INNOVATION MASTERCLASS:Part Four: Finding finance for your new business is a big hurdle on the way to success - we look at some of the options Recognised awards such as Seedcorn prove that we are serious about our business, and that we are a safe and smart investment bet
Finance is a key requirement for any start-up. Banks might be an obvious choice, but this sector has been criticised for its reluctance to lend to the start-up sector.
That has started to change, with a number of banks offering competitive packages to new businesses. Ulster Bank's business start-up package offers customers transaction fee-free banking, a start-up loan rate of 4.95 per cent variable and access to a loan of up to €30,000 with no asset backing or personal guarantees.
Whether the credit crunch will cool the desire of banks to lend to start-ups remains to be seen. Nevertheless, it is probably best to look at other sources of finance and banks are more likely to entertain your business idea if you have managed to receive grant or equity funding - so checking your company's eligibility for State support is an obvious first step.
City and County Enterprise Boards (CEBs) offer a variety of supports to small businesses in the manufacturing and services sectors, employing 10 people or less. Capital grants - to a maximum of €75,000 - are available for machinery and equipment purchases or for purchasing or altering premises.
Since 2000, a proportion of the total financial supports provided by each CEB each year must be refundable.
The CEBs may also provide capital support to qualifying limited companies by means of a Redeemable Preference Share Scheme. As a holder of preference shares, the CEB has no voting rights in the business but a moratorium may be given, after which time the shares are redeemable.
Employment grants towards the cost of labour are available to incentivise job creation in new/expanding projects. A grant of up to €7,500 for each job, up to a maximum of 10 jobs, may be provided.
Feasibility grants may be provided to assist with the cost of necessary pre-start-up studies. The maximum grants are €7,500 (BMW) and €5,100 (S&E) per individual study.
Business Innovation Centres (Bics), of which there are six nationwide, encourage and foster innovation and provide advice on making effective applications for finance to various agencies and to the enterprise support units of the main banks.
The Dublin Bic manages three venture capital funds - the Business Innovation Fund, the Dublin Seed Capital Fund and the Irish Bics Seed Capital Fund.
Venture capital is capital provided by full-time, professional firms or private persons who invest with management in ambitious, fast-growing companies with the potential to develop into significant businesses.
In addition to injecting cash, the venture capitalist is likely to add to the company's credibility and supply management expertise, support and access to their contacts. As part of their mentoring and monitoring of their investment, they are likely to seek board membership.
In contrast to bank finance, venture capitalists are not looking for scheduled repayment, but for a minority of the share capital of your company in return for cash. The venture capitalists will typically look to realise their investment in five years, either through floatation on a public market, a trade sale or for their stake to be bought out by the company.
Enterprise Ireland (EI) supports the development of High Potential Start Up (HPSU) companies where it provides a financial contribution towards the company's business plan to develop products, services or processes which are technologically new or substantially improved when compared with the state-of-the-art in its industry in the European Community and which carry a risk of technological or industrial failure.
The funding of a business plan is similar to a venture capitalist approach. Clients receive funding towards the achievement of an overall business plan, rather than funding towards discrete elements of it, such as R&D or management development.
The amount of EI funding will be determined following an assessment of the business plan and the promoters will be expected to provide a financial contribution.
First Step Microfinance, a not-for-profit organisation which receives funding from the private sector, partners and the Government, specialises in loans of less than €25,000 to start-up firms. First Step takes no collateral and has a high repayment rate on its portfolio. It receives around 300 applications a year, of which around half are approved for funding.
BUSINESS COMPETITIONS
When trying to raise cash, one area that should not be overlooked is business competitions.
Just ask Tomás Finneran and Kristian O'Donovan, founders of e-learning company Flúirse which picked up €10,000 for the "best venture stemming from a university spinout or platform programme" at last year's Intertrade Ireland all-island seedcorn competition.
"Recognised awards such as the Seedcorn prove that we're serious about our business, and that we're a safe and smart bet for investment. That's an important endorsement, that no money can buy," says Finneran.
