How does venture debt actually work?

VC funding is expected to continue its slowdown into 2023 amid the tech crunch. As such, growing numbers of startups are turning to venture debt as a means to ride out the rocky period and wait for calmer — more cash-heavy — seas. European startups raised record amounts of debt last year — with a large part coming from US investors. Debt financing can involve interest payments or give lenders a cut of exit proceeds, as opposed to equity investors who take an ownership stake when they invest. But how does venture debt really work and what do founders need to know about it? Taking inspiration from venture debt adviser Klymb’s new report and insights from the experts, this guide will give you the what, when and how of venture debt. Many companies that were planning a round in Q1 of this year have decided to hold off in order to achieve better numbers and growth, says Lourdes Alvarez de Toledo, a partner at early-stage investment firm JME Ventures. “During these times of downturn, it’s a good way to extend runway and wait for a better moment to raise equity” According to Klymb’s two general partners in venture debt advisory, Faÿçal Hafied and Yohan Obadia, as the average ticket in equity fundraising has fallen, the proportion of debt top-ups in equity rounds has increased to complement funding and reach sufficient investment size. It’s a “great instrument at any given time but particularly during a temporary downturn to avoid a downround, keep focusing on growth and ultimately achieve a higher valuation,” says Obadia. It also enables startups to raise lots of cash and fast: up to 1.5x the annual recurring revenue, with an average three months or so to get funded, he adds. Which startups are viable for venture debt and what type of assets does it finance? But not every scaleup can — or should — pursue venture debt. Venture debt emerged in the wake of venture capital to fund the intangible economy. Unlike traditional loans which take tangible assets as collateral, venture debt takes intangible assets like VC backing, predictable future revenue and intellectual property (IP). Bootstrapped companies are generally not suitable for venture debt. So the main targets for venture debt tend to be deeptech companies with IP, typically in life sciences, or recurring revenue companies, like SaaS. When should you use venture debt? Obadia and Hafied emphasise that venture debt is an instrument made exclusively for a company’s growth. This is echoed by Ross Ahlgren, general partner at Kreos Capital, Europe’s largest venture debt/growth debt fund manager. He advises founders to always approach it “from a position of strength as a team — when you have an existing cash runway — and to think about what you want it for: make sure you understand the value of that expansion capital whether it’s acquisition or something else”. Venture or growth debt is best employed for specific use cases such as breaking into new markets or internationalising, generating new customers or acquisition financing. As companies grow, these use cases evolve. “If you’re looking at the earlier stages, a lot of it is about giving the company more ‘firepower’ or extending existing cash runways,” says Ahlgren. “In the mid and late stage, it’s really about expansion capital — the debt is never used to leverage up the balance sheet. “One of the nuances of the companies that we invest in is that the majority of our companies have traded profit for growth.” Source: Klymb While some investors believe venture debt is suitable for the entire funding continuum, Alvarez de Toledo warns early-stage seed companies against it due to the risk of still needing to find their product-market fit. Whether a startup should consider venture debt is based on three criteria. First, how much debt the company already has. “If there’s debt, I don’t advise venture debt because the repayment is very aggressive,” she says. Second, the burn rate. A breakeven or cash-efficient company will likely find a way to repay the money but for companies with a high burn rate it’s riskier. Lastly, the track record of the company. “One of the defining things about the debt that we do is that the majority of our companies have traded profit for growth” “When I think it’s advisable to take venture debt is for companies in Series A with nice growth and good unit economics that won’t have problems raising the next round so having more runway is advisable,” she says. What do investors look for? The venture debt industry can be divided into two categories: Banks with venture debt arms and specialised investment funds. According to Hafied and Obadia, investors are looking for a “mission-critical product that is not easily replaceable — ideally sticky which means with low clients churn rate — as well as substantial revenue growth over the past 12-24 months and a current runway of at least six months”. For Ahlgren, a web of factors are considered: management teams, underlying business models, unit economics, scale vs competition positioning and vision. Working alongside equity sponsors is a prerequisite for Ahlgren’s loans: “It creates a three-legged stool so if there are possible issues everyone works together to find solutions.” “There’s a larger relationship and a bigger ecosystem that we all play in. So start small. And hopefully, as the balance sheet grows, the company grows” When it comes to advice for VCs or growth equity sponsors, Ahlgren says it’s pretty much the same as what he’d give founders. “It’s a very symbiotic relationship,” he says. “It’s not like any of us wants to maximise our position to the detriment of the others. There’s a larger relationship and a bigger ecosystem that we all play in. So start small. Never over leverage. And hopefully, as the company grows the use cases for further