Taking the Alternative Approach to Raising Money
BY CAROL LEWIS
PUBLISHED 19TH JUNE 2012
Read the article online
If small companies find that banks are not helping them, they can look elsewhere
Rob Symington and Dom Jackman left their jobs as management consultants to set up a company devoted to helping others to escape the City — so the last thing they wanted was to rely on the City when they needed cash to expand the business.
Yet, like many small companies, they found that the usual business finance options — venture capital, angel investment, banks and even friends and family — were less than ideal. They had to find alternatives.
“To get venture capital, you have to have a lot of traction and revenue,” Mr Symington said. “They wanted it to be the sort of venture that would turn into a £500 million business. But we had more modest goals.”
The pair had heard of equity crowdfunding and, despite securing venture capital, they decided to give it a go. Within 16 days they had raised £600,000 via the crowdfunding website crowdcube.com. A total of 394 subscribers to their website escapethecity.org pledged an average of £1,500 each in return for a 24 per cent share of the company and a branded hoody.
“We were flabbergasted,” Mr Symington said. “With venture capital there would have been pressure to build a massive business with an emphasis on revenue driving to a defined exit date. This way we can build a sustainable, profitable business together with our members.”
Sarat Pediredla, a co-founder of Hedgehog Lab, an IT consultancy, also found that venture capital wasn’t for him. “The amount of ambition and risk they wanted didn’t suit us,” he said. He opted for proof-of-concept funding from the European Regional Development Fund. “What attracted us was it was a convertible loan. If the venture succeeded, then it was converted to an investment or into a straight loan; but if it failed, the loan could be written off.”
As it was, his plan to develop software for the finance industry was thwarted by the banking crisis, forcing him to agree to writing off the £60,000 debt and to change the company’s direction from software development to consultancy, which is successfully financed by its fee income. “We spent nearly a year looking for money and in that time we could have probably built the product and got it to market before the crash. We spent too much time having big ambitions.”
Heather Jones, director of Lamont Jones, an outsourced HR provider, also has big ambitions. Having won a contract with a large company, she needed to expand her six-person team to a staff of twenty within two years. She asked the bank for a £65,000 loan, but it “acted as if they were doing me a favour”.
Working with Clifton Asset Management, she reactivated an old company pension, putting it in trust to borrow against. It was a win-win-win situation, with the interest paid on the loan paid into her pension. She can also use the pension to offset corporate tax and can borrow more should she need to. She also had her intellectual property valued, giving her the option of borrowing against that in future, too. “I feel now as if I am in control and I have options, which as a business owner is what you want. It is important as a small business to realise that the bank is not your only option for funding.”
Liz Oram and Allison Herbert also decided against a bank loan when they launched Love-local.com, a site selling gifts from the West Country. Instead, they gained £20,000 of website design and support by winning a national competition. The Expo Successful E-commerce Award also gave them valuable business accreditation: “It was a fantastic way of giving us credibility,” Ms Oram said. “Doing the entry really made us do our research and analyse our business plan.”
Sometimes funds are required to make the cash flow. Angela Burdett, from the recruitment company Incite People, said that because large clients could take up to 60 days to pay invoices, she occasionally needed loans to cover costs. But banks want assets to secure against the loans and also charge expensive monthly fees.
She went to the online invoice auction marketinvoice.com. Ms Burdett has used the service to pay advances on six invoices in the past six months. “We have covered 90 per cent of costs at an interest rate of 0.5 per cent plus the 0.5 per cent that MarketInvoice take,” she said. “It is incredibly good value. I have become quite evangelical about it.”