This is a lively discussion about Grant, Equity and Alternative Funding options for businesses involving 4 leading experts in their fields. If you want to know more about the options available to your business then this is a video not to be missed.
This is very much a partnership event bringing together the following individuals:
John Courtney, Founder/CEO Boardroom Advisors
John has been a Board Director himself for over 40 years and first started placing Non-Executive Directors over 25 years ago. John founded and ran six of his own businesses including a Management Consultancy for 10 years, a Corporate Finance offering for 10 years and a mid-sized Digital Agency for another 10 years.
Nick Richards, Head of Investor Partnerships at SeedLegals
Nick began his career in Deloitte M&A and then moved into investing in both funds and venture backed companies. Nick moved to the operator side in 2018 to SeedLegals, an Index Ventures backed start-up, that is transforming the way investors do deals.
Jon Steinberg, Co-Founder at Mountside Ventures
Supporting tech startups with raising funding from the world of Venture Capital & Family Offices.
Jon is a chartered accountant (ACA) with a background in helping companies raise their Seed to Series B rounds and prior to this mid-market PE deals and valuations.
Sara Palmer, Head Of Partnerships at Granted Consultancy Ltd
Granted Consultancy is a strategic business consultancy that specialises in identifying and securing non-dilutive funding (grants and R&D tax credits).
Sara spends a good amount of her time helping others working with businesses in the start-up/scale-up space to understand the grant funding landscape and what funding is there to support their clients.
Watch the video here:
John: Okay, so this is now being recorded. So, welcome, everybody. Welcome to this webinar. I’m John Courtney, I’m founder and CEO of Boardroom Advisors and we’re going to be talking today about Grant Equity and Alternative Funding Options as We Come Out of Lockdown.
I’m in my conservatory and unfortunately now it’s pouring with rain so if you hear tiny pitter patter that’s the rain on my, my conservatory roof. So, there we go. Today we’ve got with us some experts. From Seed Legals we have Nick Richards, from Granted we have Sara Palmer and from Mountside Ventures we have Jon Steinberg. I’d just like you guys to introduce yourselves, who you are what you do, a little bit about your company just a couple of minutes, so people have a, have an understanding. Nick, do you want to start us off?
Nick: Sure, absolutely! Thanks, John. Thanks for inviting me today. So, afternoon everyone! My name is Nick Richards and I’m the head of Investor Partnerships at Sea Legals. Broadly speaking, that’s basically a business development role but, to give you an overview of what Seed Legals is, for those who aren’t aware, Seed Legals is effectively a law tech platform that helps start-ups and young businesses. So, all the legals that I suppose are crucial in their net growth trajectory.
So, if you’re a start-up, for example, looking to raise your next round of financing, our platform plus our human support is going to help you every step of the way in that; and the other kind of key offering we have is all around talent incentivization so, setting up your options scheme and managing all that. And in terms of our, sort of our history, we’ve been going for four years but in that time, we’ve become the largest closer of funding rounds in the UK. So, that’s an overview from me.
John: Brilliant! Thanks, thanks, Nick. And Sara, do please tell us all about Granted.
Sara: Hi! Thanks, and thanks for having us today and good to see everybody here. So, my name is Sara, I’m head of Partnerships at Granted Consultancy. We are a non-dilutive funding agency, non-diluted funding that lovely free money. So, we predominantly specialize in R&D helping our clients to secure R&D grants and which plug that really nice spot between having a proof of concept and taking a technology to the market often before companies are able to secure any, any funding from investors.
We provide full non-dilutive fund consultancy so that includes sort of helping companies to develop their innovation projects in order to get to the point that they’re ready to secure grant funding and also R&D tax credits and then and then the project management of those projects.
John: Cool! Thanks, Sara. And John, do tell us all about Mountside Ventures.
Jon: Yeah, sure. Hey, everyone. Thanks for tuning in on a 5pm on a Thursday. I guess it’s raining outside but, thanks for skipping the beers for this one. I’m one of the co-founders of Mountside Ventures so, we are a firm of child’s accountants that are laser-focused on supporting high-growth tech companies in raising institutional funding.
We support companies on how to prepare for all the advanced diligence requirements when you’re raising off the likes of venture capital funds, corporate venture, venture debt, family offices, EI’s, and BCT funds. So, around kind of like financial modeling, investment planning, go-to-market strategies, investor introductions and then supporting, and I guess leveling the playing field of investor negotiations then the VCs negotiate deals for a living, and founders only generally have to do it kind of two or three times throughout their great cycle.
And so having someone on your side who’s seen hundreds of term sheets knows what market standard is and has had success in negotiating better deals is very valuable for founders who tend to be time-poor and in reality, should be spending more time with their clients and their employees rather than kissing frogs and going for little coffees and chit chats with VC’s.
John: Brilliant. Thanks, thanks, John. And I’m John Courtney, I’m founder and CEO of this one, Boardroom Advisors, and we have over a hundred very senior people throughout the UK who have all scaled businesses. We act as non-exec directors or more likely part-time executive directors such as part-time finance marketing, sales, IT, even managing directors.