debt grow.” What are the risks? Done right, venture debt can be a less diluting option than an equity raise, offer flexibility of terms, quick fund allocation and increase a startup’s valuation ahead of the next equity round. “Most of the time,” Ahlgren says, “because the loan-to-value ratio is very low, these monthly payments are very granular and baked into the business plan. We never do large balloon payments or anything that can impair the growth prospects of the business. “These are loans that you pay back in very, very small increments over time. And hopefully whatever acquisition was completed, or expansion into new markets or new products, has accelerated the business to such an extent that the debt repayments are just another part of the funding process.” But venture debt is not a risk-free product. Venture debt investors can be flexible over the life of a loan but if debt is not repaid, default will be the last resort. “Venture debt is not capital for survival but capital for expansion” says Hafied. “We are coming out of a period where equity was abundant and available, which led many founders to think that they could always trade on their ownership with an equity round in case of capital needs… In the venture debt world, the debt is supposed to be repaid in terms set in advance. It’s a mental paradigm shift founders need to make.” What do founders need to know about terms? There are about five or six moving parts to be aware of, says Ahlgren: interest rate, transaction fee, a term to draw down the money, potentially an interest-only term and yield enhancement component. “Entrepreneurs need to work with people, whether it’s equity investors or venture debt providers, that are happy to explain every aspect of the terms and how they work,” he says. “Part of the key is understanding if there are use of capital restrictions or financial covenants, but for a growth business we almost never have them.” “Entrepreneurs need to work with people, whether it’s investors or venture debt providers, that are happy to explain every aspect of the terms and how it works” Hafied and Obadia say that the flexibility of venture debt term sheets can make them complex: “Certain clauses have sequenced effects over time, others can lead to cascading effects if they have not been limited upstream, like financial covenants that can ultimately trigger a default. The founders must model all these side effects before signing the loan contract.” Interest rates vary from deal to deal — the smallest rate 8%, according to Alvarez de Toledo, and the highest 12%, “depending on your power of negotiation”. The equity kicker — which allows the fund to invest in equity — is usually set at 10% of the committed amount at a discount between 15-25% at the next equity round and is up for negotiation, too. There might be a grace period: a time without repayment, typically up to one year. Some also opt to extend the time the money is deployed and thus when interest rates begin. Source: Klymb While there’s no aggregate study on success vs failure, looking at the performance of venture debt funds gives some indication. Hafied and Obadia say that default rates are mostly correlated with firm size — a company in its Series D will therefore be less likely to default than a company in its Series A. “The portfolios of the best venture debt funds have default rates below 5%.” BY JESSICA RAWNSLEY SIFTED 8 MARCH 2023

Lead generation tools for your business: Hubspot

When it comes to running a successful business, having the right tools and resources is essential. HubSpot is one of the top marketing and sales tools available, and it’s quickly becoming a go-to for businesses looking to increase their reach, optimize their campaigns, and boost their bottom line. HubSpot is an all-in-one platform that helps you manage your inbound marketing, sales, and customer service. It offers a wide range of features, from content creation and email marketing to lead nurturing and analytics. If you’re looking to upgrade from spreadsheets, here’s how to use HubSpot for your business. 1. Create a content marketing strategy Content is essential for any successful business. It helps you engage with potential customers and drive traffic to your website. With HubSpot, you can create content for any stage of the buyer’s journey. You can also use the platform to track the performance of your content and see how it’s impacting your business. 2. Generate leads Lead generation is key to any successful business. With HubSpot, you can create forms, landing pages, and call-to-action buttons to capture leads. You can also use the platform to segment leads, track their activity, and nurture them with automated emails. 3. Track and analyze data Data is essential for understanding your customers and making informed decisions. HubSpot provides powerful analytics tools that help you track your website’s performance, measure the success of your campaigns, and make data-driven decisions. 4. Automate your marketing With HubSpot, you can automate many of your marketing tasks, such as email campaigns, social media posts, and lead nurturing. This can help you save time and money, and make sure your marketing efforts are always on point. 5. Optimize your customer service Good customer service is essential for any successful business. With HubSpot, you can manage customer inquiries, respond quickly, and track customer satisfaction. You can also use the platform to create help desk tickets, manage customer service agents, and automate customer service processes. Using HubSpot or one of the other lead generation tools for your business can help you increase your reach, optimize your campaigns, and boost your bottom line. Automating and tracking your digital lead generation can really help you take your business to the next level.

