What it does: Digital sensors in 3D packaging
Deal size: £2.8 million
‘I went to meetings with very well known fund managers in the City who were unbelievably rude. They walked out within five minutes of my presentation’.
Launched in 2004 by four work colleagues who were made redundant, DeepStream is one of the few manufacturing start-ups to have raised venture capital in recent years. As a starting point, founder and managing director Mark Crosier hired corporate finance house Icon (which specialises in high-tech businesses) to ‘shotgun the VC market’.
After contacting 98 potential investors, DeepStream received funding of £2.8 million in September 2004 from Doughty Hanson Technology Ventures. The firm also received money from the Welsh Assembly Fund and has used asset finance to raise a total of £10 million.
Crosier had originally attracted interest from a syndicate of investors, but the deal fell apart – ‘a case of not much cash and constant arguments about the company’s valuation.’ The future for the business though, is looking bright: DeepStream has just secured a £5 million contract with an unnamed European customer, to add to its first order worth just over £3 million.
‘Doughty Hanson understood both the manufacturing and the technology side of the business. Other investors walked out when I mentioned manufacturing. They were horrified by the idea – which I found unbelievably rude and annoying,’ explains Crosier.
Stage Three Music
What it does: Music publishing
Deal size: Up to £40 million for acquisitions
‘I had fantastic contacts who did a better job of selling me than I could have done myself’.
Founded by former Chrysalis Music group head Steve Lewis, Stage Three Music acquires copyrights from individual songwriters and is seeking to build an extensive music publishing catalogue. In August 2004 it closed a deal with Apax Partners and media and entertainment investor Ingenious Ventures, enabling the business to spend up to £40 million on acquisitions.
Says Lewis, ‘There’s a general perception in the financial world that the music industry is peopled by executives who know very little about how to run a business. There were times when I felt the fundraising would drive the strategy [ie, those investing would dictate how much the company would raise and therefore how it would develop], but it has to be the other way round. I had fantastic help from Ingenious and I wouldn’t have been able to do it without them. They did a better job of selling me than I could have done myself.’
Music publishing being an intensely competitive market, Lewis is under no illusions that his is the only business with good prospects. But with a couple of hits thus far in the charts, and having completed three acquisitions, there is no doubt that Stage Three is beating an aggressive path to growth.
What it does: High quality, limited service hotels
Deal size: £18.4 million
‘It’s a big tick in the box when there is an individual involved who’s achieved something truly spectacular already’.
When you are looking to raise close to £20 million to help fund little more than an idea you need a unique selling point. Luckily for Quest Hotels, the reputation of managing director Sinclair Beecham (co-founder of Pret a Manger) was just such a draw.
Beecham established Quest with a view to building a new upmarket hotel in Shoreditch, London – due to open in the spring of 2006. Targeting primarily the business market, the idea is to provide high quality lodgings with a limited level of service. While many in the hotel industry feel this is the shape of things to come, the youthfulness of the venture marks it out as a high-risk investment.
‘It was a complete start-up,’ notes Claire Madden of venture capital investment network Hotbed, which invested around £1.5 million in the project alongside Bridges Community Ventures and others.
‘But the management was a big part of our decision (to support it), Sinclair Beecham in particular… it’s a big tick in the box when there is an individual involved who’s achieved something truly spectacular already.’
What it does: Advertising on trucks
Deal size: £900,000
‘The most expensive lawyer you can get will be the cheapest one’.
Nigel Petty is founder and managing director of truck advertising company Kinetic Media. The business, trading under the name RoadAds, sources articulated lorries to display advertisements ranging from lingerie to rock icons such as Bruce Springsteen.
Petty is no stranger to innovative media techniques. He was responsible for wrapping department store Selfridges in a massive banner, and putting on the world’s largest advertising display on Fort Dunlop in Birmingham. It is this track record that he believes helped him to secure just under £1 million from the Capital Fund (managed by Yorkshire Fund Managers), earlier this year.
‘Truck advertising is not new, but it had never been tackled on a commercial basis before. Raising venture capital is as much about money as it is about personalities. The discussions we had with Yorkshire Fund Managers were not aggressive – they were common-sensical. We had two approaches from other potential investors, but they didn’t stack up and the benefits to us weren’t obvious,’ explains Petty.
