In recent times we have seen turbulence across the world’s financial markets, a global banking crisis, a downturn in the fortunes of UK plc and not surprisingly  there has been a rise in the number of businesses that have struggled to survive, or even gone to the wall.

Whilst well-managed enterprises are not immune to external pressures, such businesses are far better equipped to survive tough times having squeezed out unnecessary costs and even downsized in order to continue to trade.

Now, despite worries over the Government’s proposed public sector spending cuts, there seems to be a little more confidence amongst SMEs. However, after  emerging leaner and fitter from the recession, some will, as a result,  be starved of cash – the oxygen that they now need to grow and build for the future.

SMEs trying to attract funding in the sub £2m arena are likely to find the banks pretty discerning when it comes to taking on new customers. Those companies with a good track record should fare better, but for those unhappy with their current banking facilities, moving to another bank in order to get the required debt funding may prove difficult.

Companies heavily reliant on the public sector for work are going to find it increasingly tough as cutbacks in government spending start to bite. Therefore, such enterprises need to consider rebuilding their businesses and move away from public sector contracts and focus on private sector opportunities.  We have seen a marked shift in the investment attitude away from businesses with a high public sector spend – a few years ago they were flavour of the month as they had secure cashflows in a time when the private sector was cutting back. 

Now the tables have been turned and those businesses are seeing their public sector income drying up and will have to cut costs or develop new sales to survive.  Those businesses will also find that their attractiveness, as measured by the exit multiple of profits, has also diminished to reflect the reduced attractiveness of being reliant on the public sector in a time of wholesale austerity measures.  Unfortunately the cash cow of public sector finances is on a diet, one that will impact many firms over the next two years.

Clearly, for some individuals part of the appeal of all-debt funding is not having to give up shares in their company.  However, this has to be balanced against the reduced risk of an equity package and the potential extra value which may be generated as a result of VC involvement.  

Over the past two years some equity providers – like the banks - have winched up the drawbridge and withdrawn from investing in new companies. Throughout this period Catapult has continued to invest both in existing portfolio companies as well as into new ventures.

In 2008 Catapult invested into a business whose parent was having difficulties which was resulting in it being starved of funds to grow - Staffordshire based smart battery manufacturer Accutronics Ltd, was bought out of administrative receivership, saving 47 jobs in Newcastle under Lyme.

Catapult and Orbis Partners LLP backed the acquisition of the business together with an invoice discounting facility provided by Fortis Commercial Finance.

Accutronics specialises in developing and manufacturing custom-designed batteries for high-end global OEM businesses. The business is a centre of excellence in battery design, developing the battery electronics solutions in-house to maximise performance, safety and lifetime. Its batteries are used in the medical, military and industrial electronics sectors powering critical high performance products such as medical ventilators, night vision goggles, deep sea data logging & telematics and industrial robotics.

Another of our recent investments includes a £1.125m investment into Coventry-based UK Gear Ltd, developers of high performance running shoes and sportswear. The funding is being used to increase the number of sales staff in both the UK and United States in order to accelerate expansion into overseas military markets, as well as traditional retail markets.  UK Gear is going through a period of rapid growth on the back of orders from the US military, but was finding it impossible to get any form of stock finance from the asset finance community.  The equity package has freed the business to grasp the opportunity with both hands – a real case of equity allowing the company to grow rapidly.

Whilst VCs are clearly not immune from tightening up their investment criteria, there is currently a major opportunity for SMEs, with Catapult looking to support investment opportunities looking for up to £2m of equity funding to grow.   Catapult expects to be an investor in the £2m and below equity sector for years to come, however for those based in the greater West Midlands area there exists a specific opportunity to receive funding from its West Midlands based fund.  Those who are based there or are prepared to relocate there need to be getting their business plans to Catapult before the end of September / start of October to give themselves the breathing space necessary to secure an investment from that fund.

Any company interested in talking to us about the AEIF should call us on 0121 616 0180 or visit: www.catapult-vm.co.uk