8 Ways To Become A More Successful Entreprenuer

Photo by Jason Goodman on Unsplash Whether you’re a seasoned entrepreneur or just getting started on your entrepreneurial journey, there’s always room to grow and lessons to learn. I spoke with award-winning entrepreneur Ashley Black, founder of FasciaBlaster to share tips on how she created her multi-million dollar business. Here’s the advice she shared to help entrepreneurs build their own successful businesses and companies: Start small. You can always scale a business once things start to take off, but it’s hard to rescue a business that’s over-extended from the start. Be strategic in the products or services you offer in the beginning, build a loyal following, and you can grow and expand from there. Black advises entrepreneurs to “do what you know, keep it simple, and don’t try to branch out too much or too soon.” Black’s strategy has always been to make small strategic moves that have a big impact. Prioritize your health and wellness. You absolutely must prioritize your mental and physical health if you want to achieve success and be able to actually enjoy it. Health and wellness have always come first for Black, and she credits much of her success to this practice. “I am not addicted to ‘the chase.’ I don’t work until I run myself into the ground. Instead, I focus my energy on my vision and I work to inspire my team to help me execute with passion.” This keeps her grounded and focused on what’s most important. Surround yourself with experts. Don't avoid aspects of your business if you're not good at them or don't understand them. Instead, surround yourself with experts who can teach you and educate you. That’s exactly what Black did in the early days of her business, and still does now when she’s faced with something new. “I did everything first before I turned it over to someone else. And because of that, I know all the ins and outs of my business.” Investing in learning always pays off. Think of it this way - if you pay someone to do something you’ll be reliant on them, but if you pay someone to teach you, you’ll be able to use those skills again going forward. Be involved with every aspect of your company. It’s important that you take an active role in your business. This doesn’t mean that you do everything yourself, but instead that you keep your finger on the pulse of things. Spend time working on the day to day operations, dabble a bit in customer service, and engage with customers on your social media channels. This will help you provide direction to your team and understand where you can be more hands-off and where you might need to be more hands-on. Create everything with your customer in mind. “I don't really focus on what my physical, tangible product is. Instead, I focus on what the contribution is to the customer,” explains Black. Black went through an extensive journey to heal herself from a life-threating bone infection and lifelong pain from juvenile arthritis, and that inspired her to create a product that would in turn heal millions of people. Think of the impact your product or service will have on customers and use that to guide you. Outsource what you aren’t good at, but maintain creative control. You never want to give up full control when you outsource things like design, content creation, and social media. When building and growing a company, it’s important to keep the brand voice consistent. When you outsource something, think of yourself as the creative director. You aren’t the one doing the actual filming and editing of photos and videos, but you’re providing a vision and direction for them, allowing you to maintain creative control. Be careful with funding and partnerships. Choose your source of funding carefully. Each type of funding comes with its own set of pros and cons, and you need to take the time to think through and weight your options before moving forward. There is however, one thing Black says that you shouldn’t do—don't give up ownership if at all possible. If you do have to give up ownership to get funding, buy it back as soon as possible. Black also shares a word of caution for taking on silent partners. "People say take silent partners. Well, they may be silent in the beginning, but not when they don't make the money that they’re expecting." Even if the money is there, they can still be an outside voice trying to exert control over things. It’s important for you to be able to stay fully in control of your business, so evaluate any potential partnerships before making that commitment. Don’t be afraid to break from convention. There really isn’t a conventional path to success as an entrepreneur, yet too often entrepreneurs fall into the trap of “it’s been done this way before so I should do it that way too.” Black achieved success by doing things her own way, and recommends all entrepreneurs find and follow their own paths and ignore so-called “convention.” 8 Ways To Become A More Successful Entreprenuer: By Ashira Prossack on Forbes.com – June 23, 2021

Digital whiteboards: The next must-have tool for hybrid teams?

