IT’S YOUR IDEA, BUT SHOULD YOU BE RUNNING THE BUSINESS?

Is the founder the right person to grow their business?

Perhaps? Or perhaps not. A founder may have a great idea, and while they might have the enthusiasm to turn it into a business, it doesn’t mean they’ve got the skills to make it successful.

But that doesn’t mean they can’t learn argues David Mott, Founder Partner at one of the region’s most successful venture capital companies.

Oxford Capital invests in seed stage and Series A companies, and it believes in backing the people who’ve started a business, not edging them to the periphery and replacing them with an experienced executive team (which is more a trait of private equity investors).

Oxford Capital’s philosophy is all around backing founders because it makes financial sense to do so.

Good investors invest in people often as much as the ideas they’ve brought forward. Avid viewers of the BBC Dragon’s Den may have heard Peter Jones mutter to Deborah Meaden: “I’m not sure about their product, but I like them,” before offering to invest.

David explained: “In our experience, out of the 100 or so companies we’ve backed over the years, those that still have the founders in a leadership role at the point of exit have delivered a 51 per cent greater return than those where the founder has been replaced.

“We are investment managers. Our responsibility is to deliver returns and we see a clear correlation between outperformance and founder leadership.”

There is also some anecdotal evidence within Oxford Capital’s investments that co-founders seem to be outperforming solo founders – although that might not be the case for more than two founders.

Should I stay or should I go?

Oxford Capital has looked in depth at why founders stay or leave a business.

David said: “We asked, is it because they don’t understand business, or it’s just too much of a struggle for them? Is it because they think their new investors don’t like them or rate their abilities?”

And the company applies this thinking on each investment. “We are there to back the founders, and we tell them that at the beginning.

“We want them to be the best possible leaders and we have some honest conversations around that.

“From the beginning of our first investment we help founders prepare themselves to last longer on the journey and be there at the end.

“Perhaps they have fantastic commercial skills which aren’t matched by their knowledge of finance. In that instance we’d suggest a sensible early senior hire would be a good financial director. That will enable a founder to focus on their core strengths.

“It may be that we need to put a line in the budget to allow the founder to go off to business school for three months and learn specific skills. Or perhaps they need a mentor – an independent non-executive or chair. It could be someone who’s been there and done it before or has other industry relevant experience.

“Everyone who leads a business needs a pretty thick skin at times, so we need to ensure there’s someone on the board who can support them through these challenges,” he added.

It’s a natural human fear to relinquish control of a board when a founder takes on a chair or non-executive directors. “But in experience it’s almost always a positive decision,” said David.

When Oxford Capital makes its investment it’s often the first time its target company has had external investors.

And the company also always co-invests with other venture capital companies or angel investors. This means that the founder has a range of experience and knowledge available to them, as one or two of the co-investors will also have a seat on the board.

“We have found that the best company boards are those who set a clear culture early on,” David said. “We also ask about their ESG (environmental, social and governance) impact.

“It’s all about trying to set the right foundations so that a few years down the line, when the company is bigger and has more investors, it has built on those foundations and is a well-run, wellgoverned, impactful business.”

A mindful venture capital company helps founders avoid burnout

A common failure point for founders is burnout. Starting a company is tough. It takes a long time and there are ups and downs along the way. There are always going to be challenges – from losing a major customer, a deal being delayed or cash getting tight. All these have a stress impact.

Oxford Capital thinks of itself as a mindful venture capital investor, and part of that is appreciating and understanding a founder’s mental health and resilience requirements.

An obvious peak stress point is the worry about running out of money. Accepting that, Oxford Capital funds businesses for 18 months or two years, not a just year.

“Most young companies are chasing to reach a milestone,” said David. “Perhaps that will be to prove a product, close a deal, or get to a certain turnover.

“Inevitably delays will push up against their cash reserves. If we offer 18 months of funding, there is some wriggle room for them to still meet the outcomes they’d planned in their one-year business plan, allowing for slippage.”