Our clients have funded start-ups, scale-ups and SME’s. And my contact details are in the chat and do please put your own contact details in the chat and please in particular, if you’ve got any questions as we go through, do please put them in the chat and mark question because I’ll be hurriedly looking at those while the others are talking and so we’ll try and tackle some of those at the end if that’s okay. So, no further ado, let’s have a look at some of the trends that we see, and let’s start with Granted, with Sara.
So, what government funding is coming out of the transition out of the EU, Sara?
Sarah: Okay, yeah. Really interesting and it’s going to be a fairly vague answer, but I will explain the reasons, so obviously. So, the government has announced, and as they promised over the last few years, that coming out of the EU that the R&D budget for the UK would be expanded, and they’ve kept to that promise when the budget was announced.
However, it hasn’t yet been announced really what those funds are going to be, and we predict that they’re going to be in the high-tech areas that follow the general trends. So, the cleantech, agri-tech space, for example, health and life sciences, biotech, plenty in sustainability, circular economy, those are the sorts of sectors that it’s going into but we’re still having a bit of a delay in terms of the actual funds being announced. And I think, as well as coming out of [from the] EU, obviously, we’re losing a lot of the EU funding, and the company is, the government is talking about this leveling up program, which is going to replace the RDP funding for the regions, and also shared prosperity fund but again the details of it haven’t yet been announced.
So, that goes along with a reshuffle politically with the UKRI, which is the UK’s largest funding body for R&D, and also a lot of the funds last year were obviously side-tracked to focus on solutions for covid. So yeah, it’s going to be where all of the funds that we would expect to be released directly from the budget are still, still yet TBC. I think they’re sort of delayed into Q3 for this year rather than Q2, but we do expect them, like I said, to go in the areas that we would expect of the usual industrial strategy so, the cleantech space, the digital health space, agri-tech and anything involving sustainability.
John: And Sara, with Boardroom Advisors, one of the things we’ve been helping people with is the internationalization fund, which is horrible mouthful, where there’s up to, up to 9000 pounds available in match funding for people looking to export, to help them export. And this was launched before Brexit but, it has continued and possibly has maybe another year or so.
John: It’s a DIT grant. Do you get, we’re getting involved with that. Do you get involved with that at all or is that outside your…
Sara: We do. It’s not one of the core funds that we advertise in. For example, so the core funds that we specialize in would be more the kind of innovate UK-based kind of funds, but we do get involved with some of the larger international bids, for example. And we do know that fortunately, again it’s not exactly clear how, but that we will still benefit from the Horizon Europe program, despite not no longer being an EU member, and also the Eurostars program, where you don’t actually have to be EU member to access it.
And I know as well that the core focus, one of the core focuses for a lot of the UK funds this year will be on the export potential of new technologies for the UK. That international competitiveness is really going to be pushed and driven and there’s a lot of talk about the new innovate UK CEO who joined, I think in the last few weeks, that they’re very much keen to steer towards commercial projects rather than research projects.
I think when we had a catch up with this webinar team a few weeks ago, John you were saying that there’s that kind of rumor of, you know, a lot of R&D funding going to academics which is great we need the experts but then companies getting lost in that trap of getting grant after grant but never actually taking things to market. I think that’s going to change now, I think the commercialization, the export potential is going to be really key.
John: And certainly the, what I’m seeing and I think what you’ve just hinted at is, is some of the European Grant funding, that even though we’ve left Europe, we’ve committed to before we left before Brexit and still has some of those still have some time to run before, before the next round and then we’re not in the next round is, is that right?
Sara: So, the Horizon 2020 Program has come to an end so the new, the new Horizon Program is being released anyway. And like I said, it’s not entirely clear how at the moment but as far, as as far as rumors go, we will still have involvement in that, for the new program going forward.
John: Cool. And so, Grant Funding so it’s non-diluted, I can’t get my words out, you don’t dilute. So, tell me about the pros and cons of Grant Funding and non-dilution and what non-dilution means.
Sara: Essentially, it’s, you know, these companies aren’t, it’s not debt and it’s not equity so you’re not giving away shares, you’re not diluting your cap table and there aren’t associated costs with it with regard to debt and payback and so on.
The idea is that these grants, and as well important to point out that R&D grants aren’t for any particular size of company, it doesn’t, you could be a complete start-up micro business you could be a large corporate. I believe as long as you’ve got, I think fifty million under fifty million turnovers, you can still apply for government grant funding because it’s all about whether or not you’ve got a project coming up for creating new technology. And the idea is that the grant plugs that gap between taking having that idea and that proof of concept and all of the R&D activity and it will fund up to 100 percent of the costs to take an idea to the point where you have an MVP or an MMP or prototype whatever it is, ready to take to market and commercialize when which is where a lot of other funding tends to be unlocked.
So it’s that bit in the middle it’s the government’s way of incentivizing companies to take ideas and with that that will provide a solution for the UK economy with wider impacts whether that’s economic or, you know it’s going to solve a regional problem or a social problem whatever it is, but it’s those high height high-risk technology projects if you like that solve problems for entire industries that are game-changers essentially, and the government wants to incentivize businesses to do that so they provide up to 100 percent of the funding for all of that R&D activity, so that would include, you know hiring involving experts to or subcontractors to help you take that to market, academic researchers, any equipment that’s needed will fund that gap.
