Experienced VC Alex Macpherson is looking for entrepreneurs with a clear vision and the ability to realise it
Tumbling interest rates and various government initiatives to help small businesses access finance are having little impact. According to a survey of 6,000 small firms, a third said that, if anything, they had been hit by changes their banks had made, either putting up their fees or making the terms of their loans more onerous.
Venture capital, if you can find it, is starting to look more enticing, despite the chunk of equity that VC firms tend to take for themselves. Octopus Ventures (formerly Katalyst Ventures) takes what co-founder Alex Macpherson describes as "a significant minority" of between 20 and 40 per cent of the business.
In return, he says, the company gets the benefit of the "skills and knowledge" of Macpherson and his colleagues. "For small businesses, access to finance is exceedingly challenging," he says. "That's why we look to provide a spectrum of options. And what's most valuable to them is that we open doors; once the investment is made we can help those businesses move forward and develop, grow and expand."
Macpherson formed Katalyst with some colleagues in 2000 before merging with Octopus Investments in 2007—"they were looking for a ventures team, we were looking for somebody to provide the financial capital, so it was a good thing". Only investing in businesses that they understand, Macpherson says the common denominator is always that it has the opportunity to "really expand and be big." He clarifies: "We are looking for businesses with a few hundred thousand pounds-worth of sales to have around £25m of sales in a three-year timeframe. For businesses that are worth £7m when we make the investment to be worth £70m."
Even in a recession? "This is a massive time to be making investments," claims Macpherson. The best deals from an investor's point of view are in the worst economic climate, he says. "The businesses you're backing are growing up in a cost-conscious environment, so their natural instinct is to spend every penny like it's their last. They're small, fast and flexible, which enables them to establish themselves in the marketplace for when the upturn arrives."
So what should businesses looking to go the VC route do to make themselves investment-ready? According to Macpherson, it comes down to two fundamental points. "The entrepreneur must have a vision of the future—to be able to get a clear, concise message across of what they can turn into and become. And then show how they will execute it."
This climate could be a win-win for both parties, concludes Macpherson: "There are some exciting companies out there. And these businesses, because they are small, may only be looking to take a relatively small market share of what could be a contracting marketplace. If they turn around and take that market share they'll be highly prized by potential acquirers. That's why this sort of environment is exciting for making these sorts of investments."
Posted 24 March 2009 : Director.co.uk