With a total prize fund of €280,000, InterTradeIreland's competition offers the biggest prize fund of any business competition on the island.
"The prize money is the icing on the cake. Seedcorn gives growing enterprises access to invaluable advice from some of Ireland's top investment experts, helping them to raise significant additional investment and grow their businesses at accelerated speed," says Liam Nellis, chief executive of InterTradeIreland.
The competition is split into four regions - Dublin, Northern Ireland, Munster, and Connacht, plus counties Cavan, Monaghan, Donegal and the rest of Leinster excluding Dublin. Each regional winner receives €20,000, while there is a top prize of €100,000 for the best emerging international company in Ireland, with €50,000 for the best emerging company in Ireland.
But the seedcorn competition is by no means the only show in town. The Shell Livewire young entrepreneur programme rewards enterprise in young people aged 16-30. Top prize for the All-Ireland Young Entrepreneur of the Year award is €5,000, with a runner-up prize money of €3,000.
Earlier this year, 22-year-old Andrew Deegan and 28-year-old Brian Quigley from Breakout Gaming Concepts won the Docklands Innovation Park Enterprise Awards 2008 and €10,000 for best new investment proposal.
Other competitions include the davidmanleyawards.ie, named after David Manley, a former president of the Dublin Chamber of Commerce. The winner receives a €10,000 cash prize plus mentoring and advice worth €80,000 from the awards' sponsors.
The overall winner of the Small Firms' Association (SFA) national small business award gets a €15,000 cash prize and lifetime SFA membership. Awards are also presented to six category winners, who each receive a €5,000 cash prize and one year free SFA membership.
In July, Eircom announced details of the four winning companies in its €100,000 Web Innovation Fund. The fund was launched at the eircom Golden Spider Awards in November last year to promote, mentor and sponsor innovative web applications in the Irish Internet industry.
Case study: securing investment
This month we look at how AspiraCon Ltd made their start-up period easier by choosing their banking and accountancy partners wisely and by securing an Enterprise Ireland grant
THEY SAY the first place to look for funding is to go to the 3 F's - friends, family and fools. When AspiraCon Ltd started business in May 2007, there were more options open to them.
"Two of the important decisions we had to make early on were who we would bank with, and who we would use as our accountants," says Pat Lucey, founder of AspiraCon.
"We decided to go with the Bank of Ireland. The local branch has a team dedicated to working with new businesses that gave us lots of practical advice: sorting out a very competitive equipment lease, and giving us free banking for two years. They've called out to our premises and have even put us in contact with a couple of prospective customers."
"After meeting with a few different accountancy practices, we went with FDC. They have advised us on what systems to put in place, and crucially helped us select financial management systems that can scale up as we grow."
AspiraCon founders Colum Horgan and Pat Lucey, were coming out of a redundancy situation so they had some of their own money to invest.
"Because we also met the requirements for the seed capital scheme, we were eligible to get a refund of 40 per cent of the amount we invested - basically you get back some of the tax you've been paying."
The company was designated as a High Potential Start-Up by Enterprise Ireland (EI) so this investment was matched by EI.
"EI are very fair in their dealings with start-ups so you won't find a better investor. Theinvestment comes as a combination of grants and equity. The grants are only payable if you meet employment targets and the equity investment means that EI have the right to convert their investment into part-ownership."
For AspiraCon, the initial injection of founders investment, matched by EI, was only enough to cover their cashflow projections for the first year.
"We realised early on that the best source of funding is to find paying customers."
AspiraCon established a services division, centred around project management services and software development and used the revenues generated by the services division to fund its flagship project.
Growth can place its own strain on finances and AspiraCon is in exploratory discussions with some venture capitalists to secure additional investment and are also looking at the Business Expansion Scheme (BES).
Since the investment ceilings for BES were raised last year, it has become a realistic method to raise finance again.
AspiraCon has no plans to appear on the Dragon's Den looking for funding.
"My goal is to be there as one of the dragons," says Lucey.
