Barclay's Eagle Lab Lecture

Ian Jarvis and Mark Rands from Barclays Eagle Labs

Basic Terms - common words and phrases and what they mean.

Turnover: Sales of a business, also known as income or gross revenue

Profit: Turnover - expenditure

Gross Profit: Profit made after production and sales costs

Net Profit: Profit made after all costs

Costs: The amount that needs to be paid for

Fixed Costs: Costs regardless of production outputs

Variable Costs: Costs that vary depending on production output

Costs of Goods Sold: The direct costs involved in direct production

Breakeven: The point costs and sales equal 0. How many items need to be solved before you can start making profit?

Cashflow: Net amount of cash and cash-equivalents being transferred into and out of a business

Working capital: The amount a business can safely spend

Depreciation: The decrease in the monetary value of an item

Amortisation: As above but for tangible assets

Goodwill: is an intangible amount associated with the sale/purchase of a business that includes brand name, client base etc.

Tax: is a mandatory government charge or levy

CFO: Chief Financial Officer

Valuation: How much a business of item is worth

Equity: represents the value that would be returned to a company’s shareholder if all the assets were liquidated and all of the company’s debts were paid off

Stake: is often used to describe the amount of stock an investor owns, and this is certainly a correct way to use the word

Shareholding: number of or value of shares in a business

Dividends: a payment based on factors such as profit and shareholding

Salary: Personal incomes paid to staff

Raising Funds

Bootstrapping – funding the business with little or no investment. It usually means relying on “sweat investment” which is working with personal income and savings. Therefore, you won’t be tied down by loans or giving up any equity/stakes in the business. However, it can take much longer to grow the business.

Stick to a business domain you know.

Fins team members to work for equity rather than cash.

Build a plan around your budget, rathe than around your wishes.

Defer the urge to find office space until you have customers, don’t spend money on equipment and services that you don’t need.

Ask for advance on royalties and vendor deferred payments. Don’t be afraid to ask for money upfront or ask if you can pay someone later on.

Negotiate inventory management with suppliers and distributors.

Choose a business model to optimize your revenue flow and timing.

Be creative.

Friends and family investment

This is when an investor has an affection for the founder

Usually is between £10-150k

Terms will be agreed by a “handshake”

Pros are that the terms can be more flexible and is based on trust rather than business plans or evidence

Cons are you may feel more pressures as you are risking money of someone you have a personal attachment to.

Ask for a specific amount to meet a specific millstone

Offer a formal agreement as well as a handshake

Let people see your own investment and commitment

Build a prototype first on your own time and money

Don’t ask for more than your friends or family can afford to lose

Communicate the plan and risks upfront

Focus on well-connected friends with relevant business experience

Tie re-payments to revenue growth in the start-up

Communicate!

Crowdfunding

The process of raising money from a large number of people in order to fund a project, a company, or a cause.

In some cases, the funder does so as an altruistic donation, in other cases, they get rewards, equity in the company who raised the money.

Pros: can generate an engaged audience while funding the project, can garner a lot of attentions. Furthermore, can raise funds quicker than via other investment methods and can support the gaining of other investments types in the future by showing a demand.

Cons: If target amounts aren’t reached, there is risk of going away empty handed. Getting the rewards or returns wrong can end up giving away too much. A big display of what you are offering increases the risk of the idea of being copied.

Talk to the experts

Check out the competition

Be realistic with your target

Factor in all costs

Be creative in both pitch and rewards

Focus on the first 48 hours

Use social media for more than just asking for money – only 20% of posts should ask for money the rest for more meaningful posts

Deliver what you have promised

Stay connected – keep supporters posted on what’s happening and developments

Angel Investor

Also known as a private investor, seed investor or angel funder. They are a high-net-worth individual who provides financial backing for small start-ups or entrepreneurs, typically in exchange for ownership equity in the company.

Typical amounts range from £5-250k

Pros: angels are willing to take more risks than other investment types. It’s not a loan. If they company does well, you all do well. Brings increased chances of success. Angels often have been successful and bring experience to the table.

Cons: The bar may be set high and angles expect a return of up to 10x their investment in 5-7 years. There will be strings, you will be giving up a share of ownership and future earnings. Angel investors are more likely to want an active role or to have regular updates.

What you need to do:

1. Tell your story: angels are investing in the people as much as the product

2. Solve a problem: how does your product solve a given problem

3. Get your financials in order: make sure you know what your business is worth

4. Create a business plan: show the angel how the money will be used.

5. Conduct due diligence: o your business and the Angel. Do you want to work with them?

6. Focus on your market: your angel will want to know who your customer are and how you plan to reach them… Be specific.

7. Be transparent: they will find out

8. Describe your exit strategy: what is your long-term strategy

Private Equity

Private equity refers to shares pf a company that represents its ownership.

An individual who wants to take partial ownership of a company can make a private equity investment in that particular firm. These companies are not listed or traded on any stock exchange.

Pros: cash infusion. PE groups have deep pockets and can provide the financial resources to fuel growth. Expertise – they can supply the talent that your business is lacking. They have connections

Management incentives – if you’re looking to reward your management team, private equity is one way to do that. PE investors want to ensure your management team. And will have all the experience to do so.

Proven returns – Private equity firms are experts at creating 2/3s. Private equity firms provide at least 20% growth

Commitment to success – PE firms have their own vested interests in making sure your business does well.

What you need to do:

1. Audit your financials – no sloppy numbers. If this is overlooked by an investor you are not getting value

2. Fill gaps in the team – you can’t do everything yourself

3. Diversify your customer base – more customers tend to feel safer for sophisticated investors

4. Create and exit plan

5. Solidify your contracts – it costs more to get a new customer, hold your existing ones

6. Build the product pipeline – give investors a reason to see continued success

7. Get a realistic valuation

8. Make an acquisition – this is a quick way to grow your business and can show investors you are serious

9. Protect your IP – this will be a major asset for you

Traditional Lending

- Loans

- Overdrafts

- Invoice discounting

- Commercial mortgages

- Credit cards

- Bank lending is more traditional and allows you to maintain ownership of the business

- It is usually quicker to obtain

Grants and competitions

Generally, allow ownership to stay with founders.

Generally, do not need to be repaid as long as clauses and conditions are met

Many different types but most will focus on a challenge such as innovation, diversity or social.

Will usually be either government backed (local councils or LEP’s or national investment) or from big companies.

Grants and competitions. Successful candidates demonstrate:

- Unique technology

- Often IP defensible

- Solving a universal problem seen in a multitude of areas, sectors or locations

- Commercial business plan

- Partnerships with industry or research collaborators

- Relevance to industrial strategy challenges (read the ISC descriptor)

- UK registered business, trading 50% of revenue or with 50% staff based full time in the UK as a minimum

- Financial commitment from the founders, owners or investors.

Accelerators and incubators

Business incubators and business accelerators provide advice, guidance and various forms of support for business in the start-up phase.

Business accelerators aim to help entrepreneurs hit the ground running

Business incubators nurture the business in its start-up phases, allowing it to develop at its own pace.

While not a direct type of investment, many of these programmes will support with the essentials.