Photo by Business Insider Digital whiteboards may be the latest success in online visual collaboration tools which connect teams in a productive and interactive manner. The scope of workplace collaboration tools available to teams today stretches far beyond anything employees might have imagined two and a half years ago. When work-from-home orders swept the globe in early 2020, most organizations were focused on ensuring they had viable video and chat platforms in place. Now, as a significant proportion of employees have decided to work outside of the office for at least part of the work week, tools that do more than just support workers’ basic communication needs are becoming more sought after. One product that has seen an explosion in growth this year has been the digital whiteboard. Also known as visual collaboration platforms or shared canvas apps, these tools let hybrid teams collaborate visually via an online interface. Between March and May 2022, Box, ClickUp, Mural, BlueJeans, and Zoom all made announcements relating to the launch of a new whiteboarding product or significant updates to an existing whiteboarding tool. Why the flurry of activity? Connecting a hybrid workforce Data published by Forrester in May 2022 shows that 62% of business and technology professionals who have transitioned at least some of their workforce to full-time remote work due to the COVID-19 pandemic anticipate that they’ll maintain a permanently higher rate of full-time remote employees, even across traditionally in-person industries. As a result of these wide-reaching changes to the workforce, many organizations are searching for ways to create a more unified collaboration experience for a geographically dispersed workforce. Digital whiteboard vendors say their platforms fulfill that need. Typically accessed via web browser, visual collaboration apps create persistent workspaces where team members can collaborate from any device, in real time or asynchronously. In addition to drawing and writing tools, the apps offer users the ability to add images, videos, diagrams, sticky notes, and other elements. Several platforms offer integrations with enterprise tools such as Slack, Trello, Jira, Dropbox, Google Drive, and Microsoft Teams. Andrew Hewitt, a senior analyst at Forrester, said that virtual whiteboards provide a way for organizations to reduce the friction between hybrid and remote workers. But, he noted, because very few people considered a physical whiteboard key to their work setup before the pandemic, workers who had no need for an online brainstorming tool three years ago are unlikely to be pushing for their adoption today. Historically, the customer base for digital whiteboard tools is made up of developers or those working in creative roles like design, not general business users. So, unlike more traditional collaboration tools such as videoconferencing and chat platforms, which have an enterprise adoption rate of almost 80%, digital whiteboarding tools have yet to become widespread in the corporate world. “Just like with any technology, getting people to deploy these tools and learn how to use them effectively is really important for their overall adoption — especially in this market where you’re asking people to collaborate in a way they might not be accustomed to,” Hewitt said. Whiteboarding tools are not just for “work” work In November 2021, Research Nester estimated that the visual collaboration market is set to be worth $1.67 billion by 2028. One company operating in that space is Figma, which offers a collaborative browser-based interface design tool. The vendor’s FigJam whiteboarding solution was launched in April 2021 and now counts Stripe, Twitter, Airbnb, and Netflix as customers. Adobe has just announced a $20 billion deal to acquire Figma. Emily Lin, product manager at Figma, said that even before 2020, the company was seeing a trend among Figma customers who were using the tool to make the design process more collaborative. Engineers and project managers who were not traditional Figma users were starting to use the tool to collaborate with design teams in a way the company had never seen before. “We saw that people were beginning to push the platform beyond things like classic UI design and instead beginning to use Figma for things like ideating on what they should even design,” Lin said. As a result, the company decided to launch a dedicated tool that would allow all these different teams to come together in one place and collaborate. When FigJam first hit the market, Lin said it had two key use cases, one being ideation and brainstorming and the second being user flows and basic diagrams. However, after the launch of FigJam, the company saw a spike in customers using the platform as a means of socializing with teams. Users started sharing their unique FigJam use cases on Twitter and developing team rituals such as a Friday coffee chat or a games night. Now the platform offers more playful capabilities, including a photobooth that takes digital polaroid pictures of whiteboarding session participants, alongside the traditional options. External developers who use FigJam in a professional capacity have also extended the platform’s socializing capabilities. Lin said the company is seeing a lot of individual developers as well as partner companies build add-ons that have pushed that end goal of helping teams feel more connected and engaged. “Someone created a widget that had different icebreakers and games that you can play with people, and there’s even things like Rock Paper Scissors. There are now all sorts of activities which are really fun and sit alongside your traditional JIRA and Asana widgets,” she said. Although Figma is platform designed specifically for designers, Lin said that 70% of FigJam’s new users are people from other parts of the company. Financial services and software company Stripe is one of FigJam’s customers. Although the company declined to name the tools it was using before FigJam came onto the scene, Talia Siegel, product designer at Stripe, said the other tools didn’t offer templates that made it easy to brainstorm or work alongside many colleagues at a time. Like most customers, Stripe originally started using the platform for team brainstorms, but over time have embraced what she describes as the “playful side” of