Published: Mar 14, 2023
Focus:
Insights
1. What kinds of businesses do you invest in?
At Maven we see businesses at various stages of their growth trajectory and across many sectors, from niche engineering to BioTech. There is no typical business or sector that we work with, what we look for in our investments is a strong management team with the skills to take the business forward to its next stage of growth.
Maven provides several flexible funding options to support dynamic UK SMEs and can invest up to £20 million in a single transaction. This includes private equity investment, VCT funding and debt or equity funding from the several regional growth funds it manages.
The finance Maven offers can cover a variety of transactional activity including management buyouts, buy-and-build strategies, acquisition finance, development capital, and replacement capital.
My specific remit is investing growth capital from Maven’s VCTs, and a typical prospective company would have strong IP and have already started commercialising its product or service. The common thread across all Maven investments, regardless of the fund, is a strong management team with relevant sector experience and/or previous experience of successfully growing another business.
2. What type of finance is best for SMEs with ambitious long-term plans?
This is exactly the type of scenario that Maven would seek to support through the provision of equity and/or debt and we would look to agree a flexible funding structure which accommodates the SME’s longer-term strategy. The option of whether debt or equity is best for the business is usually driven by several factors including the strength of the existing balance sheet, current and forecast cashflow generation and the purpose of the funding.
One of the key benefits of equity for SMEs is the advice and input they will gain from Maven’s experienced investment team. Our portfolio executives work closely and collaboratively with each investee company, providing strategic counsel and operational expertise to optimise performance and ensure each investment fulfils its potential.
3. What is the process from A to B of a business applying for investment and being handed the money?
This is dependent on the type and extent of funding that the business is seeking. For example, a Maven MBO transaction would be funded via equity and is likely to require a larger investment which would then drive a broader due diligence remit compared perhaps to a business looking for a smaller debt investment.
In every case we will need sight of a detailed business plan and financial projections providing information about the market, management team and growth strategy. Following an initial assessment by the deal team, each transaction then goes through a robust internal review and approval process. The decision on whether to proceed rests with Maven’s Investment Committee which is made up of members of our partner group and other senior executives.
Following first stage Committee approval, a formal offer letter will be issued, and the SME will be subject to due diligence, covering all key aspects of the business including financial, legal and management referencing, as well as full market and commercial analysis.
On conclusion of this process a final detailed investment paper is submitted to our investment committee, summarising the due diligence findings, and making recommendations. The decision ultimately on whether to proceed to legal completion of the investment will be made at this point. The end to end process takes on average 8-12 weeks for a debt investment and typically between 4-6 months for an equity investment.
4. What sort of corporate activity are businesses looking to finance?
SMEs approach Maven seeking finance to help them grow their businesses. For instance, investment in new products/markets, development capital to drive revenue growth, acquisition finance or funding for a management buy-out.
5. What sort of businesses have been successful in the past?
Good ideas come in all shapes and sizes but success tends to be driven by a capable management team. Some of Maven’s recent investments that have achieved strong returns for investors include Quorum Cyber, an award winning cyber security business, where the Maven VCTs achieved a return of more than 6.5x in just 18 months. Another is Titan Wealth, a buy and build platform to consolidate the discretionary fund management sector, which is set to deliver an IRR in excess of 100% for investors. We also find that successful businesses are often the ones that find a niche or have strong core characteristics such as a sector-disruptive business model which is capable of being scaled.
6. What tips can you give to businesses pitching? What makes a good pitch?
A knowledge of the market and competitive space is important; being able to articulate the opportunities and threats and how you plan to address these shows clear business vision.
Any investment proposal should also include comprehensive information on the company’s financials: historic trading performance, 3 years projections and details of the underlying assumptions on turnover growth, gross margin, overheads, and cash flow as well as outlining how the funding will be used.
Plus, don’t forget to outline any aspirations around exit as this will help align investors’ interests with your own from the outset.
7. What is a common mistake made by small businesses seeking finance?
On the whole, companies tend to underestimate the amount of funding they need for a combination of reasons: trying to limit dilution, getting staff up to speed which can take longer than anticipated, and disruption to business as usual during the fundraising process. However, if the investment case remains strong, Maven has the capacity to perform follow-on funding to support its portfolio companies.
Potential investors will also want to see that you have a firm grip on the cash flow. Effective cash flow management and liquidity within a company is essential for survival. Cash, not profits, is the lifeblood of any business and enables it to operate. Problems may start to occur where cash generation is low as business owners may then be unable to meet their obligations to suppliers. On the other hand, retaining too much cash within a business can mean this is not being re-invested to generate growth, so the right balance needs to be achieved.
8. Any top tips for companies looking for investment through a VCT?
The EIS and VCT qualification rules are often being tweaked which can be challenging for companies looking to raise capital under these schemes. My tip would be to work with an adviser who lives and breathes EIS/VCT so you will always be on the front foot when it comes to optimising your business for this type of funding. Whether it means capitalising a portion of your R&D or taking a modest EIS investment prior to the 7th anniversary of your first commercial sale.
9. What red flags do you encounter with small businesses seeking finance?
Business models that scale the cost base too aggressively is a particular bugbear of mine. Rapidly increasing the headcount of a small team is very difficult to roll out logistically and has a huge impact on cash burn. It is also a challenge to retain the culture in a company with this level of scaling. Crucially, if revenues fall behind target for whatever reason, and of particular concern as we enter a recessionary environment, company morale can be damaged when having to let go exciting new hires within months of taking them on.
10. The consensus is that the UK is entering a recession. What impact does that have on your existing investments and the climate for new investments?
Answering this question from the perspective of our VCTs much of our 50+ private VCT investments have a B2B subscription business model which means we are somewhat protected from the likely reduced levels of consumer discretionary spending. Drilling deeper into our software portfolio we have risk management, ESG and cyber security companies, which arguably become more important recessionary periods. Looking to history, our portfolio has been resilient throughout the COVID pandemic, I’m sure it helps that we have limited exposure to travel, hospitality, leisure. In terms of new investments, we continue to robustly interrogate financial models and perform sensitivity analysis prior to investing.
However, we are now extra vigilant on companies maintaining a reasonable cash buffer and them being able to evidence rigorous cash management. We need business plans that can adapt depending on market conditions, reporting metrics to give adequate warning when required, then management teams capable of overseeing and enforcing necessary change. We work closely with management teams throughout the investment timeline but particularly during the 100-day planning process that occurs immediately post investment. A lot of focus will be spent optimising the company’s plans, so we have a resilient scalable model that is responsive to revenue growth.
11. How do you support businesses beyond the capital you provide?
I have been investing in businesses using capital raised through EIS and VCTs for the past 15 years. During this time, I have worked very closely with numerous management teams. Although the sectors they operate in have been diverse: from healthcare, media and software, they do often face very similar challenges as they are at similar stages scaling up. This could include creating a structured sales process, introducing a digital marketing strategy, positioning to become a category king and, ultimately sourcing the next round of funding or an exit.
At Maven, we have a dedicated in house portfolio management team with operational experience to support companies with the common challenges they face in the scale-up stage. We can also tap into local eco-systems via our 11 regional offices and help provide relevant introductions to support companies as they scale. However, ultimately cash is king. Where we stand out is our ability to provide end to end funding to investee companies starting with seed capital from our regionally managed funds, through growth capital via our VCTs and quasi cash out via our MBO funds and Maven Investment Partners.
If you require funding for your business, you can apply here.
