Relief for growing pains.

The funding gap has always been a dilemma for growing businesses. Raising #15,000 from the local bank manager for a greenfield venture has always been possible with a fair wind and a plausible argument. At the other end of the scale, major national and transnational companies with years of history, reasonable track records and persuasive senior management – on their day – can command millions in investment.

But the real challenge faces the developing company. An organisation has grown to a substantial size – perhaps 30 to 40 employees – and achieved a reasonable measure of success. To reach the next stage of development, it needs an injection of perhaps #2m. The options for raising that kind of money are limited: a call to shareholders, a traditional venture capital fund, an investment bank or even a string of angels.

None of these are ideal. Shareholders in a small to medium business are often the senior management, family and friends. Few of these have the additional capital to invest further millions. Traditional venture capital funds like businesses with proven track records, but they can make difficult masters.

Investment banks prefer larger companies with apparently less risk. Angels, on average, tend to put in around #50k each, which means that a very long line of celestials is required to get the show on the road.

The government recognised this – and to its credit – chose to deal directly with the problem through the regional development agency (RDA) structure.

One of its first principles was to offer venture funding for businesses in this funding gap.

During the next two months many of these funds will be opening their doors for business and the first grants will be made available to companies.

Around #200m will be available across the UK for the first call, although some regions have been more successful than others in putting the capital together.

The path has not been a smooth one. The programme of regional venture funds was originally envisaged in 1998 but circumstance, in the form of Europe, stepped in to delay matters. ‘The route has been torturous,’ says Ian Fletcher, economist with British Chambers of Commerce.

‘The European Commission decided to investigate RDA venture funds to ensure they did not conflict with state aid provisions and the interests of commercial competitors. They have only recently been given the all clear.’

In June, the commission allowed the RDA venture funds to go ahead and they have sprung into life to varying degrees. Among the most enterprising is the East Midlands Development Agency, which is based in Nottingham. It has been inspired by its chairman Derek Mapp, who feels passionately about the funding needs of developing companies because he has run two of them.

His initial business was Toby Cobbold, the leisure business, which he eventually sold to Bass. He has now created a similar sized group of nursing homes which is established in the Midlands and is rapidly spreading south.

Chief executive Martin Briggs says: ‘Derek’s own experience has been confirmed by the government’s research nationally and ours at a regional level. This is a major problem that can restrict the growth of strong businesses with room for expansion.

‘We are not venture capitalists, though, and we have contracted the management of the fund to Catapult Venture in Nottingham. Some of the money has come from private sources, some from government and European funds and a reasonable amount from the pension funds of the local county councils. Four out of the five local county council pensions funds are taking part.’

Briggs says that the eight regional development agencies in the UK plus the London Development Agency have adopted similar approaches to locating the capital. Not all of them have been as effective as East Midlands in sourcing funds. But all of them should be up and running by Christmas. The criteria for applications are broadly the same throughout the UK. Briggs outlines them: ‘Our largest businesses have a turnover of #10m. After that, other sources of finance are more appropriate. Generally, we deal with companies looking for #250,000 and above. We will be able to offer #50,000 but in the main we are talking about a quarter of a million and above. ‘Our principal guideline will be the quality of the management team and its capacity to bring proposals to reality.’ Early-day projections suggest that around 15% of the first call money will go to start-ups, around 30% to early stage ventures, 40% to development capital applicants and the remainder to buy-outs and buy-ins. Another agency that is well ahead is SEEDA (South East England Development Agency). SEEDA is based in Guildford and covers everywhere in a semicircle around Greater London from Milton Keynes to Kent. It has an integrated funding system, which includes business angels for the lower end through to private commercial interests and government funds at the top. Applications will be to the fund managers through a website, which will be online as soon as the fund opens. The site address is www.financesoutheast.co.uk. Jim Hedges, head of the enterprise funds at SEEDA, says: ‘Although there are more funds and fund managers in this part of the UK than anywhere else, the same limitations to securing capital prevail. We are further down the road than some of the RDAs and we will be open shortly. ‘At the front of the website will be ten questions. If you can answer them you will be investment-ready. We will place the applications in three categories: excellent, fair and weak. The excellent go straight to the fund manager. The fair ones will have germs of a good idea but need help. The weak ones will be told that they are not ready. ‘The fair pile will be guided to advisers who can help them. If applications go through to the fund manager, they will generally be processed within 30 days.’ REGIONAL DEVELOPMENT CONTACTS: OneNorthEast: 0191 261 2000 www.onenortheast.co.uk North West: 01925 400 100 www.nwda.co.uk Yorkshire Forward: 0113 243 9222 www.yorkshire-forward.com Advantage West Midlands: 0121 380 3500 www.advantage-westmidlands.co.uk East Midlands: 0115 988 8300 www.emda.org.uk East of England: 01223 713 900 www.eeda.org.uk South West of England: 01392 214 747 www.southwestrda.org.uk SEEDA: 01473 484 226 www.seeds.org.uk London: 0207 983 4800 www.lda.gov.uk.