FigJam. “Illustrations, stickers, and emojis fill our brainstorming docs now. We also have used FigJam to create activities for team-wide bonding while working remotely,” she said. What’s the future of the whiteboarding market? Despite the spate of product launches at the start of the year, Hewitt said the market is still relatively undersaturated. But, as the popularity of these tools continues to grow, we’ll likely see more vendors enter the space — in mid-August, for example, graphic design platform Canva became the latest company to launch a whiteboarding product. “[For vendors] there's always this question of: ‘Do I build it natively? Do I integrate or do I acquire something?’” Hewitt said. “There’s also a lot of small vendors that would be ripe for acquisition in this space... but currently, there are only around six vendors total that are really making strides.” And where FigJam has seen its use cases expand beyond its original purpose, Hewitt said that a lot of vendors in this space don’t want to be seen as just a whiteboarding solution, instead focusing on the wider visual collaboration aspect of this technology that enables multiple types of collaboration, such as content creation, project management, mind mapping, and design sprints, among others. As the market continues to grow, Hewitt said we can expect to see these platforms integrate with other technologies including AR, VR, and the metaverse. “It’s very, very early days for that right now… but that is definitely something people are hypothesizing, that the market will move in that direction, and we’ll see better integration between AR and VR technologies and the visual collaboration tools themselves.” However, he warns that while employees might have started to see the benefits of having access to a visual collaboration tool, standalone platforms might find themselves struggling to grow their customer base in a tough economic climate. If companies are forced to make difficult budgeting decisions, a one-off visual collaboration platform might fail to justify itself economically, compared to a simpler whiteboard tool included in the licensing cost of a larger unified communication platform that addresses a company’s overall collaboration strategy. “[Whiteboarding tools are] an add-on capability, but it’s not the case that if you don’t have this product, you’re going fail as an organization,” Hewitt said. Digital whiteboards: The next must-have tool for hybrid teams?: By Charlotte Trueman on Computerworld.com – September 15, 2022

How to Develop a Company Vision and Values That Employees Buy Into

Photo by Ian Schneider on Unsplash It can be a long process, but it's well worth the effort. I'm sure you've read about the importance of having company values and a mission or vision statement. But why is it important and how do you establish them? When I first started my business with one client and a couple of employees, I didn't have the structure in place. But as we grew and added more clients and staff, I realized the importance of having a roadmap so that everyone was on the same page. I might have had a vision in my mind about where I thought we were going, but I needed to share that vision and get input from my team on where they wanted to go as well. Brainstorm what you want and what you don't After I made some key leadership hires, we met together as a group and did a lot of brainstorming. We thought about everything we wanted to be and what we didn't want to be. We looked at our staff and our clients, people we admired and looked up to and tried to reverse-engineer their characteristics (can you tell I'm passionate about reverse-engineering?) We agreed that we wanted to be more like "this," and we wanted to work with clients that are more like "that." We used these to create our values. Why didn't we like working with certain people? Because they were jerks — that's where one of our four core values of "Make it Fun, Don't Be a Jerk" came from. Once we came up with our mission and core values, we put a system in place to make sure those values became part of our workplace culture. We created a Slack channel to recognize people who live up to those values. Anyone can publicly recognize anyone else by giving them a shoutout for something they've done. Then at our biweekly company-wide meetings, we select a few people who were nominated and give them a financial award. I used to think mission, values and vision were just things they taught business school, but it's real and I've seen the positive impact it's had on our company. I was an SEO expert but didn't have a lot of experience as a CEO of a fast-growing company. At this point, I decided to work with a coach who recommended that I develop a "vivid vision," something that outlines where I see myself and the company three years into the future. He recommended that I go to a place that inspires me and just sit there and try to put the vision that I had in my head on paper. I chose to go to a nice hotel in Beverly Hills. I spent the afternoon sitting in a nice coffee shop where they had a piano player, beautiful paintings on the wall, people coming in and out and nice cars pulling up. It inspired me, and I came up with three pages of bullet notes. I used adjectives that described the specific details of what each part of the vision looked like. Creating a vivid vision doesn't need to be a whole book — just write a few bullet points of your dreams and goals. Describe in detail what the office looks like, how many people you employ, your revenue and perhaps even the awards you have received. The point is to create a visual for the rest of your employees so that they can envision the future in the same way you do. This way everyone is aligned and clear on where you are going as a company. Making the dream a reality After my time at the coffee shop, I got on a call with our director of communications to discuss what I had come up with, and then she wrote it into our vivid vision story. The mission and values were created with the leadership team. The vision was something that I needed to develop myself, as the CEO. It's written in the present tense, three years from now, as if it is already accomplished. We decided on a three-year vision as 5-10 years seemed too far in the future to be realistic. From here, it went to our creative team to make it come to life with