutional. Up is down, down is up, and the strategies your parents and grandparents deployed for the past century need to be reconsidered and sometimes cast aside. For some of us, this means the consideration of Mixed Martial Arts (MMA) as an attractive and very investable asset class. POPULARITY OF MMA The sport of Mixed Martial Arts has skyrocketed over the past decade – whilst originally perceived as organised brawls, MMA is now one of the fastest-growing sports world-wide, gaining notoriety through event organisation such as One Championship, Bellator and of course, the renowned Ultimate Fighting Championship (UFC). 16

The equality within the sport is another quite unique aspect, with the women’s divisions growing at a fierce rate and headlining PayPer-View (PPV) cards. WHY YOU SHOULD INVEST Its continued growth lies in part with the popularity of the UFC and its first mainstream programme – ‘The Ultimate Fighter’. The UFC is the current pinnacle of the MMA world. At the forefront, the UFC was purchased in 2002 for $2m (£1.6m) and later sold in 2016 for over $4bn (£3.2bn), amounting to one of the highest value deals ever in sports In 2018, UFC alone generated $700m (£570m) in revenue and accumulated a worth of $7bn (£5.7bn) after acquiring a gregarious $1.5bn (£1.2bn) TV contract with ESPN. Currently, the UFC’s parent company is filing to go public, making investing into MMA much more accessible than it’s ever been before. SURVIVING ECONOMIC CORRECTION According to Nielsen Sports DNA, MMA maintains 451 million permeable fans. Quite surprisingly, its global presence is key to surviving the next global recession. 85% of MMA audiences lie outside of the U.S.

regardless of the UFC’s presence in the U.S., dominating arguably the most profitable demographic world-wide. With year-on-year growth, we’ve yet to see the sport mature, making investing into MMA, UFC and even other industries that surround them (such industries like media, clothing, sports nutrition, etc.) highly profitable. MMA is also culturally transformative, especially within the UK. WHERE DOES MMA GO FROM HERE? I’ve shared why many are bullish on MMA, but how does one capitalise on this unique and high-growth investment opportunity? The first objective, really for any investment, is to separate the real players from the opportunists. The truth is, MMA has been around for a while, it’s just now really hitting its stride. Industry “professionals” are jumping in and positioning themselves as MMA experts, but they’re likely more just good marketers or someone with deep media and operational experience. By comparison, there are professionals and true “experts” who have been operating in the space for years, and understand the unique blend of entertainment, sports, media, and financials needed to scale an operation. If MMA is the “horse”, you need to find the right jockey. September - October 2019

REPORT

IN PARTNERSHIP WITH

With around 320 funding options available for businesses –

HOW DO YOU BEST NAVIGATE THE FUNDING MINEFIELD?

o look at what funding options are available to businesses looking to grow and scale-up, Business Money brought together a panel of experts from across the funding spectrum, to delve deep into the subject matter.

HOW ARE THE FUNDING OPTIONS AVAILABLE TO BUSINESSES EVOLVING? EJ Flynn: “I have heard that there are something like 320 different types of funding options available, which is huge. “To help with this, The British Business 18

Bank is looking to create a portal where you can search and find out what is available. Now, entrepreneurs are having to be much savvier in pinning down what option is best for them. “Entrepreneurs are not just looking for money now either, they’re looking for much more and this can be around what networks the funder can introduce them to.” Matt Gubba: “A big challenge is the lack of understanding around what is available and what is right for businesses. The other thing we’re seeing is younger businesses, who are not as educated, going to the major banks and getting batted away after applying because they haven’t got either the track record or the understanding and it puts them off. I think there should be more

awareness of what’s around other than the traditional methods.” Alexei Garran: “We see a lot of people borrowing any which way they can, without any order around liability structure. What’s happened is people have concentrated on the asset-based and business growth side and neglected the attention on what’s being paid out for capital. “People can choose whatever avenue they like but what’s smart to do is assess which option is likely to have the more positive impact on your business.” Jacqueline Watts: “Education on the options available to entrepreneurs needs looking at. When companies come to us, especially early stage start-ups, they only September - October 2019

EQUITY INVESTMENT

have equity. They haven’t had a look at all the funding options available and instead we see a lot of businesses blindly going for one particular option.” EJ Flynn: “There is something with start-ups and the sexiness surrounding ‘closing a round’, and it’s the ego shot that they can close a million pound, but maybe it could have been much better with another option? There’s a love story that the press has with fundraising of these types at the moment, but beyond the headlines the funding option has to be what’s right.”