So, for a lot of companies, they don’t have access to funding from elsewhere so that’s obviously a huge pro and if you do you know it’s very very competitive process if you are so lucky as to secure grant funding from the government through that process, it does provide that wonderful validation to then go on and seek further investment so, it’s really key. But I guess the cons, you know it’s government money, so it’s hugely bureaucratic. It’s a lengthy process.
The application process itself takes, you know, it might, even for our grant writers it might take you know, four to six weeks to pull together a really good bid because essentially you’re putting together a dossier and to enter the competition, then you might be waiting a few months to find out whether or not you’ve been successful then there’ll be a due diligence process and they’re also paid in arrears so you know the gov the company would have to have some cash flow to start the project before the government then reimburses so, it is hugely bureaucratic hence why we have a project management service for that for companies.
But like I said, it’s funding that companies otherwise might not have access to and wouldn’t be able to chase these wonderful ideas down the rabbit hole to bring them to market without.
John: And everybody loves free money, right?
Jon: You have R&D tax credits as well, which are pretty significant if you can’t win a grant and there’s been some quite interest in updates to those actually which really affects early-stage companies. So, they’ve actually implemented a cap on the amount of R&D tax credits you can claim back as a link to your PAYE and NIC is there that you’ve paid on your employers. So, if you’re an early-stage tech company…
Sara: Yeah, so there’s a lot of change. And yeah, HMRC basically released a huge amount of funding for tax credit fraud claims going forward. I think there are a lot of companies out there that claim to specialize in not R&D tax credits that companies have claimed without actually, you know, having gone through the process of creating an innovation so they weren’t eligible in the first place for example.
And so, it’s really important when engaging a R&D tax credit specialist that they are as a specialist it’s not just an accounting exercise, it’s really about understanding the activity that you’ve done. And tax credits are that, if you think about grant funding, it’s about funding defined projects that a company is going to do. The tax credits are the other side of that project they’re that retrospective and non-dilutive incentive from the government for the R&D activity that’s already done
Jon: Got it
Jon: Yeah and definitely, if there’s any founders on the call who have R&D projects and are claiming R&D tax credits, I definitely advise investigating kind of your potential claim now that the rules have changed because if you’re using an outsourced tech provider, previously you can only claim I think 60 of that back rather than a 400, but with the new cap it’s definitely worth forecasting what your cap would be and if you need to internalize some dev to boost your cap up rather than fully outsourcing the tech, which isn’t something that the founders have had to really think about as much previously but it can have a big effect on the early stage if someone you can’t get your R&D tax credits back because you’ve outsourced 100 percent of the debt and you don’t have enough, you haven’t paid enough employee taxes to be able to claim back what you’re owed.
Sara: Exactly. And there are two schemes as well, with tax credits. There’s the SME scheme and then there’s the Ardex scheme and it’s they have different claim back rates and an activity can be claimed you can claim from the SME scheme and the Ardex scheme.
For example, if you’ve if you’ve done a grant project you can actually claim back tax credits on the grant funding that you’ve secured as well it’s just under a different scheme and you can claim that alongside tax credits under the SME scheme for general activity that the company’s done and they do go hand in hand, but again you need to engage an expert to make sure that you you really are claiming it in the right place. It’s a really good point, Jon.
John: And R&D tax credits are brilliant. I remember in my previous company, I claimed back tens of thousands. I was always surprised what things could qualify under an R&D, and I didn’t think they would necessarily research and development areas but, but you know the definition was relatively one what I found which was excellent for me and for my business.
Things may have changed, I don’t know. Listen, Sara thank you. That’s very clear. We need to bring Nick into the conversation, Nick with Seed Legals and so, you’re one of the last largest closer of funding rounds, Nick. Nick you and your colleagues, are there any trends you’re seeing on how entrepreneurs are raising capital at the moment?
Nick: Sure, absolutely. I think well, speaking from Seed Legal’s perspective, I can certainly talk about two things and then from speaking to both founders and investors on a day-to-day basis, like I’m supposed to talk about new emerging things. So, I think one of the key trends which existed, to be honest, even pre-Covid but I think has even but I think has accelerated further during covid, is this whole concept of what we call Agile Funding.
And for those who aren’t familiar with what that concept is, it’s probably better to talk about what the old model of fundraising is. So, the traditional kind of old you know start-up method of fundraising is to try and basically herd a bunch of cats together to basically all commit their checks to commit to commit their money at one point in time, so you want to go out and raise 500k, a million, 2 million whatever, you want to get everyone on the bus at exactly the same time. That’s an incredibly time intensive exercise for founders and obviously the longer that draws out, the more volatility there is in that kind of race how investors get cold feet you know their appetite changes and that that in turn can compromise the whole status of your race.