Ultimately, founders come in all shapes and sizes and have widely differing personalities. But David Mott says that helping a founder recognise their abilities, as well as the gaps in their professional knowledge will add to their skills, and external experience can plug the gap.

And with such self-awareness, success is more likely to follow.

“Founders almost inevitably show grit, determination and a never-give-up attitude,” said David. “Yes, you can get it with professional management, but in our experience it’s the businesses which enjoy their founder’s continuing commitment that deliver the best results for everyone concerned.”

Debt Finance

A capital sum is borrowed from a bank, or another lender and the amount borrowed is paid back in full, with interest, over a period of time.

This can be through a loan, or (generally more expensive) an overdraft.

There are additional forms of debt finance. Two of the most widely-adopted are finance secured on assets and factoring.

Asset finance (leasing or hire purchase) can be ideal for businesses seeking help to buy expensive assets, without using funds earmarked for cash flow.

Factoring turns invoices into working capital. A business sells its invoices to a third party (a factoring company) at a discount. Invoice factoring can be provided by independent finance providers, or by banks.

Venture Capital

Capital generally invested into promising start-ups or small businesses in exchange for equity. Funding such as this usually comes from wealthy investors, investment banks or other financial institutions looking for opportunities to support young companies in the hope that early investment will help them grow faster, making money for the investor and founders faster. The financial investment may come with managerial or technical support.

Venture capitalists will often invest in a number of small companies taking around 50 per cent equity in the business. By doing this they spread their risk, and also allow the business founders to retain equity in the business so that its success will also deliver for them as well as their investors.

Oxford attracts more venture capital funding than any other region outside the capital

Oxford not only attracted the most venture capital funding of any region outside London in 2021, but the city raised more than all the other regions combined.

Using data from Dealroom and job search engine Adzuna, the new Digital Economy Council Levelling Up Power Tech League reveals that between January and November, Oxford-based firms attracted £1.3 billion in funding. By comparison, all the other regions analysed – including Manchester, Liverpool, Newcastle, Birmingham, Bristol, Leeds, Cambridge, Edinburgh, Cardiff and Belfast – raised a combined total of £1.275 billion.

Oxford’s impressive figure was driven by a number of high-profile, high-value deals, including the £396 million raised by AI drug discovery Exscientia and £127 million raised by biotech company Vaccitech which helped create the AstraZeneca Covid-19 vaccine.

REVENUE-BASED FINANCING

A relatively new form of funding. This is a way for young companies to secure financing without giving up equity or having the burden of inflexible debt repayment conditions.

The money is repaid as a percentage of future revenues, which means that if sales struggle, the company will have more time to pay. If not, the debt can be repaid more quickly.

This type of financing is different to debt financing because interest is not paid on an outstanding amount and there are no fixed payments.

Repayments are directly proportional to how well the firm is doing. This is because payments vary based on the level of the business’s income. If sales fall off in one month, an investor will see their royalty payment reduced. Likewise, if the sales in the following month increase, payments to the investor for that month will also increase.

Private Equity Funding

Similar to, but not to be confused with venture capital.

Private equity investors take shares in a business. Like venture capital, the investors are generally high net worth individuals, or large institutional investors, such as pension funds or companies acting on their behalf. The goal of private equity investors is generally to take control of the whole business and so they usually invest in mature or proven businesses which the investors feel have fundamentally good products or services but have unrealised potential because of poor management or other inefficiencies.

Manufacturers set sights on private equity investment

Manufacturers are turning their attention to private equity investment as the sector makes a strong post-pandemic recovery and sets its sights on growth.

According to research by the manufacturers organisation Make UK and business advisory firm BDO, a third of manufacturers are considering private equity investment to help fund the growth of their business.

Seventy per cent of respondents said their company had a good understanding of how private equity works – a jump of 10 per cent compared to 2019 when respondents were asked a similar question – with manufacturers increasingly realising the broader benefits private equity investment can bring to their business.