“ENTREPRENEURS ARE NOT JUST LOOKING FOR MONEY NOW EITHER, THEY’RE LOOKING FOR MUCH MORE AND THIS CAN BE AROUND WHAT NETWORKS THE FUNDER CAN INTRODUCE THEM TO.” EJ Flynn

DO YOU BELIEVE ENTREPRENEURS KNOW THE DIFFERENCE BETWEEN THE DIFFERENT TYPES OF FUNDING AVAILABLE? Chand Patel: “I’m unsure the advice has been there, and the options remain unclear. What we’re seeing is a gap between the earlier stage VTC/EIS qualifying, and then older businesses who haven’t quite showed that recurring revenue. “Once businesses reach a certain level of scale it’s probably more obvious which route to go for. I read in the recent British Business Report that 70% of smaller businesses would rather not borrow for growth than actually grow, which shows that there is still some negativity around this. There’s still a lot of businesses out there which are nervous and hesitant about funding.”

“It’s impossible for a business to know all the options and to know where the lenders are in their cycle, as what they were doing six months ago isn’t necessarily what they’re doing now.” HOW ARE WE SEEING EQUITY INVESTMENT CHANGING? Tom Britton: “I think we’re starting to see companies finally realising that they should be raising more capital than previously. When the Syndicate Room started almost six years ago, companies wanted to do small frequent rounds, and if you’re raising capital that takes time. Doing these small rounds means you raise the money but then after a few months you need to raise some more. “Now, businesses are more open to taking more. It’s pleasing to see entrepreneurs looking for larger rounds to raise more capital. “However, larger rounds do mean they’re giving up a bit more of the company because they’re taking more valuation, but it means they can scale it more in that round and then the next. The landscape is going more towards where Silicon Valley is, where people raise larger seed rounds than wanting £150,000 and then needing more.” WHERE ARE WE SEEING INVESTMENT IN THE UK? ARE WE SEEING IT OUTSIDE OF LONDON OR IS THERE A BIGGER PROBLEM HERE? Tom Purkis: “There’s a lot of good growth businesses out there which potentially don’t have the same attention as others around London. There’s still a lot of capital in the private equity market, whether that’s based on the venture capital side or the buyout side which has increased the pricing.” REGARDING ASSET FINANCE, THE SECTOR HAS SEEN RECORD LEVELS OF INVESTMENT – WHAT’S NEXT FOR IT?

Steve Ive: “It’s a time-consuming thing looking for debt or equity and you need to be targeted in terms of who you speak to and that they’re the right people in terms of deciding.

Stephen Brewer: “We like to see customers with a blend of funding, leveraging different elements of their balance sheet. Whether it’s funding assets or funding debt, I think working across products is better for a customer in order to get more efficiency, more effectiveness and more growth of capacity for capital.”

“We see lots of people who haven’t done the preparation and don’t know what they want. It’s very hard to be supportive on that basis until there’s a clearly defined plan.

MOVING ONTO BANKING – WHAT IS THE REALITY AROUND BANK LENDING TO BUSINESSES? Andy Vears: “Because we’re a new bank,

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we’ll do these deals between £1m and £8m, and the other banks don’t get out of bed until it’s at least £10m, so there’s a nice gap for us in the space of MBO’s and MBI’s. All we do is finance a business without them giving away any of their company, and for us it’s about knowing the company and building a relationship. “It’s something which banks should be doing, and I don’t think our industry promotes enough of it. We need to promote what we do in banks better. HOW CAN BUSINESSES BEST PREPARE FOR SALE? Alexei Garran: “Engage early in the process. You’re selling all the time and exiting most of the time, especially a couple of years out. Get advisors on board early, to point out what creates enterprise value.” Jacqueline Watts: “From a legal standpoint you have to have your house in order. It’s never too late to get all your legal documents sorted and make sure that you can have a very slick due diligence process, because it is painful and always takes longer. It’s hard as a seller to also run a business at the same time especially as you close to completion.”  The Panel: Jacqueline Watts A City Law Firm EJ Flynn The Supper Club Tom Britton Syndicate Room Alexei Garran Shaw + Co Matt Gubba BizBritain Andy Vears Metro Bank Steve Ive Investec Stephen Brewer Lombard Asset Finance Tom Purkis Maven Capital Partners Chand Patel Bagboard Ltd Kevin Steinlechner Radcliffe & Newlands

VC TRENDS

What are the main trends affecting the UK Venture Capital (VC) market?