But what we saw, I suppose before Covid and I think hass accelerated during Covid, is founders take a completely different approach to that. So rather than go out and try and raise 200k, 500k, one million all in one go, they think “well actually hang on, what if I could do effectively like a series of micro races? What if I’ve got an angel who’s willing to commit to me 5k, 10k, 30k now? That’s actually really useful to me right now. It might mean that I can go take on a contract or you know hire a new developer that effectively gets me closer and closer to reaching my next milestone”, which for a founder means, you know, a good few thing.
So, one my business is more progress so when it comes to raising the future, my either the valuation I have in mind is more solid or maybe I can go and you know get a higher evaluation; and then secondly, I think you know it instils more confidence in investors who you’re trying to raise from at that time. So, it effectively means, you kind of bring well rather than trying to get everyone on one bus at the same time, which is how the old model was rather you can kind of bring people on at different times on different busses.
Think of it for anyone who’s been married and had to escort people from the church to the wedding reception in a series of cabs and that could be a bit of a nightmare, it is actually quite useful for founders in that respect. And I don’t know whether this Agile, look, I don’t have all the answers.
But you know a certain theory I have for this is, one you know during covid there was a there was a lot of sort of a lot of V, a lot of VC’s out in the market saying “Yes, yes. We’re open for business. We’re open for business.” I don’t know if that’s actually the case. John might be able to comment on that better. I certainly know of kind of the more esteemed VC’s saying “Actually no, we need to pause here because there’s a lot of uncertainties right in the world. We can’t you know, I suppose fully fathom yet”.
But what i will say is, this comes on to my second point of what I’m, I’m not going to call it an alternative method, I just seen it really burgeon. So at Seed Legals, for people’s background here, the majority of funding rounds that take place on our platform are generally in the precedence and the seed space. So anything from say from 150k all the way up to a 2 million round. Now, I come from an XVC background myself and you know previously if I’d seen a two million round, I would have thought “All right, okay.
There’s a fund probably has been the cornerstone investor there put in anywhere between 500k or maybe writing the whole 2 million check itself.” But actually what’s really surprised me particularly during Covid is seeing these really really large rounds so you know 500k, 2 million plus been completely occupied by angels. There’s not a single fund in that funding round and I think that’s obviously a good thing particularly as a founder because angels generally, other than obviously the free money from R&D tax credits and grants angels are your cheapest and your quickest source of capital.
But you know i think, i don’t know whether this is found as going to angels because I thought that’s that source but, at the same time, i also kind of feel like in Covid let’s be honest if you look at the business world the magnifying glass has really come on tech. Unless you’re kind of a traditional business selling face masks, the only businesses who you hear doing well at the moment are online digital things, so the zooms, the amazons, the facebooks all that kind of stuff.
So, i think there’s been a real magnifying glass on tech and thus I think there’s been increased angel appetite to invest in these businesses thus it seems to me that it’s actually kind of a lot easier or you can you can win angels a lot quicker. Furthermore, I think you know with Covid at least for people who are in that kind of in a fortunate position of where their jobs aren’t too impactful. They can do everything remote. There’s obviously as well like a lot of pent-up cash so there’s a lot of pent-up cash people wanting to, you know, maybe try investing. And there’s been a lot of tech that’s obviously helped make that easier so, you know, Seed Legals, I would say obviously for the legals, the crowdfunding websites, etc. So, I suppose those are the trends I see within CV goals. The other thing I’ve seen over the last few months and you’re seeing a lot of companies flourishing the space it’s this whole concept of revenue based financing.
So for any of those on the cool who aren’t familiar with what that is, it is effectively debt but it’s not like debts where you basically have kind of a fixed interest rate rather it’s debt that’s provided to you up front you pay a fee on it up front but basically you pay back a proportion of it out of your revenue every month. So if your revenue goes up you pay more if your revenue goes down you pay less so it’s regarded as kind of like a, you know, sort of a flexible lending.
The interesting thing is you’re actually seeing even VC’s offer this. Not all VC’s, only a few at the moment. So that they offer this revenue-based financing but you’re also seeing, you know, there are companies out there for those who aren’t familiar, there’s Clear Bank. There’s a company called Uncapped but there’s also Pipe, the sums they can provide anything from 10k up to 2 million.
At the moment there are caveats to it and that there has to be quite a lot of visibility on your revenue so generally, they like digital businesses where all their transactions are online and often they will stipulate what they want that money to be spent so for example like Facebook advertising or something like that. But it’s quite an interesting and I think potentially disruptive kind of like rival finance to venture capital but then even for a lot of people entrepreneurs on the call here, I would say actually it’s also good because most, a lot of businesses aren’t VC backable at all and that’s a lot of criticism the businesses they just don’t fit with the VC models, so yeah. Revenue-based finance I think, it’s kind of the real interesting alternative I’ve seen come out of this market.
John: Brilliant. Thank you and Jon, what trends have you seen in in VC’s recently?
Jon: Yeah, I mean a lot of what Nick was saying I guess over to go in so, where we sit is I guess what you traditionally call a Series A round and if you’re looking to raise seed or angels you probably don’t need an advisor it’s more about you as a person and your founder and your you as a founder and your expertise and the market opportunity. When you go into a Series A round, it becomes a lot more about data and financials.