visuals and images. Once it came to life visually, our engineering team then took it and turned it into a web page that is live on our website for anyone to see. That includes our employees, our clients, our bankers and our competitors. We're radically transparent, and we're very clear about where we're going, We just created our vivid vision last year, and there are already aspects of the vision that are coming to fruition. I think there's a lot to be said for being intentional about direction and then just watching the manifestation happen. As everyone starts to understand where we're going, it starts happening. As the CEO, I couldn't possibly do it all on my own, but I can instill the vision into the team and with them to make that vision a reality. We have our vision for the next three years. We won't change it or lower our expectations if we miss a target. We have set our sights high and will work towards achieving or surpassing those goals. We also review our vision once a quarter. We like to do this at our leadership retreat, where we get high-level reports on how things are going. If you haven't put together a mission or vision for your company, perhaps it's time to take action. If you think it's only something for large corporations or only something they talk about in business school, I hope my experience can help change that perception. Having a clear vision and a specific mission helps define the purpose of the organization. It makes sure you are working towards the right goals and helps you direct resources to the appropriate place. When everyone is working towards the same goal, it increases productivity. It gives employees a sense of unity. When employees understand the vision, it motivates them to work hard to achieve the goals that have been laid out. It takes some time to put together, but the results are more than worth it. I don't think I've ever worked in another company that has a better culture because of the way we initially structured our vision and mission. How to Develop a Company Vision and Values That Employees Buy Into: By Jason Hennessey on Entreprenuer.com – October 19, 2022

(De)risky business: Why your startup should outsource in an economic downturn

Photo by Mathieu Stern on Unsplash Data from startups across Europe shows clear signs of an economic downturn in the European tech space, leading businesses to reevaluate their burn rates and expenditure. To keep flexibility and agility while growing their team and optimise costs, some startups are turning to outsourcing. “A large majority of functions in a company can be outsourced, from customer support, to sales, platform management, software development or compliance services — from the most simple task to the most complex one,” Andréa-Lou Laffitte, group programme director at outsourcing partner The Nest by Webhelp, tells Sifted. “The important thing is to make the right internal vs. external decisions. When you have a repeating process that you’ve mastered internally, that’s one of the best things that you can outsource.” But what does your startup need to know about outsourcing? And how can it help in turbulent economic times? The outsourcing model Outsourcing is not only about recruitment; it can involve training, managing, upskilling and retaining your extended team. All of these are important yet time-consuming tasks — even more challenging when startups need to extend their teams internationally. “By outsourcing, you can deliver a quality experience to customers without needing to divert internal resources” A key perk of outsourcing is handing over repetitive, tried-and-tested projects to an external company to free up time and resources internally. Robert Gamble is chief operations officer at GO Sharing, a Netherlands-based micromobility startup that offers shared electric vehicles. He believes that working with a business process outsourcing (BPO) partner can help derisk in times of economic uncertainty and focus resources on critical core competencies. “When starting or scaling a company, it’s easy to get distracted away from focusing on, investing in and developing your core competencies and service offerings that make you unique or disruptive,” says Gamble. “By outsourcing, you can deliver a quality experience to customers without needing to divert internal resources.” De-risking business plans Working with an outsourcing provider can also help startups absorb market shocks. “While we are able to set up and ramp-up an international team for a start-up within a few days/weeks, we are also able to “take the hit” in times of crisis for the start-up, if they need to reduce their staff and costs” “While we are able to set up and ramp up an international team for a startup within a few days/weeks, we are also able to ‘take the hit’ in times of crisis for the startup — if they need to reduce their staff and costs,” says Laffitte. “This way the startup doesn’t have to carry out internal layoffs and we can easily reassign our experts to other projects.” Outsourcing specific activities to a specialised partner may be a solution for some startups to consider, in order to focus on their core business and their best in-house talents. For example, Gamble notes that for early-stage startups, the recruitment and HR functions are often under heavy pressure as companies enter hypergrowth stages. So working with an outsourcing partner can allow recruitment teams to allocate more time to hiring management roles, facilitate the recruitment of larger international teams or acquire new skills and industry best practices. One issue GO Sharing had was a need to provide high-quality customer support in multiple languages. And within western Europe, it was difficult to find full-time customer support team members who were also interested in working evenings and weekends, which are the company’s peak demand periods. The Nest by Webhelp’s team in Turkey was able to find talented multilingual staff to support GO Sharing’s customers. This ability to source talent from multiple countries is a key attribute of outsourcing, helping startups scale faster without hiring permanent staff and burning through cash. “If you were a startup we work with and you were planning to enter six new countries in two months, you could just send us an email and we could easily build up the ideal team to manage those