James Butterfield

Apr 08 issue

James Butterfield is a serial investor in fast-growth companies. He has over 25 years’ experience advising small and medium-sized businesses on a range of activities, from stock market listings to mergers and acquisitions and fundraising

I started in what is now venture capital and private equity firm 3i in 1969. While I was there, I did an MBA and focused on the European venture capital market. That means I’ve seen a lot of changes since I left the firm in 1979.

Back in the good old days, venture capitalists (VCs) still looked to invest modest amounts, as well as bigger sums. You could pick up an investment worth between £20,000 and £1 million, but these days they are simply not interested in the small players. To a large extent, it’s incredibly stifling for smaller companies because nobody is fulfilling that end of the market.

Today, the best way to raise money is to float your company. It’s not only easier to raise funds on markets like the Alternative Investment Market (AIM), but it’s also cheaper.

There’s an assumption that it can be very expensive to float on AIM, but I think, at the moment, that’s a fallacy. Admittedly there are upfront costs, but you soon realise that the money you raise is yours to keep, unlike VC funding, which you have to pay back. Public money also doesn’t gain interest, so if you have a good company, a good product and a half-decent management team, a listing makes sense – even in today’s bombed out market. I’ve just taken a company from very little to over £2 million pre-tax profits on AIM, and I just don’t think that would have happened if we had gone for VC money.

The long way round
The most common mistake people make when floating a company is the tendency to lose financial control. You have to make sure that you have enough cash to see the flotation through and that the management team can cope when you start to grow. That means not taking short cuts, which is what businesses all too often do.

Companies try to cut corners and save costs by putting a beefed-up accounting team in place to do the role of a finance director. In reality, the FD’s job is so much more than just accounting processes as it involves appraising investment opportunities and dealing with cash flow, right through to advising on acquisitions.

The same is true of your chairman. It’s essential that you appoint someone who knows the ropes. That doesn’t necessarily mean someone who knows your market like the back of their hand, but if you are a smaller company, they should have a similar sort of background. They should be able to offer some sort of inside knowledge about running a company of your size and be able to bring a good portfolio of contacts and a high degree of respectability in the City. I’m not saying they’re going to do investor presentations for you, but having their name on the board should carry some weight.

In terms of the markets that are available to smaller players, Ofex was interesting because it filled a gap. You could quite easily raise £200,000 or £300,000, but it did suffer from a lack of liquidity. Ofex is now PLUS, and it benefits from greater liquidity, but I think it’s still too young a market if you want to raise sums of around £1 million or £2 million. That is, unless it’s a truly exceptional company, but if that were the case I think you would be able to raise that amount anywhere.

At the moment, AIM is the place to be, simply because the liquidity is better. You should be aware, however, that costs are going up as the quality of companies is improving and AIM positions itself to attract larger players. So as PLUS begins to improve, it could be a fantastic place for growth businesses and would give the VC market a run for its money.