And over, I guess the coded period, where we said we work with a lot of kind of B2B enterprise level companies and sales cycles got significantly extended. People, people’s growth rate dropped off and you never want to go into a VC round when your growth rate is dropping off not accelerating because that’s not a good, negotiated position. And so, lots and lots of companies that I’ve worked with, and I’d say two three years ago I’d never really seen this, have paid people like Clearbank who fund their marketing spend up front and then push the cash flow back like three or four months so there gives you the opportunity to like, to get in a bridge round or some equity but still maintain that growth up front.
Revenue based finance, this is a dream for e-commerce subscription businesses and the like because, I think Uncapped sell themselves then kind of 24 to 48 hours, they can suck in all your data they charge you like, I don’t know, five percent five percent fee and then you just pay that back out of your revenue. So instead of having to like scramble around giving away equity to angels and the like, like you can keep your marketing spend up you can keep your growth rate up without having to take your foot off the gas pedal and go around courting angels to keep that acceleration off before going out to a VC, which is so important because, in reality it’s kind of if you’re on a high grade trajectory and you think you can be a fifty, a hundred million business every day that you spend out the business is worth tens of thousands of pounds.
And so, if you have these kinds of alternative funders who, who can give you facilities in a quick amount of time and allow you to just keep going and spend more time with your clients and your employees and your technology, it makes an astronomical difference. And so, instead of, I guess what I traditionally saw as a bridge round, which generally looked like a convertible that was kind of all the bridge rounds I used to see. Now, there’s so many options to bridge yourself in between funding rounds.
Agile fundraising hasn’t quite hit the institutional BC level it is still very much kind of, we’re opening our round. We want to close in three to six months, we’ll speak to fifty funders and then we’ll make our decision about who to bring in. Unfortunately, I guess with VC’s, they’re not investing in their own cash they’re investing their limited partners’ cash so, so they are, they have to go through kind of the whole diligence process and get to know you and tickle, tickle the right boxes so that if you do go, if your business does get tips up and you don’t return anything for the fund, they can tell their investors that they ticked all the right boxes and therefore they shouldn’t get fired.
John: And what about…
Sara: I do have a question for Nick and Jon. I’m not, I don’t know if this is still a trend from but from a couple years ago when I was working more in the equity space, I saw a lot of businesses particularly kind of e-commerce businesses or i guess any form of digital tech platform where they engage, you know, a software development agency that is offering sweat equity. So, equity in exchange for services. Is that, is that still a fairly big trend? Is that moved on?
Jon: I almost, unless there’s a real need for it, I generally try and advise companies to, if they can pay in cash, pay in cash. Because, if you’re again, if you’re on a high grade trajectory and you think you’re going to be hundred million business and you’re giving away one percent then you’re giving away potential million pounds for what like a fifty to a hundred grand development project.
And so, the multiple doesn’t make sense. I do see it, one of our clients at the moment who actually did their round both around three Seed Legals there is kind of two mil, two mill in November and two mil again about a month or so ago, they really like their development agency they want them to be around they want them to be incentivized, to support them and meet deadlines and get them to the Series A. So, it’s a way of them incentivizing their development outsource development team to actually meet timelines, build a good product because then, then everyone wins.
Nick: Yeah, I agree basically with what Jon says. I mean, what we, what we very much do at Seed Legals when it comes to issuing equity as opposed to people who are supporting you in your journey, whether it’s a development agency or an advisor, is to pay them in cash because particularly advisors, as we said Seed Legals, ideas are cheap execution is what is expensive. But in terms of trends, I mean in terms of and in terms of outsourcing tech agencies, I mean I’ve been at Seed Legals nearly two years, so I suppose I don’t have the kind of full history of what it’s like a few years ago.
I would say, you know, obviously we do get companies who, you know, outsource tech results. But to give equity away, I would say as a party line generally no. But to echo Jon’s point, I think you have to look at a case-by-case basis and really understand suppose at that point in time what it is they’re offering to your business and I suppose how significantly, you know, is that going to help you versus maybe what other people do. So for example, you know, I actually have a, a friend of mine from university who’s practicing with his pre-Seed start-up and the instant advisor on board and this advisor actually is kind of you know a leading academic in in sort of all the maths that underpins their offering.
So, in my view it makes sense to, you know, given they are kind of a very lean start-up moment to give that guy some equity because there’ll be a long-term engagement with that person for the business. Evidently, his insights can be critical to the value of that business. So I’d like you some equities worth in that instance. But if it’s kind of like a commoditized resource like to some extent, you know, tech you could say, unless this guy’s unless the guy you’ve got is like you know the only developer in the world who can do it as you’re building, then yeah like it there’s some American equity there.
Sara: I think the key message is to get somebody to look at the terms first because, I also know that when I saw a lot of this in the past that there was quite a big kind of hidden under claws about who the IP, you know, if you’ve got somebody who’s, who’s taking equity and developing a platform for you, with their service terms, who who owns the IP in the end. So, that’s another really key thing to look to look out for
Jon: Yeah, absolutely. Another thing to think about as well, if you are looking to bring in advisors and people for equities, get them on a good investing schedule like, don’t like, unless and that’s there’s a really good case for it, don’t give them everything away on day one.
