Finance : The art of linking providers of funds to users of funds, to exploit opportunities and create wealth for both.

South West of England

Finance for Business Strategy

South West of England Regional Development Agency

Front cover photograph of Bristol bridge supplied courtesy of Peter Hill

Contents
Page 4 Page 5 Foreword Context Aims Objectives Vision Actions Access Culture Education & support Rights & responsibilities Collaboration The financial escalator Case studies

Page 6 Page 7 Page 8 Page Page Page Page Page 9 10 11 12 13

Foreword
Inability to access the right funding package at the right time is a barrier to all business groups whether they are wanting help to get started or trying to develop a new product, technology or process. It can hold back a company that has an exciting opportunity and that needs to grow rapidly, or one that doesnt conform to conventional business model - such as a community or social enterprise. The Government has addressed the macroeconomic issues by providing a stable investment climate, structural reform to stimulate competition and a range of fiscal incentives to encourage investment in research & development and skills. Finance, however, is as much about people as it is about policies and we recognise that we can build more effective policy by working with and through regional networks where more tailored solutions can better address the diversity of need that exists across the business community in the UK. This regional strategy will provide a framework from which initiatives such as the Regional Venture Capital Fund will flow, to better meet the needs of businesses seeking to grow in the South West. It will complement the fiscal support that we are able to provide, developing an economic environment in the South West that encourages entrepreneurship and opportunity for all.

Dawn Primarolo
HM Paymaster General

Context
Business growth in the South West is widely recognised as a key driver for a successful regional economy. It contributes directly to wealth creation and, through that, supports the regional strategys key objective of increasing prosperity by improving business competitiveness. Growth requires resource human, physical and financial. There are generic financial issues around access to funding that can be tackled on a national basis. However the diversity of the South West economy both in terms of the urban/rural mix, sector and business size requires regional solutions, as the business community is dominated by micro, small and medium sized enterprises. This strategy sets out the aims, objectives and vision that will address these issues in the South West. It outlines the actions that will guide and influence both the demand and supply side of the financial equation. Finance on its own is not the answer. This strategy also identifies the links to the other factors that are critical to successful support for businesses in every stage of their growth.

Aims
To raise the understanding and awareness of the different types of finance available to fund business growth. To change the cultural aversion to equity finance on both the demand and the supply side. To improve access to finance through encouraging greater collaboration between finance providers, business intermediaries and their customers. To encourage innovation in finance provision to meet the changing needs of innovative businesses. To facilitate and support the development of financial instruments that address the current market gaps. To develop awareness of the benefits of a holistic approach to the issues that businesses face finance on its own will not raise productivity, competitiveness and growth.

Objectives
To develop a financial escalator that will provide an appropriate financial package for each stage in a businesss growth. It is recognised that the escalator articulates a framework one that provides parameters, but accommodates diversity. Where, how and at what speed businesses progress through the various stages will be dependent on their needs and prospects. To develop a support environment that encourages "money with management" recognising that finance is only a part of the total package required to foster and encourage business growth.

Vision
The South West of England Regional Development Agency recognises that access to finance remains a barrier to growth for many businesses in the region. It is committed to working with finance providers, business intermediaries and businesses themselves to find regional solutions, where these are relevant, as well as actively contributing to the wider national debate on generic issues. We recognise that finance is just one component in a complex equation and our aim is to ensure that this strategy complements and draws on the other initiatives being developed to support economic development in the region. Developing the financial escalator will be the foundation on which we build a business support environment that links funding to training, coaching and mentoring so that the money is really made to work to create wealth, not destroy it. Our vision of the future sees a more entrepreneurial, knowledge based business community where the value of the "intangibles" will equal, if not surpass, the traditional measures of worth. New products and ideas will have shorter development times and profit cycles the pace of change will continue to increase. Flexible, adaptable and innovative will be the hallmarks of successful business. Those who support business will need to display the same characteristics attitudes to risk will need to change to reflect this.

Actions - The South West RDA will: Lead

The creation of a regional business angels network South West Angels Network [SWAN] to improve access to informal equity finance. The creation of a South West regional venture capital fund that will address the equity gap by providing risk capital to growth companies up to 250,000 first stage, with maximum investment of 500,000. The development of a "money with management" mentoring scheme that will support companies in using investment wisely improving survival and growth prospects.

Facilitate
Improved links between finance providers and users both debt and equity, also engaging the intermediaries that support them through development of a financial escalator in the region. The creation of an investor readiness programme that will increase the understanding of the needs of both sides of an investment and improve the process of gaining/making such an investment. Development of networks that cut across cultural barriers encouraging innovative approaches to overcome the barriers to growth caused by lack of access to funding.

Engage
Finance providers and intermediaries in the development of a more coherent supply market better networks and sign-posting Finance institutions in assessing the viability of a regional bank for innovation looking at new assessment methods for financing innovative business ideas, products and processes.

