VENTURE FORWARD

In order for your company to grow it will be necessary to secure second round funding to further your business aspirations and help develop its full potential. Jill Acheson reports on the options available.

When you have set up a business and you’ve already negotiated the start up period it may be necessary to obtain further funding. Many start ups will have already sourced initial finance to get themselves off the ground. The next rung on the funding ladder comes with the expansion of an already established business that has initiated its production and export services. At this stage, a company may need an injection of large amounts of capital for areas such as recruiting more members of specialised sales or marketing staff or investing in the research and development of their products and services.

In order for companies to expand their business, second stage capital provides a helping hand and allows their venture to reach its optimum potential. According to Neil O’Donnellan, Head of Investment Services with Enterprise Ireland, “the stage that a company is at when applying for second stage finance varies, but primarily you’re looking at businesses that are at a non profit making stage leading them into the next phase in terms of development.”

NEXT STEP

There are a number of categories of second tier funding, including grants, equity and venture capital, angel investors, and debt. Equity or capital funding are generally invested in the company under the condition that the investor will receive a percentage of ownership for their financial input. These funds are accessed from a private source, a financial institution, an angel investor or what is known as a venture capitalist. Venture capital is cash given in exchange for shares in the investee company. This type of funding comes under the heading of private equity capital and is typically provided by professional, outside investors to new, growing businesses.

SUFFICIENT FINANCE

Venture capital offers the potential for above average returns for the investor but can be described as high risk as returns of course depend on the economic performance of the investee business. This may be the reason why venture capital used to be known as risk capital. While this option avoids the process of repayment the downside for the entrepreneur however, is that, in return for their investment the venture capitalist will have a sway in the running of the business so in effect the entrepreneur’s ownership will become diluted.

The amount of finance required will have to be sufficient to carry the business for a reasonable period of time. It will then be necessary for the incoming money to balance with the money that is outgoing. Your financing may have to supply most of the working capital until sales begin to generate sufficient income to give you an adequate cash flow. Business loans are probably the best option when it is a small amount of money that needs to be acquired.

HEAD START

According to Enterprise Ireland’s Seed and Venture Capital Programme Report 2000 to 2006, since the establishment of the Venture Capital Scheme in 2001 the body’s Partnership Funds have invested a total of €250 million in 116 companies in the last six years. Last year venture capital investment in Ireland continued to increase where over €67 million was invested in high potential companies. O’Donnellan says that companies accessing second round funding are already at the stage where they have received good feed back on a product or a service and they are confident that they are at the stage to move forward from that. “Second tier funding through a state body like Enterprise Ireland is a combination package of venture capital and sometimes grant aid but it always depends on the situation of the business at the time,” explains O’Donnellan.

According to the sectoral breakdown of investments in the 2006 report, the types of companies applying for next step finance come from a range of sectors, commonly high potential industries including IT, communications and life sciences where there are definate investment prospects.

MEETING MILESTONES

Businesses can utilise the financing from a loan to boost and further grow their company. There can often be difficulty in gaining finance however as financial institutions may perceive a risk in investing in certain types of businesses. It is vital, therefore to remain confident in your product and your future enterprise plans and to be well researched eliminating the risk element. Whatever your strategy in gaining vital capital for your venture, it is essential to have a good business plan, so that the investor can access your plans for the company and decide whether to give the all clear on future capital investment.

Whether you are approaching a state body such as Enterprise Ireland or a County Enterprise Board, a financial institution, or a venture capitalist a clear and concise business plan is an essential tool of persuasion. O’Donnellan offers some key advice saying, “have a business plan that’s based in reality with a clear understanding that your milestones have been achieved since the first round of funding. A clear business plan reveals how the company is going to build on their achievements in the future and how they’re going to create value within the business and eventually build market sales and profitability in the future.”

THINK AHEAD

Recognising the opportune moment for this stage of investment will come typically when you need to gain further monetary help to realise your businesses’ next step. If your company has already completed a successful launch more funds may be necessary to develop the business plan, hire additional staff, and to gain a strong foothold in your chosen market area.

“The key thing is that they have already met some milestones in their business’ life span and would be able to turn around to potential investors and say, we know the project has a reasonable chance of success, we’ve actually tested it and achieved certain milestones and now we’re ready to go to the next stage,” says O’Donnellan. He says that it is imperative to have a very good business plan in place where the business makes it clear that they understand where they can access potential investment and usually have already approached sources of investment like venture capitalists before approaching Enterprise Ireland.

Business plans are vital if you want to have a clear idea of what your goals are and where you may run into challenges. If you are considering accessing second round finance this is an essential element in the process. Your business plan showcases your company’s aspirations showing that you have planned your strategy and you know how to make your idea a reality.

Putting a business plan together helps you to focus on important issues facing your business. You'll have to identify your competition, focus on your potential customers and clients, and plan your finances and marketing strategies in order to fine tune your goals.“Second stage funding is essentially a plan to get significant higher value for the company, so that it’s worth investors putting their money into it and from our point of view it’s good to have developments in terms of value added to the Irish economy,” concludes the investment expert.

Published in the October 2007 Issue of Irish Entrepreneur