Give them their allocation. Let it invest over a three four year basis and then if, because people get bored and people move on and they might seem like the most invested person at this moment, in a year’s time when if they got married or they want to move to Australia or have kids, you want to have the mechanism where they they’ve only earned twenty five percent of it so they only get twenty five percent.
Nick: Another suggestion as well, rather than, well, either alongside or alternative investing is also, if it’s possible some sort of milestone thing. I mean of the problem with milestones is obviously they can be kind of very nebulous definitions but ideally, if there’s some kind of clear deliverable that that person can bring to your business. I don’t know, help broken a contract for example with a major partner or, you know, or counterparty, you know, that that could be a useful thing.
John: And guys, what about types of funders? I think we all know about individual angels and crowdfunding, but Jon what other types of funders are there out there that people should be considering particularly, I guess at Series A also.
Jon: Yeah. The main thing that I spent a lot of my time working on now that I never did two years ago is venture debt. So, people used to open up that Series A round. They’d get in a equity VC, they’d raise three to five million pounds. Twelve months later they’d raise five to ten mil Series B and so on and so on.
Now, you have venture debt providers who, if you raise a Series A of three million, they’re happy to rely on the due diligence of the equity investor and give you a facility for kind of three million and that will come with like ten percent interest rate eleven percent.
But if you have the revenues and the cash flow, that is astronomically cheaper than giving away equity because again if you’re not fifty, a hundred million exit track and you’re you think you can get a very good exit in five years, but you can get the one of these three year facilities and you can use it for a lot more. Like you can use it to acquire companies, you can use it to lots of stuff. The VC equity they don’t want you using it for…
John: So, so Jon just to be clear. So this is, this is debt financing but it’s tied to the growth and scaling of the company. Is that?
Jon: It’s debt financing on for companies that traditionally couldn’t get debt financing. Debt financing traditionally has up to about a year or two ago was for Ebitda positive, Ebitda positive companies. This is for loss making companies who, in two to three years are expecting to be profitable then.
And they, you can raise kind of three to five million off the back of a couple of million equity raise and pay ten percent interest you give away kind of five to ten percent of the facility amount as warrants to give them a little equity sweetener on a potential exit to reduce your interest rate.
But, if you’re on that high growth trajectory and paying ten percent on a five mil facility per year gives you, kind of what, like one point five million that you would have paid in in interest over over three year basis, and if that means that you haven’t had to give away an extra twenty percent of your company and you’re on that hundred million exit track that’s one and a half million of interest expense versus twenty million of equity that you would have had to give away for the same for the same amount of cash at that point. So, there’s a few log providers that are popping up all over the place at the moment.
Nick: I was about to ask John, because this is, I suppose from previous from previous roles I’ve been in, I understood for venture debt generally, it had to be quite a major ticket. So, the only kind of player I knew out there at the time was Silicon Valley Bank and it seemed like the only people who could provide venture debt were larger awful organizations with big enough balance sheets to suffer the potential losses.
So for example, you heard of Silicon Valley Bank, now I have no idea what the minim check is. I presumed it would be in the Series B space. I don’t know maybe ten million maybe even more so. I mean, is that marked?
Has it become a lot more competitive are there a lot more providers out there and also can you get, are more people eligible for it now because it from what you’re telling me it sounds like you can actually get kind of the smaller sums under venture debt so, but you know relatively speaking like you know I don’t know five million I don’t know if that’s the figure you go for.
Jon: Yeah, far lower than that. The one we worked on recently was two million. Okay, and bear in mind this isn’t like traditional debt, it doesn’t come along with personal guarantees. It’s unsecured and it’s, it follows the same trend as VC funds like all the Series B and later stage VC funds are opening up seed funds because it gets too competitive for deals later on.
And a lot of these venture debt houses actually realize that, to build a relationship with a company that would be four or five million in revenue and really profitable then, that you have to go earlier. Like you have to, you have to start looking at companies on like one million in revenue who are growing fast because if you don’t get it early then, then you miss out because by the time, by the time a company gets to the Series B level now, they know they’re the investors they know and they know what they’re doing there isn’t really kind of the same funding generational approach that used to be.
Everyone’s going early, all the Series B, Series C funds are opening up seed funds, all the US funds are now opening up offices in London, which is quite funny because all the, all the UK and European funds complain about how overvalued all these deals are but with the US funds saying it’s so cheap over here compared to where we are and I was listening to an interview with one of the managing partners of insight in the US, he was then he regularly sees companies at ten to fourteen million ARR dollars asking for a billion valuation now in the US which is pretty unheard of in in the UK or in Europe.
John: Great, great stuff guys. Listen we need to come to some questions, so let me just throw some out at you and please chip in if you’ve got a response or an opinion. So, from Rick. Hi, Rick! “If, as we already have two UK grants, are we able to claim R&D credits as over de minimis level?” It’s probably for you, Sara.
