General Questions and FAQ's
Frequently Asked Questions This page is intended to answer any questions you might have about the Fund. If you have any other questions please email them to Kevin Caley (kevin@aegf.co.uk). We have split them into three categories : General questions, questions from Potential Private Investors and Businesses Seeking Funds.
THE ANSWERS:I hear that venture capitalists are sometimes referred to as 'vulture capitalists'! How can I find out more about my potential new partners?An investment is like a marriage; the partners need to get on well and trust each other for the partnership to work. Investors will try to find out as much as possible about the business founders before they commit their money and that will include taking references. Entrepreneurs should take out references on their investors before entering into a deal You should always speak to some of their other investee companies and find out what their experience has been like. Ask the investors for some contact details. There is, of course, a danger that you will be given the contact details of the one company that will give a good reference! Just like you are unlikely to give the name of someone who would give you a bad reference (in the case of the AEGF investee companies you can contact them directly via our link to their own websites if you wish). There is now an important new source of feedback on VC funds which allows investee companies to post anonymous comments about their VC fund managers www.thefunded.com it is a very useful place to start your research! How does the Fund Work? The Fund has a set of standard legal documents designed to protect the company and all of its shareholders and this should save considerable costs and time in arranging an investment. More importantly it will help to address the natural concerns that both business founders and investors have when considering such a partnership. The Fund will be able to act as an impartial referee with a direct interest in the future success of the business if ever the various shareholders disagree. The Fund does not always insist on using its own documentation but where they are used there is no cost involved. This can save substantial legal fees. Return to top Yes, the Fund can be very flexible, but will always have to invest on terms that are at least as good as those given to the private sector investor. Sometimes private investors are interested in convertible loans rather than the tax relief that may be available from investing in new ordinary shares under the Enterprise Investment Scheme and we can accommodate that. Because the Fund is providing risk capital it will always be looking for a way to share in any profits made as a result of its investment and that normally involves a share holding or an option to buy shares. There are NO opportunities for investors to invest in the Fund itself, only to invest alongside it. In order to comply with the complex European "State Aid" rules and the Financial Services and Marketing Act 2000 the Fund is entirely “public sector'' but must always achieve at least 50:50 private sector matching at the point of investment. It also must not give advice or act on behalf of any other investor. However, if you are interested in investing small amounts in a diversified portfolio of small businesses alongside the Fund, Advantage Business Angels and Central England Business Angels have several investment clubs that we often invest alongside. These clubs provide an opportunity for new "virgin" angels to gain experience and spread their risk by syndicating with others and making a few small investments. If you are already an experienced investor and are serious about investing alongside the Fund feel free to contact us to find out what projects we are currently working on. Please remember that because the Fund is not FSA regulated we cannot give you any investment advice. Where did the Fund get it's money from? In 2004 the Fund was a successful bidder for the DTI Small Business Service "Early Growth Fund" project, that provided £5m to AEGF as part of a project to support the establishment such funds throughout England. Scotland, Wales and Northern Ireland have their own provisions. All the money in the Fund is a long term loan from the UK Government and if the Fund succeeds in its objective of proving that such small investments can be profitable the money will be paid back with interest after 10-12 years. In 2006 the Regional Development Agency Advantage West Midlands provided a further £3m on the same terms. Are there similar funds in other regions? Yes, there are similar funds in London, Cambridge, Yorkshire and the East Midlands, all are different in the way they operate. The first to be launched was London Seed Capital. The Viking Fund in Yorkshire specialises in technology related businesses and operates in close partnership with its own dedicated business angels club "The Viking Club". What do you expect to see in a business plan?Your business plan should give sufficient information to enable us to understand your proposal and the investment opportunity it represents. We have prepared a guide to the contents of a business plan which we hope will help but the most important thing is that it is YOUR plan, not something that was written for you. Are there any businesses AEGF cannot invest in? The fund has a few basic rules set by its capital providers which are:
