Adam Wayland talks to entrepreneurs who have succeeded and investors with cash to spare.
Name: Frank Hannigan
Company: Yougetitback.com, a 24/7 lost property service
Job title: Co-founder and managing director
We initially tried to fund the business ourselves and went on as long as we could, but eventually we needed to look elsewhere. I always thought raising money from the BBC’s Dragons’ Den would be unlikely, but we went on and, even though we got turned down, the positives far outweighed the downside.
Admittedly, I left the den feeling dejected, with the notion that some shrewd business people had turned me down. Once I’d properly thought about what the dragons said, I realised that actually they hadn’t once criticised the business model for Yougetitback. So, I told myself: ‘I’m not an idiot, I’ll take the show for what it is “entertainment” and try again.’
We travelled around using much the same pitch as we had on the show, until we went back to where we are based in Ireland to meet an investment network. We pitched to farmers and other private individuals and raised more than £500,000. This was twice the amount we had asked for on Dragons’ Den and we only parted with 12 per cent of the equity.
In the end we racked up funding of £2 million from various sources. So, I would suggest that you approach local business people for funding. They tend to have more sympathy than a VC, who will view you and your company solely as an investment.
My advice is that if you can fund your business yourself to a sustainable level before you turn to outside investment, then do so. It’s desperately hard to achieve, but you’ll get a much better deal out of it in the end as you’ll be in control of your business.
Name: Sean O’Flanagan
Company: Collins Stewart, a global financial services group
Job title: Fund manager
The key issues I consider at the outset are the quality of the management team and the shape of the business. The CEO and other key directors need to have a “uniqueness”. By this I mean they need to have a deep understanding of their market and their product or service, and they should be not readily replaceable.
In larger businesses, those running them are often not core to their progress and are easily replaced â“ despite the salaries they command. In growing businesses, the opposite is true. Exceptional, energised and ambitious executives living and breathing their product every day is what excites investors.
If management passes muster, then it’s all down to the operating characteristics. I examine the underlying organic rate of growth, the return on sales and the return on capital. What I admire is good cash generation as the company journeys up the growth curve.
Due to the nature of my work, most of the businesses I see are referred by brokers or other intermediaries. But if you’re unable to get onto this merry-go-round, having a well-connected and active non-executive director on your board should help. Introductions from experienced and successful entrepreneurs is often the first step on the cash route.
Name: Trevor Hope
Company: Beringea, an international private equity and investment banking firm
Job title: Investment director
Institutional VCs can be perfect if you can find the right match, simply because they can have sector specialisation and offer a network of contacts and skills to add to your business. They can put you in touch with other companies and are very keen to push mutually beneficial networking.
Early-stage investors tend to restrict their investments across a portfolio and might not always be able to offer follow-on funding. From a VC perspective, as long as the business case is looking good, there should be the opportunity to provide further rounds of finance.
There are also various ways of doing a deal to ensure a steady flow of financing, such as an investment that comes in stages based on hitting performance targets.
We are in this business to make money and we’re quite clear about deals being a partnership. Someone may come on the board as a non-executive director and can help to fill the skills gaps that you have, but we don’t want to run the business.
When there is a significant injection of funds, the entrepreneur is giving up complete control of his or her outfit. Some business owners, particularly those who have nurtured a company from the start, can struggle to relinquish that control; others feel quite isolated and are pleased to have the assistance in place. Those who are reticent are not really the kind of owners that we want to work with.
When it comes to a pitch, an entrepreneur needs to show a vision for their business, demonstrating that they have thought through the skills they lack and how they can fill those gaps through recruitment going forward.
We also want to know how management will respond in a crisis. It’s important to see an underlying drive to push the business on no matter what happens.
Name: Michael Weaver
Company: Beer & Partners, business angel network
Job title: Chief executive
Many businesses look for debt finance in the first instance. The bottom line is that if you don’t have assets, you’re not going to get any finance. Business angels tend to fall to the bottom of the pile because people are reluctant to give away any equity. But you have to be sensible and ask yourself which is better: owning 100 per cent of nothing or 50 per cent of something that’s worth
It doesn’t have to be a permanent situation. There are ways of structuring a deal so that you can buy that investor out after two or three years. An angel is looking to make a good economic return so they will be thinking about their exit in any case. They also want to spread the risk, which means they’re looking for you to have some money invested too â“ not a huge amount, just enough for an important part of your life to be hanging on the line.
In terms of valuing the business, the true value is that figure which you are prepared to accept and which they are prepared to pay.
The typical angel is 45 to 65 years old, has taken early retirement and is looking for a bit of excitement, so you may get a better valuation if your company has sex appeal or something the angel can relate to from a short pitch. If you truly understand your business, you should be able to explain it succinctly in two or three minutes.
You can get tremendous value from an angel in terms of skills and contacts that you won’t usually get from a VC. So, be prepared to take onboard what they say.
Having said that, not all angels want to get involved. Some are more hands-off and others will want to do management buy-ins. Either way, you have to make sure that the relationship you have with your investor is a comfortable one.
Name: Sherry Madera
Company: AwayPhone, an international mobile operator
Job title: CEO
Every entrepreneur is seeking money. If you are looking at a step up for your company, having someone supportive of the business model, pushing it forward and introducing you to the right people is going to be critical during the early stages.
In the longer term, one of the biggest benefits is to find backers who have the capability to provide follow-on funding.
If you find yourself in a position where you have to start all over again, it’s a problem as the process of identifying a backer always takes longer than you think it will, using up valuable management time.
Understanding the profile of your investor is important. Having people who can dip back into their pockets to maintain their stake or indeed stepping up to the next round when you need it can really be a benefit as the business starts to grow.
Of course, when on the hunt for funds, a lot of people will try and blitz the networking scene to promote their business and attract a backer.
That is important, but if people do show interest, you really need to have a well thought-out business plan prepared. It isn’t good enough to speak to someone and than deliver the details months later.
Backers will listen to you on the basis of the concept, the idea and the logic behind the business, but the very next thing they will want to know is the numbers.
We were fortunate enough to get in touch with venture capital firm Global Group as lead financier for AwayPhone through a personal contact. I had met people from Global Group while working in my previous role in Hong Kong and China.
It’s important to be aware of who your contacts are. If you mine your current network, you’ll be surprised at how many people will point you in the direction of interested parties for funding.
Name: William Berry
Company: Net121, a web marketing agency
Job title: Founder and managing director
I managed to get seed funding for my first company but had to part with 20 per cent of the equity in the process. Two years later, we were in a position to buy that stake back. Early-stage funding can be a useful source of investment for a number of reasons. For instance, if you sell a stake in your business, it means that everyone has a vested interest in seeing it perform well.
First and foremost, they try to ascertain whether they can bank on you and your skills to succeed, so lengthy business plans can be a waste of time. As soon as you sit down and write one, it’s out of date because you can’t include any subsequent opportunities that may arise. A good track record and enthusiasm will go further than a 30-page document full of estimates, which often just amounts to sticking your finger in the air and hoping for the best.
Banks, on the other hand, are different. They can withdraw funding at any time, so you really need to be super-confident to take on financing from them. Bank managers don’t care too much about your business – they want to know about cash flow and good credit ratings. They are very risk averse and, because they take a narrow perspective on things, you’ll only get money from a bank if your business is doing well.
If you’re looking for money, you don’t have to go for the big bang approach, using a weighty business plan to secure a huge amount of funding. It’s far better to start small, keep costs low and learn a little about the business. It’s a case of the tortoise and the hare: slow and steady always wins the race.