Lobby
Government to address remaining finance market gaps. Work with the national SBS finance team on: improving funding access for: early stage development/proof of concept [seed corn] post concept to production /market improving capital liquidity [regional equity markets] developing new financial instruments/processes incentivising new investors by: easing restrictions imposed by the FSA developing other fiscal incentives

Access
The Financial Escalator The concept of this model is to improve access to finance for businesses at each stage of their growth cycle providing clear entry and exit routes for both investor and user. By developing better networks and protocols between the various financial providers/institutions, the intermediaries that work with their clients, and the businesses themselves, there is considerable scope for better efficiency in the process of closing the deal. On the demand side, business intermediaries and their clients will have a clearer route to the appropriate financial package. More importantly, the escalator will build links with the essential non-financial elements that financiers look for when assessing propositions. It will seek to build capacity to help businesses not only become investor ready, but also investor attractive, by considering all the elements that make a business viable and a good risk. A key area will be the identification and engagement of mentors with proven business success to strengthen management teams. The cornerstone of the escalator will be the regional venture capital fund (RVCF). The RDA will support the fund manager to build the networks that will provide the dealflow and exit routes for the growth businesses it will support. Diversity Finance providers need to recognise that community and social enterprises play an important part in local economies and are seen as prime drivers in regenerating areas of decline and disadvantage. The fact that they are not driven by profit does not mean that they are not viable. Different financial models need to be developed and supported such as credit unions to reduce the financial barriers that these businesses face. In turn, these enterprises need to understand and recognise that they must be sustainable in economic terms and that the basic rules of strong financial governance apply equally to them. The escalator is not prescriptive we recognise that businesses do not conform to any financial model they will use a diverse number of approaches / mix of financial products and grow at different speeds. The key will be access to flexible, responsive and customer-focused financial instruments that will support, rather than hinder growth.

Culture
Building Understanding Aversion to equity finance both on the demand and supply side has been recognised as one of the key areas that need to be addressed. The creation of the RVCF and the development of SWAN will help to address the supply side issue. We will work with public and private sector intermediaries to drive a change in demand side culture helping businesses to better understand the balance between risk and reward and that some propositions are not suitable for debt finance support. Key partners will be the regional Business Link network, regional bankers and accountants and institutions such as the universities, where businesses will be created to exploit new technologies.

Education & support

Finance is the catalyst that will support the birth, survival and growth of the regions business community, creating the wealth that will provide sustainable jobs and prosperity for the working population and investors in the South West. However, providing the money alone is no guarantee of success and the RDA will promote the concept of "money with management" a holistic approach that will encourage businesses to see finance as just one element in the package of support they need to compete and thrive in their chosen market-place. We will support initiatives that will achieve a change in cultural attitudes helping business people recognise their limitations and the value of seeking help and support in those business discipline areas where they are not strong. Priority areas include: Building capacity within key partners such as the Business Link network; Building capacity in the area of mentoring through support for a business 2 business network; Building links with the major regional financial players developing networks and signposting capacity so that businesses have the widest possible access to the appropriate funding package that best matches their projects risk profile.

Rights & responsibilities

Although our leading financial institutions are developing sophisticated computerised models to assess risk, most investment decisions are still made using human/personal judgement there are no black and white rules as each proposition will have a different risk/reward profile. Matching demand to supply will always be a fallible process. The different cultural attitudes of the entrepreneur and the financier are both a strength and a weakness - developing a deeper understanding of both sides attitudes to the risk/reward equation, and encouraging greater dialogue are considered by the RDA as the most practical ways of overcoming this cultural divide and we will work with partners to achieve this. Managing expectations and having a clearer understanding of what is possible are key roles for intermediaries and support organisations. We believe that establishing a set of protocols to improve this fundamental interaction will build economic growth in the region broadening access through exercising the art of the possible. Businesses have a right to: [Financiers have a responsibility for:-] Access to relevant, quality professional advice at a reasonable cost to help prepare their business case An honest assessment of their proposition with clear reasons why/why not they will be supported. Decisions to be communicated, along with any conditions, within agreed reasonable time scales. Sign-posting to a finance provider whose investment portfolio/criteria best matches the proposition risk profile. An investment offer that fairly reflects the balance between risk and reward for both parties.

Financiers have a right to: [Businesses have a responsibility for:-] A business plan/strategy that clearly sets out: The aims and objectives of the business both short and long term. The strengths, vision and probity of the business owner/management team. The market/customer for the product/service and its income potential. Honest & realistic cash-flow, income/expenditure forecasts.

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Collaboration
Finance for business is a complex mix of competition between providers and the risk assessment models they use to achieve the lending portfolio that their stakeholders are prepared to finance. This can often lead to a mis-match between the expectations of those who need money and those who supply it. With very little product differentiation certainly in the debt finance area competition is fierce, resulting in a heavy focus on sales target achievement. This has led to a fragmentation of the market, where networking/sign-posting between finance providers depends on the vision/attitude of the individuals involved, rather than a coherent policy. The RDA will engage with the sector to encourage greater collaboration especially where debt finance providers are presented with good propositions that do not match their criteria, or where equity finance is the better route. The benefits of a financial system that offers a seamless route to the appropriate financial package will form part of a virtuous cycle where more growth businesses can devote more of their time to creating wealth, rather than chasing finance. The more growth, the greater the opportunities for the financiers to add and receive value for their services.

