FINANCE

9-1999

Feature

Banking on future success

Funding new technology-based enterprises is about to become easier. Tom Shelley reports

Big banks are setting up specialist centres and enterprises to help fund small technology-based companies.

One major bank is sending its managers on courses about the opportunities offered by technology, while another has set up a system to introduce firms to business angels.

New funds are being set up specifically to invest in start up and early stage technology and the hope is that Britain will start to experience the sort of technology investment climate long established in the US.

Losses in the 1980s made UK banks wary of investing in technology. In America on the other hand, University of Stanford alumni alone are said to have created businesses worth $1 trillion since the war and MIT has created 130 start ups in 10 years, 30 of which are listed on stock exchanges. Over 20 years, 24 US information technology and biotech companies have grown their turnover one hundredfold. In 1997, more venture capital was invested in California than in the whole of Europe, with 5 per cent of US venture capital coming from pension funds as opposed to 0.5 per cent in the UK.

David Gill, Head of the Midland Bank’s Innovation and Growth Unit, speaking at Venturefest in Oxford, said that banks would be unwise just to lend money. He said that debt financing gave only a 3 per cent profit margin, whereas the failure rate for small businesses was 40 per cent. Equity finance, where the bank takes a stake in the business, he said, works better.

Even here, out of a typical 10 TBSFs (Technology-Based Small Firms), three fail quickly, five stand still (referred to by banks as ‘the living dead’) and only two really succeed in the marketplace.

Midland Bank took the opportunity of Venturefest to announce a 4.25 million QTP fund. QTP is run by Egan & Talbot Capital. The founder investors in QTP are the Midland Bank and the European Investment Bank. The fund will invest 20,000 to 250,000 in start up and early stage technology ventures throughout southern England. The bias at present seems to be towards biotechnology but a ‘hardware advisor’ is to be appointed to look at non-biological ventures. They hope eventually to have 15 to 25 million in their kitty and to be able to offer sums of up to 1 million where appropriate.

Equity finance has the advantage that the bank takes a direct interest in where a new venture is going, and usually involves the appointment of a non-executive director to make sure that it gets somewhere. Generally speaking, technology based firms started by engineers do better when somebody is appointed to help with the business side of things. Eureka can think of an Essex-based company that has prospered since it went from debt financing to venture capital support. The founder not only looks less stressed, but boasts that his slice of the firm is now worth far more than the whole company ever was before.

Many of our readers say they only got off the ground when they were able to get in touch with a ‘business angel’, a private investor who is prepared to provide equity funding and will often also pass on the benefits of their own experience in industry and commerce. Introductions to business angels is part of the service offered by the management teams at the 15 Innovation Centres of Excellence run by Barclays Bank. More information about business angels can be found on the internet (www.nationalbusangels.co.uk).

The Midland Bank has nine Midland Enterprise Funds. It invests amounts that are typically between 10,000 and 250,000 in "well managed businesses that are ambitious to grow". The bank also adds that it "should not be the only source of finance".

At the same time, it has established the Midland Bank Chair of Innovation at Brunel University. The first holder is Professor Clive Butler, formerly Reader in the Department of Manufacturing and Engineering Systems at the same university and a founder director of Metronic Technology. The chair allows the bank to take business proposals to the university for an informed appraisal. This includes a free initial assessment to establish whether the technology is basically sound, together with guidance on commercial viability and the next steps to be taken.

The university is also providing Midland with a series of two-day training courses to bring managers up to speed on the issues faced by high technology firms. During 1999, more than 120 managers will attend courses focussing on equity finance, technical assessment, business incubation, government support, patents and other intellectual property rights.

Whatever the source of funds, the engineer or inventor with a brilliant idea first needs to sort out his or her business plan. All the banks are only too eager to help and offer either paper templates, or templates based on software. Lloyds TSB offers a free business plan template on disc which users can fill in, forcing themselves to think about issues; HSBC/Midland says it includes a business planning disc with every brochure it hands out about starting a business, which is free for customers and non customers alike.

Another source of help in formulating business plans are business incubators. Business incubators are often situated near a university or business school. They provide new businesses with premises, research, technical appraisal and financial and marketing facilities. There is also a UK Centre for Business Incubation Policy with a Web site (www.ukbi.co.uk).

Martin Rigby of Egan & Talbot Capital says that in the business plan, the company looks for competitive advantage and the path to market; the enabling technology and likely follow on products; a core of competent management; growth and profit potential; and the prospect of realisation. It also wants to see signs of ambition. If it is going to invest time and effort, as well as money, it is looking for ventures that will yield a serious return on investment.

Banks and venture capitalists are not charitable institutions. They are there to make money. So should the person with the idea. The idea is that you get rich and they get rich – hopefully both together.

Innovation and Growth Unit, Midland Bank andrew.h.marratt@hsbcgroup.com     http://www.midlandbank.com

tony.martin@barclays.co.uk

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