Thinking outside the box: Finstock Capital co-founder Edo Salvesen on borrowing against tax credits and accessing capital quickly
Securing capital at the right times is crucial for any business over the course of the financial year. In the current climate as businesses try to operate through the COVID-19 pandemic, access to capital is more challenging than ever. We spoke to Edo Salvesen, one of the founding partners at Finstock Capital, to talk about the ways they help companies access capital by borrowing against tax credits and find out how they’ve been impacted by the pandemic.
Finstock Capital was founded on 1st January 2018 by Edo and Oliver Jenkinson after they spotted a niche in early stage debt investing. After speaking with VC and EIS Funds, they realised that companies tend to get an influx of capital in April, which falls either at the end or at the start of the tax year. Explaining the original idea Edo says:
“There’s often shortages of capital where there’s good quality companies not necessarily being able to raise capital at the right times. We looked at ways to support companies without diluting their equity as we know from experience that this is a major issue for founders. Founders’ first priority is what other solutions they can find, and there aren’t many to be honest. They can’t go to high street banks, for example, overdraft limits are often restricted and there’s not many ways for them to get capital, so they’re reliant on their funders to be looking to fund at certain times of the year.”
The realisation led to Finstock Capital looking at the receivables that companies have to identify if there were any ways those could be leveraged. After looking closer at EIS Funds, they honed in on R&D tax credits and devised a way to utilise those to fund companies without diluting equity shareholders. Edo explains:
“We started working alongside these funds to provide debt to early stage businesses. Incrementally small amounts early on, £50,000 to £200,000 tickets, so businesses could get access to capital relatively quickly. As it expanded we started doing many more of these types of deals with the EIS funds who saw it as a good means to extend the runway of the companies they work with, without being diluted themselves. It was good for the companies and good for the investors because the further you extend a cash runway, normally the higher the valuation can go. For all parties, it looked like a reasonable solution and we started providing capital just off our own balance sheet.”
It wasn’t long before Finstock Capital started looking at other areas to see if they could adapt their R&D tax credit approaches to other areas. This resulted in the company starting to offer film and TV, and video game tax credit lending. Finding that there was a huge amount of demand, Finstock Capital set up a more direct B2B-type business through their website and utilising their networks. Illustrating further how their idea quickly expanded, Edo shares:
“What we always look at is more of a bespoke opportunity for each business. What started as providing capital against the R&D tax credit turned into how we could help with the overall funding strategy going forward. That might be against a tax credit, that might be against portfolio tax credits they have as a company or they may have some creative tax credits or otherwise. It might also be about further receivables in terms of invoices, that we can begin to look at and see how can we support these companies.”
“What started as providing capital against the R&D tax credit turned into how we could help with the overall funding strategy going forward.”
Seeing R&D as the gateway, Finstock Capital gets to know the business it’s working with making it easier to identify other types of products that can help such as venture debt.
“The venture debt that we provide is very different to what you’ll see from some of our competitors. It’s shorter term so it’s normally less than a year. We’re not looking to dilute equity. We don’t normally take warrants and we look at a fixed timetable for repayment. As long as we can see a catalyst for repayments, then we’ll be quite interested in that.”
Since launching Finstock Capital, Edo and Oliver have deployed over £14 million to early stage businesses. Their approach has created return custom from the businesses they’ve helped as well as working with new ones on a consistent basis. Their work saw them nominated for Venture Debt Provider of the Year at the Growth Finance Awards in 2019, which provided validation that they were taking the right steps.
At the moment, Finstock Capital, like most companies, has been trying to adapt to working during the COVID-19 pandemic. Initially they had to try to understand the repercussions of the pandemic and the hardest parts were understanding the company’s cash flow strategy and lending criteria, and supporting businesses whose funding was stopped.
“One of the first taps that get turned off is early stage investing so we have to support those companies. That’s where those relationships that we have with the VCs and the funds to really understand their portfolio companies gives us a really good position to build the support for the companies.”
Looking ahead to an uncertain 12 months, Edo is keen to emphasise Finstock Capital’s priorities as they continue to operate in the changing landscape.
“What we want to do is really focus on getting the message out on the access to capital people can get from alternative funding. We are seeing more understanding of the market and what’s available to them. We want to be able to expand the product offering so that people can see a solution that fits them now. A lot of early stage companies may not make full use of tax credits but also they may not have tax credits and they may be looking at other solutions and how can we best fit requirements.”
Expanding further about Finstock Capital’s future plans, Edo enthuses:
“What we’d like to do is to be able to offer capital to companies for longer term so they don’t have to have short repayment terms. It’s really being able to offer a product that they can access and look to repay but without diluting their equity for longer. That would be a very attractive answer if we managed to achieve that in a year and further deploy capital. We’ve got quite aggressive targets in what we’re trying to deploy to early stage businesses.”
Find out more about Finstock Capital at https://www.finstockcapital.com.