CEBA could solve your investment troubles

Dec 9 2008 article sponsored by Advantage West Midlands

The financial market is changing at such a pace it is difficult to write an article days in advance of a publication deadline, it should be minutes in advance to keep up with the changes!

We have yet to see what impact interest rates will make on the business community, but one thing is certain, it won’t alter the risk profile of high street banks. One high street banker was bragging he had completed two small firm loan guarantees last month. Wow!

Thankfully the Angel market is robust right now. As one Angel recently told me, return on cash is so dismal he is actively seeking other investment options. Angels are ready to invest today and they view this climate as one of opportunity.

So what situation do emerging high growth companies find themselves in when the most available source of funding right now is equity?

The benefits of having an Angel on your shoulder as you grow your business are well known, but how do you structure a deal that is beneficial to investor and SME?

The big issue in today’s market is valuation. The main barrier to investment is unrealistic valuations. What could have been acceptable last year is not acceptable today. As an example, one investor responded to a business plan with: £5million valuation for a business with zero revenue and under £100,000 invested to date,...you having a laugh?

For the investor the phrase is “cheap entry” but often they will accept a more expensive exit. It is possible to negotiate an exit incentive if the valuation exceeds the projected level of return. It is also possible to negotiate a ratchet equity buy-back based on performance.

The most important focus for companies seeking funding is to demonstrate sales performance. Get the sales in and the funding market suddenly loves you! A number of options open up once sales are generated.

Expensive marketing managers can assist, but it is important to know when to stop marketing and start selling.

For companies seeking funding pre-revenue the focus of the business plan should be the demonstration customers are waiting and ready to buy once the company is ready to start trading. Try to avoid setting a valuation level within the business plan, let the investor lead the valuation discussions

Pat Geraghty and David Clark