knowledge | 14 April 2020 |
COVID-19: Fundraising for Start-Ups in a Pandemic
Fundraising can be the number one challenge for any early stage company even in a healthy economic environment, let alone when globally the stock markets are plunging in the midst of a pandemic.
As the economic impact of Covid-19 (Coronavirus) continues to deepen, start-ups are increasingly faced with unexpected challenges and how to ensure sufficient funding runway has become even more important than when the economy was in “business as usual” mode. This briefing contains a short summary of the most typical sources of fundraising for start-ups in Ireland, our own view on how the market is reacting to the pandemic as well as some information on specific measures introduced in Ireland to assist early stage companies to navigate the choppy waters created by Covid-19.
1. Sources of Funding for Early Stage Companies in Ireland
There are numerous sources of investment funding that early stage companies may avail of in Ireland. Companies at an early stage in their corporate life cycle are likely to avail of some (or all!) of the following sources for funds:
Family and Friends
The most likely source of funds for very early stage companies are directly from the individuals that set up new companies, as well as their family and friends. While the convenience, low cost and speed of this approach is tempting, and many friends and family investors are more relaxed than “professional” investors, it is important to properly document the terms of the transaction to avoid misunderstandings about equity ownership to ensure that these investors understand the risk of their investment, and to avoid frightening off later stage investors.
Public Sector/State Grants – Enterprise Ireland
A common path for early stage companies in Ireland is to obtain funding from Enterprise Ireland (“EI”). EI is the government agency that is responsible for the development and promotion of the indigenous business sector, through direct equity investment and grant funding. It has a seed and venture capital programme that tries to improve access to finance for small and medium sized businesses in Ireland.
EI has committed up to €175 million as a cornerstone investor to venture capital funds under the Seed & Venture Capital Scheme 2019 to 2024. EI directly invested €24 million in Irish entities in 2019 and supported a total of 127 companies. Equity investment is provided through EI’s High Potential Start-Up (HPSU) and Competitive Start Fund (CSF) programmes.
EI also offers a number of feasibility study/innovation grants and funds are made available for the commercialisation of research as well as funding to participate in collaboration programmes. For many Irish start-up companies, EI grants are the first port of call for funding its enterprise.
Further details on the funding supports available from EI can be found here.
Micro Finance loans can provide access to capital for small businesses that might not fit eligibility criteria for large financial institutions or who might struggle to attract finance through crowdfunding. The advantage of such loans is that it provides access to capital without the more stringent criteria associated with mainstream lenders. However, the rates of return can be very high - to mitigate against this risk, the Irish Government established the Microenterprise Loan Fund.
Microfinance Ireland (“MFI”) is a not-for-profit lender established to deliver the Government’s Microenterprise Loan Fund. MFI provides loans of up to €50,000 to newly established start-ups or growing micro-enterprises that do not meet conventional risk criteria applied by commercial banks. The term on such loans is generally between 3 – 5 years. Further details on Microfinance Ireland are available here.
Crowdfunding is the financing of a new project by raising many small amounts of money from a large number of people. It is generally carried out via online platforms which match individuals or businesses seeking finance with potential investors or lenders. These online platforms also arrange for the payment and repayment of such investment.
Crowdfunding is a relatively new and expanding industry in Ireland. It can be either through an equity investment or via P2P lending. At present, the lending model is more prevalent in Ireland and is working for businesses around the country with platforms such as Linked Finance, Fund:it and Kickstarter. Spark Crowd Funding is Ireland's first equity crowdfunding platform.
Accelerator Programmes/Business Incubator
A business incubator is an organisation that helps new and start-up companies to develop by providing services such as management training or office space. There are plenty of options in the Irish market, including the NDRC, Wayra Ireland and Dogpatch labs. The obvious advantage of such Incubators is that it allows access to considerable sums of money coupled with mentoring expertise, as well as resources that are not otherwise readily available. Some accelerator programmes/incubators also offer some cash funding or prizes within their programmes.
Angel investors are high net worth individuals who provide smaller amounts of finance at an earlier stage than many venture capital firms are able or willing to invest. Angel investors usually contribute a lot more than pure cash, as they often have industry knowledge and contacts that can be of benefit to the investee company. They may also fulfil a non-executive director role for investee companies, providing much needed guidance to early-stage companies. Investors associated with the Halo Business Angel Network (HBAN) in Ireland invested more than €16.8 million into 66 Irish start-ups last year, with the average investment with the average investment totalling €255,000. Find further information here.
Venture capital typically refers to the provision of capital for early stage companies with a high growth potential. The term is also used to capture the provision of development capital to mature companies at a later stage in their corporate life cycle. Venture capital investments are most often characterised by an unsecured, equity investment for a minority stake. Typically, investee companies are unquoted, small to medium sized enterprises and investment occurs before the investee company has certain or predictable cash flows. In Ireland alone, the aggregate deal value for Irish venture capital transactions in 2019 was €820m, an increase of 11% on the 2018 figures. It is obviously a rich source of funding for Irish companies ready to take that next step. Ireland has a number of active venture capital investors including ACT Venture Capital, the AIB Start Up Accelerator Fund, the Bank of Ireland Kernel Capital Growth Fund, Atlantic Bridge, Frontline Ventures and Fountain Healthcare Partners. Active development capital funds include MML Capital Ireland, the BDO Development Capital Fund and the Cardinal Carlyle Ireland Fund.