Sara: Yes, sorry I did say at the very beginning of this so that I hope nobody asked me about things like state aid. So, that’s to be an expert and I’m certainly not the best person that granted to speak with, we do have experts in the house. I did respond to this, it’s not a straight yes or no answer because it depends on whether the funding that you’ve achieved has hit that state aid level, but also we’re now outside of the EU and it’s not again fully decided what it looks like but it’s whether or not we’re still going to fall under that cap and when you’re claiming and what your projects were. So, it’s not a straight yes-no answer and it needs an expert to look at it so it’s again touched.
Jon: And state aid is a bit of a mess at the moment, as well because for example one of the deals we’re working on at the moment is with a European VC but actually most European VCs have European commission money as their limited partners in their fund.
And so one of our clients is going through a funding round where they have a turn sheet from a VC and then they’re a Scottish company and the Scottish investment bank said, “yeah of course we’ll match fund it, we’ll match fund it” and it was all progressing really nicely and then suddenly we found out that this BC actually thirty-three percent of their money is European commission money and then there’s parity rules whereby fifty public has to be matched by fifty private and now suddenly that’s sixty-six public in this deal and now we’re scrambling trying to find some private money to top up to bring the ratio back down and no one we spoke to can tell us.
Everything online suggests that some government subsidy rules have diverged except for in the case of Northern Ireland exports, I think I’ve read a lot about this recently and, but no one wants to pull the trigger on the deal because everyone’s too scared and no one actually knows
John: Great. Okay, a question from Andy, “thoughts on issuing equity for services but with call options.” Anybody got a comment on that?
Jon: If there’s more context on the call option, I can comment, but yeah equity for services at the early stage is super standard before you before you’ve managed to raise funding otherwise, you’ll, otherwise the founder has to pay for everything out of pocket, right?
John: Right. Okay and a question from Joe, “who arbitrates on milestone investing? I prefer milestones to time served but it’s equally hard to really forecast the future. How does a missed milestone get handled in terms of vested shares?”
Nick: I think, I think well not that I’m the lawyer here, by the way, I like the biz dev team but as someone who’s done deals in the past and then bid importantly negotiation contracts, I mean in terms of the arbitrator, in terms of the arbitrator of milestones I mean, that’s purely, that’s honestly purely going to depend on what the contract says. And I think largely who arbitrates that, will also be dependent on, I suppose, what the milestone in question is. Obviously, I say if generally when it comes to milestones, if you can make it something, you know, really undebatable like, what day the fourth of June 2022 will be or something like that and that’s fine.
And then yeah sorry there was another question related to what happens. So, I mean I must admit that situation of having both milestones and vesting for advisors, I think you need to look at the specifics of that situation to come further.
Jon: It’s very hard for advisors to do milestone because it’s like, advice isn’t a project. If the company was speaking about earlier as a developed development agency, the milestone is very easy. They bring out this feature, it’s tested and it’s live in the app.
And if it’s not, then they haven’t hit the milestone. But like for me as an advisor, like how long’s a piece of string? How do you judge the milestones of the value that you’ve added to the business over time? So, for advisors, it’s probably better to vest on a time schedule basis for project-based work.
Yeah, that probably makes more sense for milestones, and to be honest when you say you arbitrate some milestone investing, if you get to the point where you need an arbitrator then everything’s kind of falling apart, anyway. You probably have more important things to worry about.
John: Okay, brilliant. And final question from Jaylen, “could someone give me a summary someone presumably give me a summary of all the tactics that can be now used to obtain funding” well perhaps rather than all of the tactics, because we could be here until midnight, perhaps maybe just let’s just whiz around the room in the current circumstances.
So, that is Brexit, coming out of lockdown, all of the stuff that’s happened and has been happening, you know. If you had to, perhaps one or two tips in the air in your area of specialism that you would ask people to have a close look at. So, Sara, where would you start?
Sara: Sure, I mean it largely depends on the stage that the company is at. I mean I’ve talked about how so granted specialize in the R&D innovation Grant space and I think understanding the right timing for getting R&D funding is really important.
On the other side from R&D grants, you have capital or structural grants which go could be anything from you know start-up grants or business support grants from 5k plus for start-ups all the way up to big capital expenditure grants first or fifty or 100k plus.
And they are, rather than the innovation R&D grants that are distributed nationally, those tend to be distributed regionally. So, in England for example, that kind of government money is distributed through the local enterprise partnership network so you can look up your local enterprise partnership or let each one of those and there are thirty-eight across England. Whales have their own. Scotland have their own. Northern Ireland has their own.
There are thirty-eight of them just in England alone and each one has a growth hub spin out which is basically the government’s business support services for all of the companies in that region and that is where you will be able to find out about any grants.
Any smaller or capital expenditure grants that are more relevant to you and I would encourage every business to have a contact or some kind of relationship with their local growth hub because that way you can find out about any smaller grants like that.
John: Yeah, excellent idea and we’re partnering with one or two growth hubs ourselves. Excellent source of information about business generally as not just grant funding but business generally.
Sara: Yeah, they’ll have free accelerators competitions that you can enter, webinars, free funding sources, yeah.
John: Yeah, absolutely. Absolutely. Nick, one or two tips in the current climate that you’d, I know it depends on absolutely raising and all the rest of it,
Nick: Yeah, absolutely so I mean maybe there’s kind of a nice trajectory here because salesforce or grant plumbing and stuff, you know, for me obviously try and get free money. But I particularly for anyone, you know, raising I would say between let’s say, anything from 50k all the way up to two million seriously don’t overlook angels.