Controversially, he believes that hiring an expensive lawyer is crucial to completing the process successfully as his biggest challenge was overcoming the due diligence hurdles.
‘The most expensive lawyer you can get will work out, in the long-term, to be the cheapest one. When it comes to raising finance, ensure you come armed with dogged tenacity, aggressive advisers and a willingness to never give up.’
What it does: Wireless broadband services
Deal size: Undisclosed
‘I happened to sit next to 3i’s head of technology at dinner, and the rest went from there’.
The Cloud, a spin-out from Inspired Broadcast Networks, claimed to have completed one of the biggest deals in the Wi-Fi sector when it raised funds from Accel Partners and 3i in July 2004.
Founder and managing director George Polk started the business in 2003 and approached Inspired, a provider of entertainment and broadband services, to help support its growth.
‘I was only going to deal with VCs I knew and 3i wasn’t one of them. But I happened to sit next to 3i’s head of technology at dinner, and the rest went from there. The hardest part of
the deal was that we shared many assets with Inspired Broadcast Networks, our parent company, and it took some time to envisage how we would separate the two. Originally, I was negotiating with those who owned what I wanted and simultaneously with VCs who wanted to own me when I had secured the deal. I was pulled in many directions’ explains Polk.
He believes that a big attraction for investors was the fact that the business has always been run from revenues generated thus far – giving it a strict operational discipline.
And his main nugget of advice for those on the fundraising trail: ‘Find someone who you can go back to again and again for more money. Accel and 3i got involved, and they do drive hard bargains. Other investors wanted to offer £5 million, but we refused because they would not have been around to offer more down the line.
It’s miserable to have to keep going back every six months. It weakens your position.’
What it does: Spend-management software
Deal size: £3.1 million
‘Once you’ve identified an opportunity, see whether you can scale it up to be a sizeable business’
Twelve months ago, Silicon Valley veteran John Bantleman was working as a consultant for leading venture capital groups Apax and Doughty Hanson. His charge was to identify prospective technology investments for the two groups, after reviewing more than 50 business plans. However, he became captivated with spend-management solutions business Marrakech.
Bantleman joined Marrakech as chief executive in December, bringing with him million (£3.1 million) of expansion capital from, principally, Doughty Hanson. ‘I think once you’ve identified an opportunity, you have to look to see whether you can scale it up to be a sizeable business,’ he elaborates, ‘and I think Marrakech definitely has that potential.’
‘The million will be primarily spent on sales and marketing – initially to establish our business in the UK and then to develop a basis from which we can build in the US.’
What it does: Pubs in Wales and southern England
Deal size: £26 million
‘We had been in contact with Sand Aire ever since they came second in our first fundraising’.
Just two years on from completing an MBO, backed by RBS Equity Finance, tenanted pub operator Celtic Inns was keen to engineer a secondary buyout to accelerate expansion.
‘We wanted to secure enough funding to double our size over the next three years,’ managing director Duncan Murray explains. Fortunately, he didn’t have to look far for the necessary backing, with Sand Aire Private Equity a long-term admirer of the company.
‘We received more than one offer,’ Murray recalls, ‘but we had been in contact with Sand Aire ever since they came second [to RBS] in our first fundraising. We were happy with their commitment to provide long-term support.’
The structure of the deal was all-important. Sand Aire provided Celtic with initial funding of up to £14 million to help Murray complete a few deals already in progress. Further cash tranches (RBS has also provided funds) will follow as Celtic works its way through the 50 or so ‘stable community boozers’ Murray intends to open over the next three years.
What it does: Defence and security services
Deal size: £9.8 million
‘The execution of this deal was such a challenge’
‘Armor Group has a high-quality management team who turned the business round – although it didn’t look on the surface like they had,’ recalls Simon Havers, director at private equity house Granville Baird, which sealed the deal.
‘The company had quite a number of subsidiaries which gave it complex accounting records. It’s unusual to find deals where the execution is a challenge – normally any old fool can execute.’
The incumbent management and Granville Baird also had to deal with a vendor who was wary about such deals, having previously agreed terms with three other VCs, none of whom delivered. Jumping on a plane to Florida to convince the vendor of their commitment worked – and the deal was
completed ahead of schedule.
Having floated the business on the official list of the London Stock Exchange, CEO Jerry Hoffman is pursuing an aggressive growth strategy.