2. Investor Response to the Pandemic
The Covid-19 pandemic has obviously had an impact on the fundraising landscape. This is a cause of great concern for early stage companies that require funding in the short term. Early indications suggest the following trends are emerging:
- many investors are still willing to invest, however the likelihood is that there will be some delay. As is to be expected, their primary focus is likely to be to help existing portfolio companies, while others may need to invest their capital over a longer period of time than anticipated;
- valuations are likely to be lower than pre-pandemic expectations, again this is not unexpected given the new and uncertain environment — this may work to the investee companies advantage in later fundraising rounds; and
- there is no “sectoral shut down” – investors remain willing to invest in companies in all sectors, but the ability to scale and grow in the near term will be a particular focus.
Most importantly, it is important that an early stage company continues to function and develop if possible and to take decisive action where the current environment can be turned to an advantage. This is an excellent time for founders to showcase their entrepreneurial talent – a clever pivot now may well be what attracts future investors.
3. Government Supports arising from the Pandemic
The Government has acted swiftly to mitigate the impact of the likely slowdown in funding for early stage companies in Ireland. The Government recently announced a range of supports for business, many of which are administered through the Department of Business, Enterprise and Innovation (DBEI) and Enterprise Ireland, and these have been subsequently enhanced by the latest announcement on 8 April 2020. These include:
- a €450m Strategic Banking Corporation of Ireland (SBCI) Working Capital scheme for eligible businesses impacted by Covid-19. Loans of up to €1.5m will be available at reduced rates, with up to the first €500,000 unsecured. Applications can be made through the SBCI website.
- an additional €200m for the SBCI Future Growth Loan Scheme. The extra €200m will be released in tranches, to provide longer-term loans to Covid-19 impacted businesses. Loan amounts will range €100,000 to a maximum of €3 million per applicant. Loan terms range from eight to 10 years and loans of up to €500,000 can be unsecured. Applications can be made through the SBCI website.
- a new €180m Covid-19 “Sustaining Enterprise Fund” administered by Enterprise Ireland providing up to €800,000 in (repayable) liquidity support for companies affected by Covid-19. The Sustaining Enterprise Fund will be available to companies who are unable to access adequate funding from the market, financial institutions or the SBCI. The Sustaining Enterprise Fund is open to eligible companies that:
- employ 10 or more full time employees;
- are operating in the manufacturing and internationally traded services sectors;
- for SMEs – that have applied for funding from a financial institution, including, where appropriate, through the SBCI COVID-19 Working Capital Loan/Future Growth Loan Schemes; and
- for large companies – that have applied for funding with an appropriate financial institution
- a €5,000 Covid-19 Business Financial Planning Grant to help companies to develop a business sustainment plan. The grant will support companies with 100% funding to engage the services of an approved Financial Consultant to develop this plan for use when applying for bank or investor funding and when developing their own medium-term financial strategy. EI will work with such companies on a one-to-one basis to support the implementation of the business sustainment plan
- a €2,500 Lean Business Continuity Voucher - a training project of up to three days carried out by an approved external advisor/trainer directly with an eligible company
- €2 million Covid-19 Online Retail Scheme providing a grant for retail companies with greater than 10 employees to develop a more competitive online offer. This competitive call has a budget of €2 million. Successful applicants will receive funding support of up to 80% of project costs, with a maximum grant of €40,000
- a €200m Package for Enterprise Supports including a Rescue and Restructuring Scheme available through Enterprise Ireland for vulnerable but viable firms that need to restructure or transform their business
- the maximum loan available from Micro Finance Ireland will be increased from €25,000 to €50,000 as an immediate measure to specifically deal with exceptional circumstances that micro-enterprises – (sole traders and firms with up to nine employees) - are facing. Applications can be made through the MFI website
- the Credit Guarantee Scheme will be available to Covid-19 impacted firms through the Pillar Banks. Loans of up to €1m will be available at terms of up to seven years
Additionally, the European Commission and European Investment Fund (EIF) announced that they are launching something called ESCALAR, or European Scale-Up Action for Risk Capital, providing €300m for start-up and scale-up tech companies. The idea is to “help reinforce Europe’s economic and technological sovereignty” and stimulate private investment in tech. The ESCALAR initiative has been in the works for years, as part of a new SME strategy to improve access to finance for small and medium-sized businesses. The current pandemic and ensuing economic turmoil has triggered the launch of the program. The program will remain in pilot phase for 2020 with the objective that ESCALAR could become a mainstream European financial instrument. Interested fund managers can participate in the scheme by responding to the EIF’s open Call for Expressions of Interest.
How can we help?
McCann FitzGerald is ready and willing to assist clients in addressing all of their concerns in respect of legal issues business may face in responding to Covid-19. Please contact any member of the McCann FitzGerald team to assist.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.
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