Features
21 Jul 2015 03:37pm

Fit for lending - competing for funding

Business competitions offer entrepreneurs the chance to win valuable investment and other support for their fledgling firms. But, asks Nick Martindale, are they really worth a punt?

For most entrepreneurs and small business owners the options for funding are relatively limited. Recent developments around crowdfunding and peer-to-peer lending have created more opportunities but fundamentally businesses will be looking at a combination of self-funding, borrowing or accepting investment in exchange for equity dilution.

Yet there are also a growing number of competitive events, designed to help encourage small business growth, where entrepreneurs and business owners can compete for either cash or some other form of support. These could be government initiatives, those designed by larger brands or wealthy individuals, or even business angel pitches.

The Futures Programme, run by the UK Commission for Employment and Skills, has run a number of competitions offering total prize money of between £1m and £1.5m, with a maximum of £250,000 for any one project. Businesses need to be able to demonstrate that the money will be used to develop skills, and be prepared to act as “anchor organisations” which can then share this knowledge with other small businesses in the local area.

“With some competitions we allow for universities or some other intermediary to be involved but mainly it’s employer-led projects,” says John Perryman, manager of the UK Futures Programme team. “It’s a fairly rigorous process assessed by commission staff and then taken to moderation and interview with our commissioners. The lead commissioner would take those recommendations to a board.”

The project started off allowing businesses a fairly open brief around the skills they were looking to develop, but has recently moved more towards targeting specific issues that have been revealed through its own research with 800,000 businesses, and verified through conversations with other firms. “If it resonates with them we invite proposals on a competitive basis,” says Perryman.

A recent competition looked to find a solution to a perceived failure by small and medium-sized firms to fully extract the value of innovation from inside their enterprises. “We had people looking at putting in management structures to incentivise innovation, and developing award schemes for employees so they think about innovation in their day-to-day tasks,” he adds.

The Regional Growth Fund, meanwhile, has invested £2.85bn in local businesses since 2010, including £297m announced in February 2015. The scheme is open to any business seeking less than £1m, and must be designed to strengthen or grow a business and to create or protect jobs, and similar funding must be unavailable elsewhere. It also revolves heavily around match-funding; for every pound the government puts in the private sector must invest £5.50, which the last government claimed would result in a total private sector investment of £16bn to date, and the creation of 582,000 jobs by the mid-2020s.

The private sector also operates a number of initiatives where applicants have to pitch for prizes. The most prominent of these is perhaps Virgin Media Business’s Pitch to Rich campaign. This year’s event attracted over 2,400 entries in three categories: new things, described as “groundbreaking new ideas, market disruptors, game-changers and innovations”; start-ups – “fledgling firms with huge potential”; and growth –established businesses experiencing real expansion.

“The main thing is that it is an interesting and innovative idea and which we feel would benefit from the prize we’re giving away,” says Duncan Higgins, marketing director at Virgin Media Business. The eventual winners of the growth category will receive £250,000 worth of marketing support, with the best start-up getting a £150,000 campaign and the new things victor taking a cash prize of £50,000. All three category winners will receive a free package of pro bono advice from the ICAEW Business Advice Service.

The competition was promoted at UK regional events where Virgin Media Business and ICAEW offered guidance and broader business advice to potential entrants. “We were involved in the regional heats and we’ve attended some of those. The final is a grand affair hosted by Sir Richard Branson in London with 150 invited guests and we’ll be sending people to that,” says Clive Lewis, head of enterprise, ICAEW.
Putting the legwork into such competitions has paid off handsomely for Rebecca Coates, commercial director at PropertECO. The company has picked up a number of notable wins: “We won best trade start-up of the year at the Startups Awards in 2012 and most innovative start-up at the Bath Business Awards,” she says.

Last year the business picked up another notable accolade, winning The Pitch competition; a national event run by Sift Media open to small firms under three years old, with a prize package of business products and services provided by sponsors. “We were given a free website,” recalls Coates. “We’ve also been given access to a PR firm, which we’re saving for a campaign we’re running later this year.”

For Coates, though, the benefit is not just in practical measures. “The value was the experience of standing up and giving a pitch to a room full of people, and also being around all the other entrepreneurs and getting ideas from what they’re doing,” she says.

The competition itself has been running since 2008, and awards prizes to an overall winner and an up-and-coming firm that is tipped to prosper. Last year it attracted over 400 entrants, with 100 going forward to a series of regional finals before the overall final. All participants also received advice on topics such as access to finance, provided by ICAEW, says Lewis.

