Enterprise: For Entrepreneurs, Growth Businesses And Their Advisers - Spring 2012

STIMULATING THE ANGEL INVESTMENT MARKET

By Adrian Walton

Enterprise looks at two new schemes set to provide a welcome boost to the angel investment market.

The UK Government has long recognised the important contribution small businesses make to the wider economy. Yet relatively few incentives have been made available to help early stage companies attract the type of investment they need to get off the ground and to the next level. This has been even more of a problem with bank funding so scarce in recent times. But things could be set to change.

The Seed Enterprise Investment Scheme (also known as the Seed EIS or SEIS) and the Business Angel Co Investment Fund (Angel CoFund) are two very different schemes, but essentially have the same objective: to support the Government's growth agenda by helping early stage companies raise the finance they need to set up and grow their businesses.

Seed EIS

The SEIS is a new tax-advantaged venture capital scheme, similar to the Enterprise Investment Scheme (EIS). It applies to unquoted companies (AIM is regarded as unquoted here) carrying on or looking to carry on a qualifying trade, with a maximum of 25 employees and gross assets of up to £200,000.

Income tax relief

Individuals who invest in qualifying businesses on or after 6 April 2012 can claim income tax relief of 50% of the amount invested, up to an annual investment amount of £100,000. Any unused annual amounts can be carried back to the previous year, as with the EIS. Directors can invest in their own company but only if they hold less than a 30% stake.

CGT exemption

For the first year of the new scheme only, i.e. the tax year 2012/13, the Government will offer a capital gains tax (CGT) holiday on any gains made on the disposal of assets that are reinvested in SEIS shares. After a qualifying period, SEIS shares disposed of at a gain will be exempt from CGT in the same way that EIS shares are.

Restrictions

A total investment limit of £150,000 applies to qualifying businesses and they are required to spend at least 70% of monies before a claim for SEIS approval is made. Businesses that have received previous EIS or venture capital trust (VCT) investment will not be eligible.

The Angel CoFund

The Angel CoFund is a private sector organisation set up to boost business angel investing in England and support job growth within the small business community.

Investment availability

Launched in November 2011 using a grant from the Regional Growth Fund, the Angel CoFund plans to invest £70m or more in small businesses over the next ten years. It can make initial equity investments of between £100,000 and £1m, subject to some geographical restrictions and an upper limit of 49% of any investment round.

The fund isn't open to direct approaches from individual businesses. Instead, investee companies must first secure the interest of a business angel syndicate or network.

Syndicates

Business angel syndicates must be made up of at least three active investors. They are responsible for identifying suitable businesses in which to invest, performing due diligence and negotiating terms. They should also be able to offer their knowledge and expertise to monitor and support the portfolio.

Syndicates become Angel CoFund partners once they have had a deal approved. An independent investment committee makes investment decisions based on satisfactory due diligence and a compelling investment case.

Following approval, the Angel CoFund will offer the syndicate a 2.5% one- time fee and be available for follow- on investments, subject to investment committee approval. The syndicate is obliged to offer all future qualifying deal flow to the fund on the same or better terms as other investors.

Looking ahead

The introduction of the SEIS and Angel CoFund are welcome developments for both early stage companies and angel investors. It will be interesting to see how they impact the funding market in the coming year.

EQUITY FINANCE Q&A - OLLY LTD'S FUNDING STORY

Raising equity finance can be a daunting experience. Henry Becket, CEO of Olly Ltd, recalls his journey to securing early stage investment.

Describe your business.

Set up in 2009, Olly Ltd has created 'Olly the Little White Van', a 52-part children's animated TV series, which has been licensed to broadcasters, publishers, toymakers and others worldwide.

Tell us about the external investment in your business.

In the last two-and-a-half years, I've raised around £3m.There are approximately 40 investors in the business, each of whom has invested between £10,000 to £500,000.

What three issues were most important to investors when deciding whether to invest in your business?

Me – essentially my knowledge, experience and enthusiasm The strength of the concept The outline business plan How important was the discussion about exiting the business as part of the investment process?

For most investors, especially EIS investors, it was a key factor in the decision-making process. Olly Ltd is an international business, which presents various possibilities when the time comes to sell. This makes it an attractive investment proposition.

How important are EIS/VCT schemes to you as an entrepreneur?

The EIS is vital to investors who are UK- based taxpayers. Around £1.3m of the £3m I've raised so far has benefited from EIS relief. This highlights the importance of the scheme to investors.

What surprised you most about the fundraising process?

I was surprised by the length of time the whole process took. But there were also huge variations in the types of due diligence requested, from basic information such as a Certificate of Incorporation to signed copies of contracts or deals to highly detailed forecasts looking several years ahead. Some potential investors asked to talk to existing investors (in some cases, half-a- dozen meetings were held), while others had no face-to-face discussions at all. Some investors took half an hour to make a final decision and some took six months.

Henry Becket, Olly Ltd www.ideasatwork.ltd.uk www.ollythelittlewhitevan.co.uk

ALTERNATIVE SOURCES OF FUNDING - LOOKING BEYOND THE BANKS

Enterprise looks at some of the alternative funding options available to businesses and individuals.

The economy has created a challenging environment for businesses and investors are finding it difficult to get returns above inflation. With many businesses struggling to raise finance through traditional routes, a range of alternative funding business models are emerging to fill the void.

Retail corporate bonds, whereby companies go directly to their customers and the public for financing, are gaining in popularity. Hotel Chocolat is a recent high-profile example and raised more than £4m by selling bonds to members of its Chocolate Tasting Club. Instead of receiving interest on their investment in cash (as is the norm), they get a box of chocolate either monthly or every other month.

Another of the new companies offering innovative finance options is Market Invoice. It's an online marketplace where growing companies selectively auction their invoices to a network of high-net- worth and institutional buyers. By selling these invoices online, businesses can access flexible working capital immediately rather than waiting for their customers to pay.

For individuals looking for a quick loan, online lender Wonga.com offers loans for up to a month. Interest is calculated based on how...