Say, I came from a VC background before coming to Seed Legals and I didn’t actually realize like what actually fantastic ecosystem we have here in the UK with business angels. You know, it is heavily incentivized by the tax incentives so, SCIS and EIS, if people aren’t familiar with what is that basically allows angels to recoup money on their investment that they invest in you from the government so it de-risks it for them. I mean I don’t have the geographical knowledge here but the US has nothing like this and that’s the most vibrant sort of you know
Sara: Later stuff the UK needs to hold on to.
Nick: Yeah, absolutely there was worries that that would go away, I think but thankfully, it stayed and it I gave us the lifeblood of the early-stage ecosystem. So, by all means, you know, I think what’s happened in our, where the magnifying glass has been on tech over the, let’s say even like twenty years with likes of Google and Facebook and Uber, you can see companies go like that and those companies get celebrated which is great.
But the VCs also gets celebrated, too. Now there are some very smart VC’s out there but some VCs get a lot of fame attributed to them and I think a lot of start-ups think that’s the way to go but like I said, most businesses are not actually VC-able and you know angels are a fantastic source of capital.
Your quickest cheapest source of capital they’re not under the same financial pressures or models that VCs have to adhere to so definitely do, you know, try and exploit that field. The problem with angels is obviously unlike a VC firm, they don’t have websites, they don’t market themselves, they’re not on the twitter-sphere so you really got to, I suppose, tap your own network, and let’s just fight to find a way to access some. In the chat, I put a little guide about how to, find angels because at least, initial stages it’s to do with your network but trust me, there are ways you can do it.
Make noise, your start-up absolutely make noise all about making yourself seem bigger than you actually are. And then if you get into that position where people coming to you, obviously that’s a great position to be in.
John: And it’s also partly a sense of scale isn’t it, because you know to be really simplistic in start-up land, angels are everything but of course when you get into scale-up land and you’re looking at Series A then angels don’t disappear, do they Jon, but you know the institutional stuff becomes much more to play. So, a couple of tips for people in the larger space, John?
Jon: Yeah, and I’ll throw a quick tip-off the back of Nick’s angel comment, actually. One good tactic if you’re struggling to find business angels is find a company similar to yours that might have had a partial exit like a Series B or secondary market.
Find all their early angels who are on their cap table that you can look at on stuff like Bowhurst or Crunch Base, and then they would have got a win in the market and you’re like, “hey so you’ve got a win, do you want to double down? I’m the new kid on the block”, and it’s a way that if you don’t have good.
To be honest, angel networks are quite closed doors, like they are very hard to get into. And no, not every founder went to Eton, unfortunately. And so sometimes, you have to get a bit scrappy when you’re trying to get there, and you have to try some quirky little things like sending cheeky messages to someone you know might have got an exit in your space and trying to get them in but off the back of that.
In terms of VC funding, and I prefer talking about institutional funding because corporate venture as well is like just as big as VC when you look at it on an overall basis. My advice is to understand the worth of your own time. Your time is probably until you’re hitting the half a mil to a mil revenue levels, your time is much better spent with your clients, employees, and technology and getting new clients rather than spending an hour having a chin work with a VC analyst, he’s probably just on a fact-finding mission anyway.
When you have tactile angels and you do have good early clients and you really feel like my tech works and my clients are happy, that is the point where you go out for VC. Unless you have those signs of product-market fit and all you’re doing is burning your own time.
You’ll speak to fifty VCs, they’ll come back, they’ll always have the same feedbacks and come back later. Raising seed VC funding is good if you can’t raise angel funding but surely, if you can raise CVC funding, you should be able to raise angel funding, and angel funding is easy.
They’re supportive, you don’t have to send them monthly management accounts, you don’t have to ask their permission to hire someone or fire anyone, you don’t have to you don’t have to ask their permission if you want to do something, pivot the business or try and go into a new market.
As soon as you bring a VC on, you get four pages of stuff that you have to ask permission to do like you have things like anti-dilution ratchet so like if you get twenty, ten ml valuation and then actually you need to raise a lower valuation next time they don’t even they don’t get diluted they get to retain that twenty and you have to give everything away out of yours.
So, you have a think about is seed VC, it is it the kind of person that you want on your board because you have to give them a board seat, and do you really think that it’s best for your business to speak to fifty VC analysts at this stage when you can do it more of a competitive process. When you have something to show off about instead of the promise that you will have something to show off about in the future.
John: Brilliant guys listen thanks so much. Wonderful, wonderful questions. I’m conscious it’s two minutes to the hour so, we’re bang on time. I’d like to say thanks very much to our panelists. Nick Richards from Seed Legals. Sara Palmer from Granted and Jon Steinberg from Mountside Ventures.
I’m John Courtney from Boardroom Advisors. Thank you, panelists for coming along. Thank you, everybody, for listening. A copy of this video will be on all of our sites. certainly ours. I expect everybody else’s as well probably next week thank you everybody for coming along and have a good evening.