Other organisations also offer competitions. Ordnance Survey, for instance, operates a scheme called GeoVation, which provides money for initiatives which use location data to solve real-life problems. To date, the business has helped create 28 new ventures and given more than £600,000 over five years. Entrepreneurs attend a GeoVation camp held over a weekend; at the end of which they can pitch their idea to an independent judging panel. Merchant banker Close Brothers, meanwhile, recently launched a scheme to fund 20 apprentices at UK manufacturing or engineering firms which would otherwise struggle to take people on.

Other events are more regional, often inviting businesses to pitch for investment in a Dragons’ Den type event. One such competition is run by the Times of Tunbridge Wells investment fund, an initiative run by a local business newspaper which has brought together a number of high-net-worth individuals from the area to build a £5m fund, for which local businesses are currently competing.

“The funding will be allocated as each individual’s business demands,” says Richard Moore, editorial director. “If there was a need for £10,000 fairly quickly to get a business through a certain phase we would do that and then feed money in as and when required. There’s also a requirement that if anyone takes part in the scheme and we decide to run it next year then they act as mentors. The idea is to build an annual event with a team of people mentoring other start-ups.”

These types of event usually involve giving up equity in return for investment, however. “Being businessmen, investors see it as an opportunity to be connected to people who have a viable proposition that will not only make those individuals money, but make the investors money as well,” says Moore. “But they’re not going to put their money into something that doesn’t stand a chance or have a solid business plan.” There are currently no restrictions on what the money can be used for, he adds.

There is often a reluctance among entrepreneurs to give up a slice of their business. “It’s strange because many business owners go to friends and family for finance and they don’t see anything odd in taking that, but they don’t then make the leap to getting outside equity finance, which would probably be a more professional form of finance from people who have already made a success of a business,” says Lewis. Initiatives such as the Enterprise Investment Scheme and the SEED enterprise investment scheme are slowly helping to challenge this, he says.

Sometimes the real benefit from these kinds of high-profile event can be the publicity that comes from any competition, suggests Phil Mitchell, director at accountancy firm Harbour Key, which regularly advises small businesses on the options open to them. “I had a client who appeared on Dragons’ Den and received an offer for funding,” he recalls. “The terms were not acceptable but the profile the appearance gave the business resulted in the website crashing due to over-subscription and bringing it to the attention of other potential investors.”

Not all of these involve equity, either. Askar Sheibani, the Comtek Group founder and CEO appointed by the Welsh government’s business minister to promote entrepreneurship in Wales, has created a community-based Business Entrepreneurship Network, which runs a Dragons’ Den process to find applicants with entrepreneurship potential, largely from predominantly underprivileged communities, who are then mentored and offered a range of business and leadership support. “We look for applicants with real enthusiasm, determination and a hunger for success, combined with a real passion and belief in their business idea,” he says.

Steve Lindsey, CEO of compressor manufacturer Lontra, has attracted nearly £8m in recent years from a variety of sources, including grants from Innovate UK and its predecessor the Technology Strategy Board.

“We’ve always had a very commercial background and that’s helped,” he says. “A lot of people just put down a technical case but it’s very important to have a full business case, and also a route to market.” He also suggests entrepreneurs ensure they have enough time to put into entering events, and can demonstrate the capability to match-fund from other sources of investment.

Yet the drawback of any competitive event is that, by definition, there is no guarantee that even an outstanding pitch will result in any investment or other prize. Lewis, in particular, sounds a note of caution. “There’s no harm in competing in these things but you shouldn’t let it allow you to put off a business idea or change it in a material way,” he says. “If you can afford to wait or be doing other things while that competition is on, then fine, but it certainly isn’t worth delaying any implementation. The odds of winning a prize are quite long.”

Case study: minicabit

Amer Hasan (left) is founder and CEO of mini-cab comparison and booking service minicabit, and veteran of many business competitions.

In 2013, the business became the first app to receive an offer of investment on Dragons’ Den, although in the end the deal did not come off. By this point, however, it had already attracted funding of £50,000 – in exchange for equity – from Telefonica O2’s Wayra Fund.

“I had been working out of my bedroom but part of the prize was office space which gave me the resource to hire a team,” says Hasan. “After nine months I came out with an app that was live in the market, marketing relationships with O2 and some real, solid advisers.”

His advice to people looking for events is to make sure their business is at the right stage. “Ideally you’d have a viable product with a proof of concept, a core team of at least two, a route to market and some thoughts on what your business model is going to be,” he says. “But even if you don’t get through it’s going to be a great lesson, either in what is wrong with your business or how you’re pitching it.”

Nick Martindale

 

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