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Show me the money! Funding for innovation ? who can help?
Innovation ? the successful exploitation of new ideas ? can lead to the production of high value-added products and services and more efficient production processes. This enables businesses to compete successfully and profitably in today?s fast-changing marketplace, which is vital for a healthy UK economy. But once a business has developed an idea, it needs funding to market the product. Luckily, there are a variety of different organisations businesses can look to for help
The department of trade and industry
The government could help to overcome some barriers to getting funding. The Department of Trade and Industry (DTI) provides a range of solutions that offer practical support and encouragement at different stages of the innovation process.
The government? s Science and Innovation Investment Framework, published in July 2004, reaffirmed the commitment to support businesses investing in new and emerging technologies. A Technology Strategy Board, made up of mainly experienced business leaders, aims to identify the new and emerging technologies critical to the growth of the UK economy into which government funding and activities can be directed. Between 2005-2008, £320 million will be made available to businesses in the form of grants to support research and development in the technology areas identified by the Board.
Research and development grants
Businesses that plan to research and develop new products or services they may be eligible to apply for financial support in the form of a research and development (R&D) grant. The UK government particularly wants to encourage innovation and R&D projects among businesses. These grants cover research and development into new technologies, innovative products or processes. Applying for an R&D grant usually involves completing application forms and for businesses to demonstrate how they can satisfy the funding conditions and requirements. The level of grant support will vary from between 25% and 75% of the business? R&D costs. The overall objective of the Technology Programme is to supply funding to encourage more investment in science, engineering and technology. It aims to help with the cost burden and share the risk involved when businesses bring new technologies to market.
Types of grants available
There are four types of grant, each supporting different types of R&D projects, and each requires the applicant to make their own contribution to the project costs.
Micro projects are low-cost development projects lasting no longer than 12 months. A grant of up to £20,000 is available to businesses with fewer than 10 employees.
Research projects aim to investigate the technical and commercial feasibility of innovative technology and last 6-18 months. A grant of up to £75,000 is available to businesses with fewer than 50 employees.
Development projects aim to develop a pre-production prototype of a new product or process that involves a significant technological advance. Projects will take 6-36 months. A grant of up to £200,000 is available to businesses with fewer than 250 employees.
Exceptional development projects involve a significant technological advance and are strategically important for a particular technology or industrial sector. Projects will take 6-36 months. A negotiable grant of up to £500,000 is available to businesses with a qualifying project.
Raising finance Innovative and growth-orientated businesses may be finding it difficult to attract the investment they need to innovate and grow. The following schemes supported by the DTican help address this problem:
Small Firms Loan Guarantee (SFLG)
The SFLG guarantees loans from the banks and other financial institutions for small firms that have viable business proposals but who have tried and failed to get a conventional loan because of lack of security.
Enterprise Capital Funds (ECF)
The government is keen to explore how ECFs might improve SME access to equity finance. They will help fill the ?equity gap? that faces some highgrowth businesses seeking modest amounts of risk capital.
More information on ECFs can be found at www.sbs.gov.uk
Selective Finance for Investment in England (SFI)
SFI is designed for businesses that are looking at the possibility of investing in an Assisted Area, but need financial help to go ahead. Business Links can act as an initial point of contact and as advisers to applicants in some cases. SFI is discretionary and normally takes the form of a grant or occasionally a loan. All projects must meet the scheme criteria and in each case the amount and terms of assistance will be negotiated as the minimum necessary for the proposed project to go ahead. There is a minimum threshold for applications of £10,000 grant.
Knowledge Transfer Partnerships
A Knowledge Transfer Partnership (KTN) can help a business to develop and grow by accessing the wealth of knowledge and expertise in the UK?s universities, colleges and research organisations.
All approved KTNs are part-funded by the government (11 government organisations led by the DTI) and can enable businesses to work with a university, college or research organisation that has expertise relevant to business and can help increase profitability.
KTNs promote and accelerate the transfer of knowledge between the science, engineering and technology base on the one hand and industry on the other. KTNs offer invaluable opportunities through networking to make contacts and exchange information with other business, academic or research organisations working in similar fields or sectors.
For more information visit www.dti.gov.uk/ktn
National Endowment For Science, Technology And The Arts (NESTA)
NESTA invests over £20 million per annum in innovative ideas and people, often much earlier than other public and private funders. NESTA supports innovation by individuals or small groups, including scientists, inventors, engineers, medical practitioners, educators, filmmakers, artists and musicians, with an emphasis on commercial or creative value.
NESTA is happy to look at ideas that combine elements from different areas of arts, science and technology. They focus on early stage investment ? from before proof of concept through to pre-production prototype. NESTA calls it an investment ? not a grant. It takes a stake in Invention and Innovation awards, and any returns it makes are reinvested in the next generation of exceptional ideas. Getting through the first stage is a major step but still no guarantee of funding. The good news, though, is that it?s open all year round and there is no closing date.
