Monday, 16 May 2011

Funding Early Stage Stary Up Companies

Funding Start up Enterprises in Ireland
I have been amazed over the years at the number of entrepreneurs I have met up with, that have poor awareness of the funding process and sources of funds available at the various stages of evolution of a new business, so I thought I would put some information out into the entrepreneurial world. In addition, I have seen entrepreneurs enter into the wrong stage of the funding cycle all too often leading to delays and frustration for all parties. This is not meant to be the be-all and end-all of funding but just a few guiding points for anyone that may be interested.
Despite the economic situation there is a healthy level of entrepreneurial activity on our Island, which will play a significant role in our recovery, and job and wealth creation. My disclaimer is that you should always seek professional advice when seeking funds or making investments.
Whether a promoter or an investor, there are some key questions that will regularly arise at every stage of the start-up and funding maturity cycle, these are:-
1.       The emotional engagement, this is about the individual promoter(s), the successful ones are competent & passionate about their idea, opportunity, product and/or service. Is this passion and emotion underpinned by some rational and facts?
2.       Is there a defined problem or clear opportunity that the new entity is going to address and does the proposed offering address the defined area in manner customers will pay to have the product or service?
3.       Have we confirmed that there are sufficient customers (Market), Groups of customers (Segments) to allow current and future competitors have a chance of achieving a share that delivers acceptable profits to stakeholders?
4.       Who is the competition?  How are we different? Can we use our uniqueness to focus on a real addressable Market where we have advantage?
5.       Have we a beach head market defined and analyses that are easy to build initial customer’s sales, usually the home/local market as regards geography and/or specific vertical or technology sub sets. Is there life after the beach head?
6.       Came we explain/demonstrate our business model, how we make money globally and at a unit level.
The first stage of investment of resources in a new enterprise (Up to circa €100k)
1.       Type 1 – Start-Up, It is normal that the promoter(s) will spend time researching their business idea, and sometimes they may even spend some of their own money before they make their first decision which is to commit to doing something active to start the new enterprise. Even at this stage there can be supports available mainly in the form of feasibility study grants from Enterprise Boards, Enterprise Ireland and InvestNI. It is in everyone’s interests that a solid feasibility study is completed to start to determine the viability of the idea.
2.       Type 2 -Start Up, Normally has its birth in academia, perhaps through primary research or research for a thesis. All our main universities now have research and incubation centres and Science foundation Ireland working with the IDA and EI have various funding programs to support these initiatives.
3.       Type 3 – Start Ups, I call these the spin outs, where in fact within the life cycle some end customer has in fact paid for the initial development indirectly. As an example a solutions or services business is paid by a client to design, build and deliver some solution and it is determined that this solution can be resold to other clients. Naturally IPR ownership considerations must be taken into account as should the suitability of the architecture and design to service a market rather than a client.
At this stage often friends and family have demonstrated some support and generosity with their time or cash to support the promoter.
Through this stage as progress is being made some meat has been put on the bone, perhaps some market research completed , even the framework for a product or service defined or sketched out.
Depending on the promoter’s approach, skill and experience there are supports available through state-sponsored programs, there are a range of programs which usually provide incubation centre facilities, training, coaching and mentoring, professional services support. There is a broad range of these programs and different types of cash and professional support; sometimes through subsidies sometimes the entity providing the support requires some small equity in the promoters venture in return for their support, which also demonstrates their willingness to share risk. Some examples are:-
·         Business innovation centres such as Dublin Business Innovation Centre (DBIC)
·         University Enterprise centres such as
o   Nova in UCD
o   Invent in DCU
·         DCU Ryan academy programs – propeller/techstart
·         County enterprise board centres
Seed Funding (Up to circa €500k)
Though still in the early stages, the promoter would normally have a clearer proposition for the market, perhaps a working proof of concept tested with prospective target friendly customers.  The promoter at this stage usually is seeking funding to resource completion of product or service development; at least the initial market release and initial sales to the beach head target market. This is still a reasonably high risk phase, where neither the product, service, market or promoter are proven, so the sources of funding as specific.
Government supports through mainly EI and IDA include
·         High Potential Start Up program and related financial supports such as matching funding, in the form of a convertible loan note.
·         Government supported R & D vouchers and grants.
·         Government funded seed funds administered by banks and professional investment firms e.g. Dublin Seed Capital Fund
Business Angels, high net worth individuals who are seeking investments in early stage companies, or syndicates of angel investors who share the risk and bring greater expertise to support their investments. There are several Angel types:-
·         Full added value investors who want to become actively involved on a day-to-day basis providing their skills and experience to achieve the goals of the business coupled with a financial investment.
·         Partial added value investors, similar to above but more advice and support, also perhaps taking on specific tasks or projects, but not engaging full time.
·         Board engagement investors who will aid in the strategy and governance of the company but keep an arm’s length from the day-to-day operations.
·         Arm’s length investors, who want to invest money but do not want any active engagement apart from getting regular updates on progress.
IBAN & HALO entities exist across the country and provide structured processes for introducing promoters to business angels and angel syndicates.
Some of the venture capital firms will invest at this stage and specialise in early stage companies, often they may have an administration role for government supplied seed capital. Crescent Capital in NI is an example and in ROI Kernel and Enterprise Equity are examples. As is the Dublin Seed Capital Fund.
Scaling Early Stage and Growth Funding (Funding greater than circa 500k)
This is the stage normally where the promoter has paying clients, revenue streams and has proven the model and now needs to scale the business perhaps refining the product or service or follow-on product development, but more importantly ramping sales, customer acquisition and market share.
The largest source of funding at present in Ireland is via the VCs who have the access to funds whether private or public, the skills and processes, to support the entity scaling.
Often at this stage a source of funding may also be a strategic partner, supplier or customer, a stakeholder who has seen the value proposition and has a strategic interest in its success.

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