Private equity and venture capital firms are using the credit crunch to squeeze up to 15 per cent more equity from entrepreneurs seeking investment funds.
The practice is widespread, according to James Caan, serial entrepreneur and a judge on BBC TV’s Dragons’ Den. “Valuations have come down since the credit crisis,” he said.
“If I was paying today, I would not expect to pay full value, not just because of the credit crisis, but because the economic outlook is uncertain.”
Mr Caan estimated prices had dropped by between 10 and 15 per cent. “Clearly the lack of liquidity available means that it is one of the worst times to be looking to raise money if you are a start-up,” he added.
Julie Meyer, chief executive of Ariadne Capital, an investment and advisory firm, said now was a good time for private equity and venture capital firms to invest.
“They’re not doing it because they are out to screw the entrepreneur. Not at all,” she said. “They are trying to be entrepreneur-friendly rather than vulture-like, but anybody in the world would want to get more for their money – and this is clearly a market in which that is possible.”
While private equity and VC firms are benefiting, it is the small and medium-sized enterprises that are suffering. For James Murray Wells, founder and chief executive of Glasses Direct, an online spectacles retailer, the credit crunch is being felt by entrepreneurs on many levels. “The climate definitely has an impact on negotiation strategy whether it actually impacts the VC market or not,” he said. “There is an implied [economic] cloud so they could walk out with better terms.”
Simon Campbell, chief executive of ViaPost, a mail delivery firm, said he spent nine months petitioning VC firms for funding. “The feedback from several VCs was that they had been doing a lot of early-stage deals over the past couple of years and that they were overexposed, so were focusing on ‘safer’ later-stage propositions,” he said.
“Hopefully, if and when we go back to the market for further funding it will be very much on our terms.”
Last month, the funding climate for UK entrepreneurs worsened when 3i, the private equity group, announced it was pulling out of early-stage investing in start-ups. According to a recent survey of senior business executives published by global consultancy McKinney Rogers, the majority of respondents believe private equity firms will now be very selective about the deals they undertake. However, others say the credit crunch has improved the situation for businesses seeking start-up capital.
Simon Wajcenberg, chief executive of Clash-Media, a digital marketing specialist, said he had been hit by a “flood” of private equity and venture capital investors. “The credit crunch, the resultant downturn and the lack of activity in the stock exchanges has meant the private equity market is the market of choice for sale or trade exit and capital raising,” he said.