Where can I get help in preparing an application?You should start by contacting the West Midlands Business Link "Gateway" on 0845 113 1234 (www.businesslinkwm.co.uk) they can provide practical and financial assistance and refer you to a local expert. If you use one of the business angels networks to raise capital they will normally provide some assistance as part of their service. Return to topAm I located in the West Midlands Region? Our definition of the West Midlands is the same as that of the DTI and the Regional Development Agency, Advantage West Midlands, It comprises of the counties of Staffordshire, Shropshire, Warwickshire, Hereford & Worcester plus the metropolitan county of the West Midlands which includes Birmingham. We are prepared to invest in businesses that also operate outside of the region provided that they are based in the West Midlands or are prepared to move to the West Midlands. By this we mean that the key business decisions are made in the region, that board meetings are held in the region and that the business is not simply creating a token presence in the region in order to access the funding. Return to topWhat other funds are available for businesses in the Region The Advantage Early Growth Fund is one of the series of “Advantage” Funds supported by Advantage West Midlands ("AWM") as part of their “access to finance” program. AWM have a web site. devoted to fund-raising for businesses in the region. Why is it so important that the fund invests alongside private sector investors?European "State Aid" rules prevent Government funds from being used to give businesses in one member state any financial assistance which gives them a commercial advantage over similar businesses in other member states. Any funding provided must therefore be at fully commercial rates. Because of this the Fund must prove it is investing at fully commercial rates but because there are very few commercial investors operating at this low level there is no established market rate. By insisting that in every case at least half of the funding is provided by an independent private sector investor AT THE SAME PRICE, the Fund can prove that it is investing at a price set by the commercial market. This is why finding a matching private sector investor is such a fundamental part of the way the Fund operates. How long does a decision take?That depends upon how "investment ready" you are! if you have a complete business plan and a private investor who has already agreed investment terms we can make a decision within two weeks and make the investment within a further 3-4 weeks. If any key things are missing (such as a private investor!) this will cause delays outside our control and could mean that the whole process could take several months. We have created a reputation for moving quickly and "doing deals". After 38 months of operation the Fund had made 97 investments in 44 different businesses (see the news page!). Are you part of Advantage West Midlands?No, Advantage Early Growth Ltd is an independent company, limited by guarantee with an independent board of un paid Non Executive Directors. AWM has no influence at all over the individual investment decisions. AWM have supported AEGF because the aims of the Fund fit in very well with AWM's Access to Finance Strategy. Who are the managers of the Fund?Unlike most venture capital funds AEGF does not have a contract with an independent fund management company and it employs its own staff directly. This helps to keep costs to a minimum. There are two Executive Directors (Kevin Caley & Peter Brown) an Investment Manager (Tim Powell) and several non-executive directors who are responsible for corporate govenance and who do not get paid. What is the relationship between the Fund and Advantage Business Angels?There is no formal link between ABA and the Fund except that Bob Barnsley from ABA is a non executive director of the Fund. Both organisations have been supported by the Regional Development Agency, Advantage West Midlands and that is why they have the word "Advantage" in their name. Both recognise that they can be of great help to each other in achieving their objectives. There is no requirement to join ABA (or any other business angels network) if you wish to deal with the Fund, nor is there any obligation to become involved with the Fund if you join ABA. The Fund welcomes opportunities to invest from any source, particularly if they can help find the matching private investor. Recently AWM has widened its support for business angels organisations and there are now three other active organisations operating in the region: Minerva and Central England Business Angels at Warwick University Science Park and Beer & Partners Ltd. All of these organisations can claim financial support from Advantage West Midlands for putting together small deals and should be able to help you for a modest charge. It is well worth comparing quotes and track records before signing up. What is the Fund doing to make sure that the rest of the region get a look in instead of all the money going to Birmingham?When we started we thought that this might be a problem since Birmingham has traditionally dominated the economy of the region and we planned to take action to overcome that. However we are pleased to report that this has not been a problem and the Fund has invested in businesses located in every area of the