EXPANDING YOUR BUSINESS THROUGH SECOND ROUND FUNDING

In this complete guide to Second Round Funding Maree Morrissey outlines how a business can grow and how to secure the right funding for your business.

Most businesses need some financial help to get started, grow and develop. It is a constant challenge facing entrepreneurs to secure the finances necessary to accelerate and development their businesses.

Finance for business comes in three different forms – equity, grants and bank finance. When identifying the need for second round funding, entrepreneurs need to establish the options available to them and determine which source of funding will be the best for their business. Once funding has been sourced it is essential that the capital be managed efficiently to ensure growth and development.

Before approaching the bank, first investigate the other forms of finance, for example grants and financial supports, available to you. Once you have organised either a grant and/or equity, you are more likely to be successful with any application to your bank. As with securing funding from other sources, getting bank finance is essentially a selling exercise because you need to sell the concept of your business idea to the bank. Banks will assess the levels of risk of your proposal and need to satisfy themselves that the potential rewards match the risk. Therefore it is imperative that you consider whether your proposed business venture has the capacity to repay the debt.

TYPE OF FINANCE REQUIRED

There are two categories of finance – debt and equity. It is important to determine the optimum use of debt and equity to finance your expansion plans because too much debt and your business could be considered too risky, while too much equity finance and your ownership of the company will be weakened.

SECURE FINANCE

The importance of a business plan in order to secure finance cannot be underestimated. The business plan must be a realistic and credible business plan, which will determine the strategic and financial needs of your business. All providers of finance, whether banks, venture capitalists or state funding agencies, will usually ask for a business plan which covers the main aspects of a business being considered for funding. The funding requirements for each funding provider are different and the business plan may have to be tailored to address the needs of each investor.

IDENTIFY YOUR NEEDS

The most effective way of raising venture capital is to select just a few venture capital firms to target with your business proposition. The key considerations should be to assess:

• The stage of your company’s development or the type of venture capital investment required.
• The industry sector in which your business operates.
• The amount of finance your company needs.
• You should select only those venture capital firms whose investment preferences match these attributes.

VENTURE CAPITAL

Access to venture capital and private equity funding is vital in the drive for knowledge-based businesses to be created and grown. Venture Capital is capital provided by full-time, professional firms (venture capitalists) or private persons who invest in, fastgrowing companies who have the potential to develop into significant businesses. In addition to injecting cash into the company, the venture capitalist is likely to add considerably to the credibility of the company and to supply management expertise, support and access to their contacts.

In contrast to bank finance, venture capitalists are not looking for repayment, but for a minority of the share capital of your company in return for cash. The venture capitalists will then typically look to realise their investment in five years, either through floatation on a public market, a trade sale or for their stake to be bought out by the company.

The Irish Venture Capital Association (IVCA) is the representative body of the venture capital industry in Ireland. The association encourages co-operation and best practices within the industry and facilitate those seeking venture capital. The IVCA also continuously works with those individuals and organisations committed to fostering an economic and regulatory climate conducive to the growth and development of an enterprising economy. Venture capital investors are interested in entrepreneurial businesses, which can be distinguished from others by their potential for growth. These entrepreneurial businesses have the potential to grow rapidly.

Venture capital investors are interested in companies with high growth prospects, which are managed by experienced and ambitious teams capable of converting their business proposition into a profitable enterprise.

Enterprise Ireland (EI) can assist companies who wish to raise venture capital funding to grow their businesses. Enterprise Ireland partners with Venture Capital funds to provide finance. Under the National Development Plan 2001-2006, the Government has committed €95 million through EI to partner with the private sector to continue the development of the venture capital market for small and medium enterprises in Ireland. EI has committed to 15 funds some of which are specifically targeted towards small and medium enterprises at early stages of development and with a greater regional perspective.

EQUITY FUNDS

InterTradeIreland’s Equity Network initiative has brought a unique approach to promoting private equity to accelerate business growth, focusing on the challenges and opportunities for SMEs. The activities of Equity Network include:

• An island-wide education programme to raise awareness of the availability and benefits of using private equity.
• The provision of value added information services to businesses to assist them in becoming 'investor ready'; and
• An annual all-island seedcorn business competition for the best business plans on the island.

OTHER SOURCES

There are additional sources of funding for your expansion plans that you may consider in addition to bank finance and private equity finance

• Friends and Family - can be a source of capital to help you finance your business. When considering this option, you need to consider what impact a business failure could have on your relationship.
• Business Angels are private investors who can provide capital. The Dublin Business Innovation Centre can assist you in finding or registering as a business angel.
• Business Expansion Scheme, outside investors can invest in your company and take advantage of personal tax incentives.
• Seed Capital Scheme- a tax refund available to certain persons interested in starting their own business.
• County Enterprise Boards- assistance for companies employing less than 10 people.
• Corporate or trade investors- if you have a technology or product offering that may be of interest to specific companies, you could convince them to become a strategic investment partner, allowing them to co-fund the development of your product for your mutual benefit.

IS VENTURE CAPITAL AN OPTION FOR YOU?

• Are you prepared to sell equity in your company?
• Does your company have high growth prospects with an ambitious team that can grow your company rapidly?
• Are you looking for more than €100,000?
• Is your market large and expanding?
• Does your product have a competitive advantage that can be protected by intellectual property rights?
• Can your team demonstrate relevant experience?
• Do you have a clearly defined exit mechanism?