Ask Piers: #5

You asked and I have answered. Questions from Laila on how to stop somebody from running off with her business plan and James on the UK market for venture capital funding.

How do I protect by business proposal?

Hi Laila – This is a very common question. It depends on what you want to protect, how it can be protected and, often most importantly, whether you can afford to enforce your rights should disclosure lead to an infringement of your intellectual property rights.

You cannot protect an idea. If you merely want to protect an idea contained in your business proposal then you have no recourse if a third party takes that idea and actually runs with it and executes your plan. If it is, for example, a TV programme format, then the fact you have written it down and dated it provides some protection through copyright. Design rights are protected in a similar way.

The conversation usually turns to confidentiality or non-disclosure agreements (NDAs). These are enforceable provided there is a binding contract, but many investors refuse to sign them due to the number of similar proposals they see. In those cases you have a choice – either provide your proposal and trust the recipient’s integrity, or don’t. Also, even when you have a binding agreement, if the other party breaches the agreement, you would have to pursue them through the courts, which can be expensive and therefore not an option.

If you are referring to actual intellectual property that is described in your proposal, then visit the excellent resources provided by the British Library Intellectual Property department to learn about your options. A trademark or patent involves a process and expense. This increases if you are intending to send your proposal overseas. There are some countries (e.g. China) where intellectual property rights have little value and protection is extremely difficult.

I have had many conversations with many entrepreneurs relating to their concerns about somebody running off with their idea. You can commit material time and money to protecting your idea and intellectual property. In the case of ground-breaking technology or patents, it is advisable to seek support to protect your intellectual property as stage 1 of your business plan. You may be able to raise seed funding for this if the value of the intellectual property is obvious. If you are just referring to a business name, domain name and idea, then protect them by registering them and seek protection by way of a confidentuality agreement. Whether you have the resources or not, you are in a better position with one in place and have the options to go to law.

If your idea is not based on unique intellectual property then do what you can within your budget, but actual execution of your plan and establishment of your brand is often a significant barrier to copycats and they don’t have your know-how.

After-all, it’s your idea.

Difficulty raising larger rounds from UK venture capital firms

Hi James – Welcome back to the UK and its imperfect market for larger rounds of equity capital. You have already noticed a recognised structural issue - the ‘funding gap’. All of the background and data you could wish for can be found in British Business Bank’s ‘Small Business Finance Markets’ report (2017/18), but here is brief and high-level sitrep. Please forgive the minor history lesson.

There was a glut of funding available including venture capital funding available before the 2000 dotcom bust. I left Credit Suisse on bonus day and raised £700,000 as I left the building. Generally, venture capital returns were better in the US compared to Europe and investors retreated leaving a financing desert for startups.

Tax breaks such as SEIS and EIS (UK) have helped to catalyse a growing number of angel investors, and there are co-investment funds to leverage such sources of funding. However, these are not going to provide your series A or B funding. In the US, Series A rounds are now up to $10m. Many of the well-known and originally US-based venture capital investors have been active in the UK for some time and firms such as Index and Balderton with European origins are the most active. However, they are playing in average rounds of £17m+ for a ca. 30% shareholding, which simplistically implies a deal post-money valuation of over £50m. A growing number of new venture capital firms have entered the market, but activity does not compare with the US market. You can read in the Small Business Finance Markets Report that equity investment was up 79% in the first three-quarters of 2017 and access to all forms of finance is improving.

The UK market has a very mature private equity market for later stage deals such as management buy-outs or to provide development capital for profitable businesses. Such funds tend to rely on leverage and financial engineering to magnify returns.

Up to 2008, banks were more active, but they were taking on risk that the underlying cash flows or asset-backing didn’t support – i.e. they were absorbing equity risk, and we all know how that ended. As the credit tide went out and never came back in the financing gap widened. The lack of funding has a detrimental impact on growth and the economy. Another issue is that traditional funds have a 10-year life and the usual investment horizon is 3- 5 years, which isn’t ideal if you need a decade or more to create value. The banks provided £2.5bn to create the Business Growth Fund (BGF), although its risk appetite doesn’t seem to include businesses unless they are the kind that a mid-market private equity house would take a look at. BGF is extremely active in putting money to work, but they don’t do venture capital. BGF has permanent capital so it can be patient and describes itself as a provider of patient capital.

In response to the lack of liquidity (of all kinds) after 2008, the government created British Business Bank, a government-owned development bank (I am a Non-Executive Director – these are my views for the avoidance of doubt), to unlock capital for UK small and medium-sized (SME) businesses. British Business Bank is catalysing the equity, debt and patient capital markets and has facilitated over £12bn of financing for UK SMEs. The recent launch of British Patient Capital will provider £2.5 billion will invest into venture and growth capital funds.

There are other gaps such as debt funding for buy and builds as much of the funding available came from Europe and cannot be used for acquisitions. More venture debt providers are needed.

The availability of venture capital finance is improving. As funds mature and raise new, and larger, funds, they are able to consider larger deals. Most funds have a limited on what percentage of any fund can be invested in any one company. Still, to secure significant sums of venture capital you are left with the well-known names with large funds. There is money out there in the UK and no shortage of ambition, but the UK market is some way behind the US, and you have to work harder to secure funding.

I have focused on comparison to the US market as investment from China (and even Singapore) comes with its own complications, but provided the terms are right and enforceable, you should raise finance where you can get it.

Try the British Business Bank Finance Hub for more information about sources of venture capital.

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