Region and we intend to keep it that way! Who owns the Fund and what happens to any profits it makes?The initial capital of £5m was provided by the DTI through their Early Growth Fund Project. In 2006 this was topped up by Advantage West Midlands with another £3m. At the end of 10years the capital will have to be paid back, together with 6% compound interest and then if there is any surplus after that it will be shared equally between the funders and the Fund's management team. How much will an investment cost in fees?We will not be charging any fees when we make our investment We think that it is inappropriate to give you the money with one hand and then take a large chunk back as an 'arrangement fee'. It's the sort of thing that gives the Financial Services industry a bad name! So we try hard to and avoid charging any fees, including anything to cover our legal costs. We feel that it should give us a marketing edge over other sources of funds and helps to improve the image of venture ("vulture") capital. Another key point is that whilst it is normal for VC funds to charge fees, private investors rarely do. Since we are investing alongside private investors on the same terms it is appropriate for us to adopt the same approach. We will be charging a 'monitoring fee' of between £300 and £500 per month (depending on deal size) to contribute towards our own overheads and we expect to make sure that this fee always represents good value for money! Will the Fund want to interfere in my business?Good question! Firstly we hope that the founders will think of the Fund as a 'partner' and as such the company will belong to all of the partners to some extent. Secondly, we cannot run your business (a) because we do not have the knowledge and (b) because we don't have the time, we are busy running our own - making more investments! We will not invest unless we believe you and your team have the ability to run the business yourselves. However, if you get into difficulties or come across major new opportunities we have probably come across something like it before and we would like a chance to help - after all, the better you do the better we do! Having said that, any investment agreement can be used in an aggressive way if the investor wishes to adopt that approach and it comes down to personalities and philosophy. We are entering into a relationship like a 'business marriage' (only in this case it will be a three way relationship including a private investor!) It is therefore essential that all parties get on well and respect each other. Before entering into such a relationship you should get to know your partners and take out references. We will be happy to give you a list of the businesses we have been involved with so that you can phone them up and ask them what we are like, after all we will be doing the same with you! We hope that you will want to share both good and bad news with us and let us help with our experience and contacts. With more than 36 other investee companies and a great deal of experience in helping early stage businesses there is a great deal of potential 'added value' that we can bring, in addition to the money. We can't force you to do what we suggest but we hope that you will want us to contribute wherever we can. Will I ever be able to get rid of the Fund?We certainly hope so! Our Fund has a life of 10 years (from January 2003) and in the first 5 years we have to make investments in about 60 busnesses (that's one a month!), during the remaining 5 years we will be devoting our attention to finding profitable 'exits' so that we can pay back our own investors and establish a track record that will make new investors want to back new funds that we will be seeking to set up. What return on its investment is the Fund seeking?In terms of individual investments that depends on the level of risk involved but overall on our portfolio we have to allow for failures and losses and still be able to pay back our capital together with 6% compound interest. One of our main objectives is to prove that such a small fund can make attractive profits when compared with the stock market and other investments so that other sources of Funds will enter the market. This will only happen if we are successful and profitable. However, our deal structures are often dictated by the private investor(s) who we invest alongside. It is the nature of a fund like this that a significant proportion of investments will fail and we will lose all our money. To succeed as a fund we need to find sufficient "stars" to pay for all the failures and since at the point of investment we do not know if we have a star or failure we will be seeking the best potential return that we can negotiate! Equity is different from loans, it has a number of advantages and disadvantages and it is important to understand what they are. There is a list below. To summarise the advantages; equity is 'patient capital', it shares the risks and the rewards, it can help gearing and thereafter make it easier to raise bank loans. Equity does not require any security and can only be repaid out of profits. What are the advantages and disadvantages of equity capital?The Advantages of an Equity Investment -
Disadvantages of an Equity Investment