new markets,” says Laffitte. “This is simple because we already know your brand and processes, so we can adapt your processes to local specificities through our knowledge of local markets.” Culture and knowledge In addition to knowledge sharing, it’s important for startups to ensure there is a good culture match when selecting an outsourcer. It’s crucial that a provider acts as an extension of your team rather than as a separate entity. “It’s really important to take the time to know the outsourcing company, understand the culture and go and meet your teams in the specific sites” “It’s important to work with the best BPO partners to ensure you can achieve this without losing touch with your customer base,” says Gamble. “Really early-stage startups can also learn a lot from working with a BPO experienced in collaborating with companies at a similar stage in growth.” Laffitte agrees, adding: “It’s really important to take the time to know the outsourcing company, understand the culture and go and meet your teams in the specific sites or countries where you will operate.” Adding value Trusting a third party with key tasks and projects may seem daunting, but taking time to select the right outsourcer will ultimately free up valuable time for startups to focus on their core goals. So what is the best approach to deciding on a provider? “It’s not only manpower or costs — it’s also about gaining access to new skills” “Go in with a clear understanding of your own business processes that BPO agents will interact with to ensure a smooth transition,” says Gamble. “I would also advise away from ‘bargain hunting’ when selecting a BPO partner because in the end, you are selecting a BPO partner to provide a quality service.” Despite the current economic uncertainty, Laffitte says The Nest by Webhelp’s operation has grown by 400% in just one year. “It’s not only manpower or costs — it’s also about gaining access to new skills,” says Laffitte. “As a startup, you can think you perfectly master some processes but as we work with several industry leaders, we have access to best practices and some of the best tech partners on the market. By outsourcing, you get access to these best practices and technologies.” (De)risky business: Why your startup should outsource in an economic downturn: By SIFTED - October 12, 2022

Use the Enterprise Investment Scheme (EIS) to raise money for your company

In case you are wondering what the Enterprise Investment Scheme (EIS) is, it is a means of getting funding if you are a growing startup. This scheme is aimed at growing companies, if you are looking for your first funding round then you will need to look at our other post on the SEIS scheme. Below is the government outline on how the EIS scheme works and your eligibility as a startup to apply. Use the Enterprise Investment Scheme (EIS) to raise money for your company The Enterprise Investment Scheme (EIS) is one of 4 venture capital schemes - check which is appropriate for you. How the scheme works EIS is designed so that your company can raise money to help grow your business. It does this by offering tax reliefs to individual investors who buy new shares in your company. Under EIS, you can raise up to £5 million each year, and a maximum of £12 million in your company’s lifetime. This also includes amounts received from other venture capital schemes. Your company must receive investment under a venture capital scheme within 7 years of its first commercial sale. You must follow the scheme rules so that your investors can claim and keep EIS tax reliefs relating to their shares. Tax reliefs will be withheld or withdrawn from your investors if you do not follow the rules for at least 3 years after the investment is made. There are different rules for knowledge-intensive companies that carry out a significant amount of research, development or innovation, and either: want to raise more than £12 million in the company’s lifetime did not receive investment under a venture capital scheme within 7 years of their first commercial sale Approved EIS funds The rules for EIS approved funds will be changing on 6 April 2020 to take account of the: changes that will focus approved funds on knowledge-intensive investments increased flexibility available to fund managers in the timing of investments Read the draft guidelines to find out more about the amendment to the requirements for an EIS approved fund. What money raised can be used for The money raised by the new share issue must be used for a qualifying business activity, which is either: a qualifying trade preparing to carry out a qualifying trade (which must start within 2 years of the investment) research and development that’s expected to lead to a qualifying trade The money raised by the new share issue must: be spent within 2 years of the investment, or if later, the date you started trading not be used to buy all or part of another business pose a risk of loss to capital for the investor be used to grow or develop your business Companies that can use the scheme Your company can use the scheme if it: has a permanent establishment in the UK is not trading on a recognised stock exchange at the time of the share issue and does not plan to do so does not control another company other than qualifying subsidiaries is not controlled by another company, or does not have more than 50% of its shares owned by another company does not expect to close after completing a project or series of projects Your company and any qualifying subsidiaries must: not have gross assets worth more than £15 million before any shares are issued, and not more than £16 million immediately afterwards have less than 250 full-time equivalent employees at the time the shares are issued Your company must carry out a qualifying trade. If you’re part of a group, the majority of the group’s activities must be qualifying trades. Limits on money raised Your company cannot raise more than £5 million in total in any 12-month period from: Your company cannot raise more than £12 million from these sources in your company’s lifetime. This includes any money received by any subsidiaries, former subsidiaries or businesses you’ve acquired. Limits on the age of your company You can receive investment under EIS as long as it’s within 7 years of your company’s first commercial sale. If you have any subsidiaries (including former subsidiaries) or businesses you’ve acquired, the date of your first commercial sale is the earliest of the group. If you received investment in this period (under EIS, SEIS, SITR, VCT or state aid approved under the risk finance guidelines), you can use EIS to raise money for the same activity as long as you showed you were planning to do so in your original business plan. If you did not receive investment within the first 7 years, or now want to raise money for a different activity from a previous investment, you’ll have to show that the money: is required to enter a completely new product market or a new geographic market you’re seeking is at least 50% of your company’s average annual turnover for the last 5 years If your company owns or controls any other companies they need to be ‘qualifying subsidiaries’. This means: your company must own more than 50% of the subsidiary’s shares no one other than your company or one of its other qualifying subsidiaries can control this subsidiary there cannot be any arrangements which would put someone else in control of this subsidiary The subsidiary must be at least 90% owned by your company where either the: business activity you’re going to spend the investment on is to be carried out by the qualifying subsidiary subsidiary’s business is mainly property or land management The subsidiary can be set up to complete a project or series of projects before closing, as long as it supports the growth and development of your company. Risk to capital condition The investment in your company must meet the risk to capital condition, which means: your company must use the money for growth and development the investment should be a risk to the investors capital Growth and development means you’ll use the investment to grow things like your revenue, customer base and number of employees. The growth and development of your company should be permanent and not rely on the investor’s continued support. The investment should carry a risk that the investor will lose more capital than they are likely to gain as a net return. HMRC will not consider the maximum return an investor could get if your company is successful, because this cannot be guaranteed. The net return includes: income from dividends, interest payments and other fees capital growth upfront tax relief When deciding if you meet the risk to capital condition, HMRC will look at things like your company’s: sources of income assets structure use of subcontractors marketing of the investment opportunity relationship with other companies You will not meet the risk to capital condition if there are risk reducing arrangements in place that result in an investor: getting priority over other investors being able to withdraw their money as soon as possible protecting their money so that other investors money is used first The shares you issue must be paid up in full, in cash, when they’re issued. Your company should have a way to accept payment before shares are issued. Your shares for EIS investments must be full risk ordinary shares which: are not redeemable carry no special rights to your assets The shares you issue can have limited preferential rights to dividends. However, the rights to receive dividends cannot be allowed to accumulate or allow the dividend to be varied. When you issue the shares there cannot be an arrangement: to guarantee the investment or protect the investor from risk to sell the shares at the end of, or during the investment period to structure your activities to let an investor benefit in a way that’s not intended by the scheme for a reciprocal agreement where you invest back in an investor’s company to also gain tax relief to raise money for the purpose of tax avoidance - the investment must be for a genuine commercial reason Before raising your money Your investors will only be able to claim tax relief if you meet the conditions for EIS. You can ask HMRC if your share issue is likely to qualify before you go ahead, this is called advance assurance. How to apply If you’ve got advance assurance, provide copies of any documents that have changed since HMRC gave you advance assurance. If you’ve not got advance assurance, you must provide the following information for your company and any subsidiaries: the business plan and financial forecasts a copy of the latest accounts an explanation of how you meet the risk to capital condition details of all trading and activities to be carries out, and how much you expect to spend on each activity an up to date copy of the memorandum and articles of association the information memorandum, prospectus or other document used to explain the fundraising proposal to your investors details of any other agreements between your company and the shareholder a list of the amounts, dates and venture capital schemes under which you’ve previously received investment any other documents to show you meet the qualifying conditions You’ll also need to show evidence that you’re a knowledge intensive company if you’re applying as one. You can only submit your compliance statement when you’ve carried out your qualifying business activity for 4 months. You must submit it within 2 years of this date, or within 2 years of the end of the tax year in which the shares were issued (whichever is later). You must complete a separate application for each share issue. Send your application You can email or post your compliance statement and supporting documents. Email: enterprise.centre@hmrc.gsi.gov.uk. Post: Venture Capital Reliefs Team WMBC HM Revenue and Customs BX9 1BN What happens next If your application is successful, HMRC will send you a letter and compliance certificates (form EIS3) to give to your investors. The letter will include a unique investment reference number. You must include this on the compliance certificates you give to investors. Investors need the compliance certificate and reference number to be able to claim tax relief. You must follow the scheme rules for at least 3 years after the investment is made - otherwise tax relief will be withdrawn from your investors. You must tell HMRC if you no longer meet the conditions within 60 days. Where HMRC decides the investments do not meet EIS requirements, we’ll write to you explaining why. If you disagree, you can ask HMRC to review the decision, or appeal against it.