Types of funding
Financial packages are available ranging from £5,000 to £150,000. Most projects receive £30,000 and £85,000. Non-financial support is often offered, too. An independent mentor can provide business and/or technical expertise. These are usually highly experienced business people with extensive networks and knowledge of building businesses.
NESTA funds anything related to progressing the idea ? research and development, carrying out tests to prove the concept (including prototype development) securing intellectual property rights, investigating the market potential and salaries for team members.
The size of investment NESTA will make depends on whether there are other investors involved. If NESTA is the sole investor it will normally only invest up to £65,000. Where there are private investors involved they will consider investing up to £150,000. NESTA will expect to make all co-investments on the same terms as the other investors involved.
For more information visit www.nesta.org.uk
EQUITY FINANCE
Equity finance is a way of raising capital from external investors in return for relinquishing a share of the business. This may take many forms including a share of future profits but is most frequently associated with sharing the ownership of the business to some degree.
There are two main providers of equity finance for private businesses - venture capitalists and business angels.
Venture capital
Venture capital is also known as private equity finance. Venture capitalists (VCs) look to invest large sums of money in return for some of the business? shares. VCs typically invest in businesses with:
- a minimum investment need of around £2 million;
- a business plan that is ambitious but realistic;
- a product or service that provides a unique selling point or other competitive advantage;
- large earning potential and offering a high return on investment within a specific time frame, eg five years;
- sound management expertise - although VCs tend not to get involved in the day-to-day running of the business, they often help with a business strategy;
- a proven track record - for this reason start-ups are generally not considered by VCs for investment.
Advantages
The advantages of securing a VC are that they can provide large sums of equity finance. VCs can bring a wealth of expertise to businesses. Also, if a business successfully attracts a VC it is likely to find it easier to secure further funding from other sources.
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The DTI?s business link website provides easy access to practical and objective information and support for small businesses. Its services are available online (www.dti.gov.uk/bss) by calling 0845 600 9006, and through a network of local operators throughout England. Business Link is managed by the DTI through its Small Business Service. By registering with the DTI?s Business Link website, businesses can take advantage of:
To find out more about how the Business Link website can help achieve best practice in your business visit www.businesslink.gov.uk |
Disadvantages
The disadvantages are that securing a deal with a VC can be a long and complex process. Businesses will be required to draw up a detailed business plan, which should include financial projections. Also, if a business gets through to the deal negotiation stage, it will have to pay legal and accounting fees whether or not it is successful in securing funds.
There are several associations. The following are two of the most wellestablished: The British Venture Capital Association (BVCA) helps larger businesses locate venture capital companies.
For more information visit www.bvca.org.uk
The European Private Equity and Venture Capital Association (EVCA) provides information and networking opportunities for investors, entrepreneurs and policymakers in the equity finance industry.
For more information visit www.evca.org.uk
Business angels
Business angels (BAs) are wealthy individuals who invest in high-growth business in return for equity. Some BAs will invest on their own, whereas others will do so as part of a network, syndicate or investment club of BAs. In addition to money, BAs often make their own skills, experience and contacts available to the company.
BAs typically invest in businesses with:
- an investment need of between £10,000 and £250,000 - most initial investments are less than £75,000;
- the potential for high return - BAs are not averse to high-risk;
- good early stage development or expansion
- a presence in a particular sector.
Advantages
The advantages of using a business angel are that they often make an investment decision quickly, without complex assessments. However, it is still a good idea to spend time drawing up a professional and tailored business plan. Some BAs may be eligible to have their investment funds matched by government under its Enterprise Capital Funds (ECFs) scheme. ECFs targeted at SMEs are under development and will only win government approval if they clearly show how they are targeting SMEs. In effect, ECFs are commercial funds, investing a combination of private and public money against a share of equity in small high-growth businesses seeking up to £2 million of equity finance.
Funding solutions for businessesSmall and growing businesses looking to raise funds could benefit from two free and comprehensive guides launched by the Department of Trade & Industry. The publications, The No-Nonsense Guide to Small Business Funding and The No-Nonsense Guide to Finance for High Growth Companies, have been produced by government-backed business-advice service Business Link. The first is aimed at start-ups and small firms in need of finance and covers the basics of finance, potential sources available and the best ways of accessing and approaching them. It offers detailed advice on, amongst other issues, the following:
The second guide, The No-Nonsense Guide to Finance for High Growth Companies, is targeted at more established enterprises that are looking to expand. This starts with working out how much a business wants and how they will spend it and goes on to cover the following funding options:
To order the guides call 0845 600 9006
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Disadvantages
The disadvantages of business angels are that they do not make investments very regularly and they may not be actively looking for an opportunity, so they may be difficult to find. Tracking down the right investor may take longer than expected and can typically take several months.
The British Business Angels? Association (BBAA) will direct a business to local and appropriate business angel networks and provide guidance with preparing and presenting your business proposal.
For more information visit www.bbaa.org.uk