Can the Fund back Management Buy-in's and Management Buy-outs?Yes, providing the matching private sector funding is from an independent investor on commercial terms and the amount of external equity needed is not more than £250,000 in this round of funding. As a private investor can I get Enterprise Investment Tax relief on my investment?Yes, if you structure your deal correctly and the investment qualifies. However, it is your responsibility to check this out, the Fund cannot be held responsible if your investment does not qualify! It is a complicated subject and its easy to make a mistake. Getting expert advice is important. AEGF has worked with RSM Bentley Jennison to produce a CD-ROM guide to the scheme and you can find out more and ask some preliminary questions about EIS by calling Nick Waterhouse-Brown on 0121 503 3804. What do you mean by "Private Sector Investor"?A risk/equity investor (i.e. not a bank) who is independent from the business so that the support is clearly on commercial terms. Will a Bank Loan be counted as matching funding?No, our rules specifically prevent this, but it doesn't stop the business raising bank finance, in fact it should make it easier to attract bank support because of the strengthened balance sheet. How is the Fund related to the other "Advantage" funds?Advantage West Midlands have sponsored the creation of several venture capital funds, each "branded" with a name starting with the word "Advantage". Each fund is independent and makes its own investment decisions but we try to work together and refer investment opportunities when one of the other funds is better suited to a particular investment. Occasionally two of the funds may make a joint investment (there are 4 companies in out of our first 40 where this is the case) but there is also a healthy element of competition which keeps us all on our toes and provides some choice for those seeking funding. It will clearly help everyone if smaller funds can hand successful businesses on to the larger funds when they are ready for further investment and we hope that the Early Growth Fund will be able to provide an attractive source of investment opportunities for the larger funds. You can find out more about the alternate sources of funding available in the region from: www.westmidlandsfinance.com How can I be sure that my information will be kept confidential?Our business requires us to keep applicant's information confidential, if it became known that this might not be the case no one would approach us and we would not have a business! Confidentiality is therefore very important to us. Sometimes people ask us to sign Non-disclosure agreements ("NDA") before they will tell us about their business, this is understandable, but presents us with a difficult problem. With applications arriving at the rate of about 10 a month, if they all wanted us to sign their own version of an NDA we would not have the resources to monitor each of those agreements and ensure that we are always complying with them fully. Indeed, NDA's are all different and can sometimes try to impose unreasonable restrictions and penalties upon us, for example one such agreement required the business plan to be kept in a locked cabinet in a locked room at all times and tried to prevent the reader communicating about the document with anyone else! This would firstly have made the plan difficult to read but more importantly would have made it impractical for our Investment Committee to discuss the application! So we have adopted a policy of refusing to enter into any NDA's. We regret any inconvenience or anxiety this may cause but so far, with only two exceptions, everyone who has been faced with the decision about trusting us with their plan without having a NDA in place has agreed to let us have their plan. If you do not wish to share confidential confidential information with us then leave it out of your plan and we will judge your application on the information we have available. What makes this fund different?
How can I find a private investorThe most active investors are often difficult to find. They don't often need to advertise their existence because their network already brings them opportunities. Personal contacts are therefore the most effective method but when that fails you can try one of the many Business Angel introduction agencies. You can find information on these from the British Business Angel Association website or the British Venture Capital Association. AEGF works closely with Advantage Business Angels, Minerva and Central England Business Angels at Warwick University Science Park and Beer & Partners Ltd. All of these organisations can claim financial support for putting together small deals from Advantage West Midlands. Although AEGF cannot provide investment advice, we now have contacts with many individual co-investors who have invested with us, some as many as 7 or 8 times and some of them often ask us about the opportunities we are working on. You might also consider advertising in a specialist publication like the Financial Times or Angel Investor Magazine. If you are successful there are no "success Fees" to pay. You should always be on the look out for people who claim to be investors but in reality they have little of no money of their own. If you are lucky they might introduce you to some rich investors and take a percentage of the investment but they could also just waste your time, we suggest that you try to get some independent references before taking that risk. |
AEGF ranked top fund in the UK by "thefunded.com"