While 45 per cent believe private equity would be more attractive if investors had longer-term investment intentions, just over half agree that such investors bring much more to the table than an injection of money, saying they would also benefit from the additional skills, expertise and credibility that such investment brings.

BDO says the figures demonstrate the appetite for growth among UK manufacturers.

Angel Investment

High net worth individuals willing to invest their own funds.

Angel investors seek to share in successful growth and have a return on their investment. However, angel investing is generally regarded as “patient capital” (an investment made for the longer term) and they may not see an exit or a return on their investment for up to eight to 10 years. While business angels can invest on their own, more frequently investment is made alongside other angel investors through syndication. This enables them to pool funds and share the risks.

There is a regulatory framework for angel investing that both protects the angel and the entrepreneurs.

Before receiving business plans or beginning to make angel investments, an angel investor must self-certify as either a High Net Worth or Sophisticated Investor.

A certified high net worth individual must have a net income in excess of £100,000 or net assets in excess of £250,000 over and above their pension fund assets and private residence.

A sophisticated investor must have either been a director of a company turning over at least £1 million within the last two years, have made more than one investment in an unlisted company in the last two years, be a member of a network or syndicate of business angels for at least six months or have worked in the past two years professionally in the private equity sector or in the provision of finance for small and medium enterprises.

The government’s Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) give angels generous tax breaks. By making investing less risky for investors, the schemes help businesses grow.

Under EIS, angels cannot take more than a 30 per cent share of a business, which makes sure that entrepreneurs stay incentivised.

Green Angels invest in Bristol agri-tech

In March Bristol-based agri-tech start-up Glaia secured £1 million of investment from Green Angel Syndicate, the UK’s largest network of specialist investors fighting climate change.

Glaia, which was founded in 2019 by two former University of Bristol scientists,

Dr David Benito and Dr Imke Sittel, has discovered how to supercharge crop growth without increasing greenhouse gases, using ground-breaking, carbonbased technology that reduces farming’s climate footprint.

The investment will allow the company to commercialise their game-changing carbon-based technology, the ‘sugar dots’, which reduces emissions from crops by 30 per cent when applied to the plants.

Government Grants

Grants from government are often difficult to find and sector specific. Application forms are also often time-consuming to complete. Try contacting your local Growth Hub where advisers (sometimes called navigators) should be able to point a business in the right direction. You can also contact the government’s innovation agency Innovate UK which operates many funding schemes.

The value of grants varies greatly but can be between £1,000 to £100,000 for small or medium-sized businesses, or much larger for the high growth businesses that the government wants to encourage.

Oxford University spin-out secures £385,000

UK Innovation funding

Oxford University bioscience spin-out HydRegen, which enables sustainable chemical manufacturing, has received £385,000 in new funding from the UK Innovation & Science Seed Fund alongside private investors, to work in collaboration with pharmaceutical and chemical companies that want to reduce their costs and environmental impact.

Development of greener and less wasteful processes is now a priority for many companies who are under increasing regulatory, policy and financial pressures to improve their sustainability. The newly raised funds will enable HydRegen to invest in the people and resources required to develop and scale up its platform and subsequent implementation into new chemical processes.

Crowd Funding

Raising capital through collective funding of individual investors. These can be friends and family or, increasingly, amateur investors or individuals seeking opportunities to invest their money via online or social media platforms.

Crowdfunding platforms offer a public arena to showcase a business’s product or service. There are different sorts of crowdfunding websites, including rewards-based where the investee offers their product or service as a reward, equity-based where the investee gives up a portion of the business to the investor, or donation-based – often used for social enterprises or community interest companies.

Crowdfunding success for Gloucester brewery

Gloucester Brewery raised more than £531,00 in a crowdfunding campaign to help realise expansion plans. The Gloucester Docks brewery is using the money to fund further beer and gin production, increase its sustainability and develop its Warehouse Four brewing space and taproom.

There are also plans for more bars with the brewery setting its sights on Cheltenham and Bristol as new locations.

Managing Director Jared Brown said: “We were overwhelmed with the level of support shown to the brewery since we launched the crowdfunding campaign.