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The financial escalator

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Case studies - Unite PLC

GROWING UP IN BRISTOL As the UK's leading provider of affordable, high quality accommodation services for students and NHS keyworkers, UNITE has moved rapidly to lead an exciting and dynamic new market sector for rented accommodation - the first stepping stone to independent living for young people. UNITE started life in 1991 with an idea to help Bristol's higher education institutions provide more student accommodation for their growing needs and better manage their existing portfolios across the city. Business Expansion Scheme funding provided a step toward the next phase of growth and then with aspirations to extend its service to a wider customer base, UNITE looked to the City for new sources of funding. UNITE's initial listing on AIM in 1999 provided the company with 3 million equity and 5.8 million convertible loan stock; a solid platform to increase its resources, open up a wider investor base and bring high quality advisers. Furthermore, relationships with UNITE's customers were strengthened by its reassuring message to universities, colleges and NHS Trusts that as a private sector company providing a public service, UNITE would be as publicly accountable as they were. Raising 38.5 million of new equity, UNITE's decision to join the Official List in 2000 after a year on AIM reflected the increasing maturity of the business and its desire to expand its proven offering across the length and breadth of the UK. Just a year later, the company increased its profile with investors to raise a further 85 million equity in order to acquire a competitor and develop further the first half of 2002, UNITE announced plans to go to the market once again, raising 57.5 million to capitalise on the exceptional position it has attained within the sector. Debt finance is also important for the Bristol based Group which has close working relationships with its banks as well as normal bank debt finance. UNITE recently undertook an innovative securitisation issuing bonds totalling 273 million and releasing 39 million for reinvestment into the business. This will increase capacity for the business in the banking markets. "My advice to any growing business who might be considering seeking equity through the stock market is that it is not a place to devise a strategy, identify a customer base or fund a new proposition. We spent eight years as a private company before we joined AIM and then really used our time on AIM to develop our City skills. Becoming a publicly limited company provides attractive opportunities to access new capital. However, it is worth remembering that it can also hamper growth, particularly in difficult market conditions."

Nicholas Porter, Chief Executive Officer, UNITE Group plc.

UNITE offers a range of accommodation and customer support services, together with project management and fast-track modular manufacturing techniques to control the quality, timely completion and affordability of its accommodation. It currently has over 27,000 rooms in its portfolio. For further information visit www.unite-group.co.uk

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Motion Media
from the beginning to the London Stock Exchange main list Motion Media was formed at the beginning of 1993 by a small group of Bristol engineers who chose to strike out on their own rather than re-locate to France when their previous employer moved its operations. Using their severance money as a stake, Motion Media Technology Limited was formed to develop and market video communications equipment into a number of markets and applications. A useful but modest financial contribution was sourced from ST Microelectronics, but attempts to secure the 1.6m of venture capital needed to fully support the business plan projections failed. Against the background of a hostile investment climate, concerns about the competition from BT (who later gave up developing their own products and bought videophones from Motion Media instead), and the fact that the management team was new, made the task of raising equity finance virtually impossible. The company, therefore, worked for the first 11 months off of the assets of the founders. By the end of 1993, technical progress was sufficient for the company to secure a deal with GPT (then the largest UK telecoms equipment manufacturer) for its first PC add-in video conferencing product. This provided much needed trading finance as well as a means of having the product manufactured. By the end of 1995 the company had developed its first videophone with the help of a DTI SPUR grant and further finance was needed to bring this into production and to market it. The company actually made a profit in 1995 but despite this, venture capital still proved elusive. The company decided to raise its capital from the public on what was then the new OFEX market. 1million was raised in 1996 and a further 3million in 1997. This allowed the company to grow considerably and develop new products and markets it also meant developing skills in dealing with private and institutional shareholders. In May 2000, the company achieved one of its original aspirations and joined the main list of the London Stock Exchange raising 18 million in the process. This valued Motion Media PLC at about 140 million. Although the route to the main list was not as originally planned, it did have a positive outcome in that the management retained a greater level of freedom than would have been the case with venture capital involvement from the outset, allowing the founders to retain considerably more of the shareholding than would have otherwise been the case.

Ken Burgin, Chief Executive Officer

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South West Contacts

South West RDA Head Office Sterling House Dix's Field Exeter EX1 1QA Email: business@southwestrda.org.uk Website: www.southwestrda.org.uk South West Ventures Ltd Argentum 510 Bristol Business Park Coldharbour Lane Bristol BS16 1EJ Fund Manager - Keith Masson Tel: 0117 906 3410 Email: info@southwestventures.co.uk Business Development Team Business Support and Investment Innovation Incubation and Cluster Development Sector Development International Trade Information & Communication Technology ICT Development Website: www.ConnectingSW.net

Business Link Tel: 0845 600 9006 Website: www.businesslink.org Department of Trade & Industry Website: www.dti.gov.uk Government Office for the South West Website: www.gosw.gov.uk

Knowledge for Business Website: www.k4b.co.uk Smart Website: www.sbs.gov.uk/smart South West Regional Venture Capital Fund (South West Ventures Ltd) Website: www.southwestventures.co.uk UK Online Website: www.ukonline.gov.uk