Kevin Monseratt is CEO of PK2M and Consilience Ventures. Here he unpicks the current state of the UK venture capital market. The Venture Capital (VC) market in the UK is often hard to define and understand as it is very much a function of the global VC market and the performance of scale-up businesses heavily depends on their capacity to grab international investors as they scale. It might be helpful to first classify the VC market in three categories, as they are all affected differently by trends. They are: • Seed Capital: private or institutional investors typically investing the first check and trying to maximize their ownership as they will be diluted in the future. • Venture Capital: this is writing checks between approximately £250k to £5m with some exception.

is tweaking the odds, and this makes the market unfortunately misaligned. What I mean by this is that start-up success is about speed and momentum and our society functions in seasons, incubators, accelerators, angels and VC funds, and everyone has a different agenda than the start-ups. Our industry manufactures start-ups the way schools manufactures students – by classes. I believe there is a need for more linear and constant growth mechanisms. Too often, we believe that successful companies and their founders were the best in their market and in control of most of its dynamic. Our industry tends to forget that most of the success is driven by luck and good timing. Instead, we need a more scientific and collaborative approach to entrepreneurship, as this would bring some significant efficiency to helping companies grow faster.

• Growth Capital: this is more about mega funds who are trying to capture more value pre-IPO.

As stated by Shikhar Ghosh of the Harvard Business School Entrepreneurship Center: “75% of venture-backed start-ups fail, which suggest to me that the VC market isn’t operating as efficiently as it could be.”

So, what are the trends impacting these markets? At macro level the whole VC market suffers from the same thing, which is that everybody

Poor quality consultants Professional Angels and venture funds are still very much the biggest pillars to drive start-up success. But they have been and

will be investing in companies that waste some of that capital working with some poor-quality service providers and consultants. This is because not only is there no quality control, but they have no skin in the game; because sweat equity does not work for most people. I would also say that another live trend is that raising capital is still too much of a distraction for start-ups, and on the flipside every investor knows that they are giving some cash to founders to finance the next funding round – which in turn will dilute them. In fact, I believe that start-ups are selling at least 50% of their shares at the wrong valuation. First, start-ups are spending between 6-12 months to raise capital, and a start-up will typically raise between 18-24 months of cash-flow before the next round.

“75% OF VENTURE-BACKED START-UPS FAIL, WHICH SUGGEST TO ME THAT THE VC MARKET ISN’T OPERATING AS EFFICIENTLY AS IT COULD BE.” Shikhar Ghosh

September - October 2019

IPO

All you need to know about floating your business

usiness Money spoke to London Stock Exchange Group, to give businesses all they need to know about London’s international public markets. What are the benefits of going public? Joining a public market such as AIM or the Main Market can both help businesses to grow and enhance their profile. A listing on London Stock Exchange gives companies access to deep pools of capital, both at IPO and for the long-term.

Uber, Slack and Airbnb Secondly high-growth companies make very good and visible progress every six months at least. For example, Uber, Slack and Airbnb have IPO’d in less than 10 years. So, in reality, for start-up founders it is important for them not to be undervaluing their shares when raising; and they should be raising every six months at a new valuation. It’s not the fault of VC funds, experts and start-ups that the market is skewed and difficult to navigate. It has simply evolved this way, and everyone has been doing their best. But the venture capital market is opaque, inefficient and mythical. So despite multiple governments attempts to enhance the VC market like: Innovate UK, H2020 (European Investment Fund), the Enterprise Europe Network there is still a massive need for connecting, informing and inspiring the next generations – but we will have to be prepared to think differently. 

What is the difference between AIM and the Main Market? AIM is the world’s leading growth market, traditionally home to ambitious companies looking to raise long-term equity finance. Over its 24-year history, more than 3,800 companies have raised nearly £110bn through AIM, with 60% of this being through further issuances. The Main Market generally admits larger, more established companies and offers the potential to be included in indices such as the FTSE 100, FTSE 250 and others. Companies on AIM may decide to proceed to the Main Market once they reach a certain size and stage of development. What trends have you been seeing? IPO activity in the UK remains strong, with a significant IPO rally in the second quarter of this year. This has contributed to an overall 35% increase in IPO capital raised on London Stock Exchange’s markets in the first half of 2019, compared to the same period last year. Over £19bn of equity capital was raised in H1 - almost

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three times more capital than on the next largest European exchange. Among the many companies to have listed on London Stock Exchange over the last 18 months, Trainline’s £1.1bn float on the Main Market in June 2019 stands out as the largest UK firm to do so. The listing is helping fuel the growth of the train booking app as well raising its public profile. At the same time, AIM has cemented its position as the world’s leading growth market. Through AIM, companies raised £2.4bn at IPO and in follow-on capital in H1, accounting for 65% of growth market capital raised in Europe. One of the key benefits of a public listing is a company’s ability to return to the market to raise further capital to fund future development. In 2018, 70% of capital raised on AIM was from companies choosing to raise new capital. What does a company need to float? Becoming a public company is a significant decision. Companies should have a well-defined business plan, a demonstrable track record and a clear equity story. Planning is essential to a successful float and can take 6–12 months. Companies will need to appoint advisors for the IPO, a law firm, broker, and others depending on the market they are planning to join. To meet the requirements of the market, companies along with their advisors will look at whether they have the right corporate structure, governance and controls. 21

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