“Every single one of the 860 pledges whether it is £10 or £10,000 will make a difference to our future success and we are immensely grateful.”

PEER-TO-PEER LENDING

Peer-to-peer lending matches up potential investors with borrowers, who could be individuals or businesses.

They appeal to investors who are willing to take on more risk with their cash for higher interest rates offered than typical savings accounts.

Retail investors access an online platform to provide loans to consumers or small business borrowers. These platforms facilitate the lending, undertake credit assessments and other risk management, but do not act as a counter-party to the loan, and contracts are direct between the investor and the borrower.

In 2019, the Financial Conduct Authority imposed stricter rules for peer-to-peer platforms to protect less experienced investors. These included the introduction of a requirement that platforms assess investors’ knowledge and experience of peer-to-peer investments where no advice has been given to them.

Four Anjels to open Cheltenham factory thanks to £1.5m funding

A bakery which supplies M&S and Pret A Manger is moving to a new site at Furlough Park in Cheltenham after securing £1.5 million funding via NatWest.

The cash injection follows a period of ‘significant growth’ for the Four Anjels bakery after it secured a contract with M&S Café for the supply of baked goods in 2020.

The funding will enable fit-out works to create a new factory and bakery. Four Anjels said it intends to increase its headcount to 120 over the next year. Plans are in place for a purpose-built bakery pod, also funded by NatWest, to be installed in the new factory to develop new lines. At present the company produces approximately 20 product lines with an average output of 700,000 portions per month.

H2 Equity Partners invests in Bristol-based Global Vans

Bristol-headquartered light commercial vehicle broker Global Vans has secured investment from H2 Equity Partners as part of its growth plans.

Global Vans is one of the largest procurers of light commercial vehicles in the UK. The company organises light commercial vehicles and a suitable finance solution for small and medium-sized businesses.

Following H2’s investment, its founders, Andrew Hurst and Jonathan Lewis, will stay and work with H2 to deliver Global Vans’ ambitious growth strategy.

£400k loan from investment fund is good news for Coventry Engineering

Coventry Engineering secured a £400,000 loan to create seven new jobs in the next three years and invest in new equipment to enable 24/7 production.

The engineering company secured the funding from the Midlands Engine Investment Fund.

It will enable the company to increase the manufacturing of its precision static and driven spindle tooling, which is used in some of the world’s most demanding and high-profile industries including the medical and aerospace sectors.

Andrew Flynn, Managing Director of Coventry Engineering, said: “We are proud to make our products using both traditional and modern manufacturing techniques. This funding will enable us to expand the modern end of our range with cutting-edge solutions, so that we can better serve our customers and continue to innovate and grow as a business.”

Foresight Williams invests £2.5m growth capital into Kognitiv Spark

The Foresight Williams Technology Fund, a joint venture between investor The Foresight Group and Wantage-based Williams Advanced Engineering, has made a £2.5 million growth capital investment into Kognitiv Spark, which has opened a UK office at at Harwell Campus in Oxfordshire.

Canada-headquartered Kognitiv Spark is commercialising software that provides 3D data to support field service workers in remote locations.

Kognitiv Spark’s leading product, RemoteSpark, is an augmented reality software package, which enables the sharing of complex and critical data between a desk-based expert and a fieldbased worker.

The growth capital will enable the company to expand into new industries and geographies via new sales and marketing teams in the US and UK and support the ongoing development of further products.

West Midlands small businesses secure £277m of investment in 2021

Smaller businesses across the West Midlands are showing a renewed appetite for growth according to figures revealed by the British Business Bank’s eighth annual Small Business Finance Market Report 2021/22.

Equity investment in West Midlands’ smaller businesses reached £277 million by the end of 2021’s third quarter across 46 deals.

This was an 18 per cent rise on the number of equity deals completed in the same period in 2020, however the region experienced a 25 per cent drop in investment value.

Nationally, equity investment in smaller businesses surged in 2021, with figures on course to double.