Phil O’Donovan believes his company is the world-leader in designing chips for ‘bluetooth’, a technology that allows appliances to communicate without wires across short distances. He attributes this outlook above any other factor to Cambridge Silicon Radio’s ability to raise million (£21 million).
‘We found that the most important thing is to have a very focused business development plan. We had a clear business model and wanted to obtain funding for it,’ says O’Donovan who founded the company with eight others in April 1999.
Passion is essential
O’Donovan, who acts as managing director for Cambridge Silicon, also maintains that you need to be passionate about your plans as well.
The company’s initial investors four years ago were 3i, Amadeus and Glide, a Dutch outfit that frequently co-invests with Amadeus. Each contributed some seed capital.
‘We did not consult outside advisers until we had raised that first round of money,’ recalls O’Donovan. He thinks if you let in advisers at too early a stage then they could make the business plan too dry and devoid of enthusiasm.
‘Write the business plan yourself,’ he urges. ‘You need to show the passion at the heart of the business.’
However, he does caution companies seeking major external funding to ‘use the best accountants and lawyers’ so that the structure is in place to make such a large transaction run smoothly.
Before contemplating last summer’s £21 million fundraising, the company went through two other rounds. In February 2000 the venture capital arm of major chip maker Intel invested and in December 2001 electronics products giants Sony and Phillips also became investors.
Vision needs managing
During this time the nine founders decided to bring in an experienced management team to complement their visionary skills. Thus John Hodgson (formerly of VLSI Technology and Lucent) joined as chief executive, followed by a finance director soon after that.
‘VCs are looking for management, management, management, in the same way as property investors value location, location, location, above anything else,’ explains O’Donovan.
Stuart Licudi of Lloyds Development Capital (LDC), who invested in Cambridge Silicon alongside Scottish Equity Partners last summer, agrees.
‘This was not an easy time to raise money by any means but the company has an excellent management team who thoroughly understand the technology they are working with and can take their products to market.’
Cambridge Silicon has certainly managed to do this, with its products installed in certain 3G mobile phones, allowing revenues to rise from million in 2000 to million in 2001 and million in 2002.
Caravan parks can attract the money
Another company that managed to raise a similar amount of development capital was holiday park operator Parkdean.
The company had principally been debt-financed before bringing in a range of institutional investors, such as Isis Capital and Artemis Asset Management, via a £22.4 million flotation on AIM, the stock market for smaller companies.
Graham Wilson, who has specialised in this sector for over 20 years, set up Parkdean in November 1999 as a vehicle to acquire Trecco Bay Holiday Park in South Wales.
At that stage Wilson was in his late 40s and had already built up and floated a similar size business previously after leading the management buy-out of Beazer’s holiday division ten years earlier.
This was eventually sold to leisure conglomerate Vardon in 1995. Wilson left the business in 1998 when it was sold to Rank and then embarked with managing director John Waterworth on a ‘buy and build’ strategy to develop a fresh chain of parks.
‘It certainly helped that I had done this before and made money,’ comments Wilson, who also highlights the presentation skills of Waterworth and finance director Michael Norden as crucial during Parkdean’s visits to 50 fund managers over three and a half weeks.
In addition Wilson maintains that ‘pricing is all important.’ Just prior to finalising the placing, Punch Taverns postponed their float and Parkdean’s business was only valued at a p/e of eight.
‘Investors, who had been burned by blue sky ventures, liked the fact that it is a ‘steady Eddie’ business which was already profitable and would continue as far as the eye can see,’ says Wilson.
Proven success was crucial
Another factor that helped was that Wilson insisted Parkdean’s original venture capital backers, 3i, completely sold their stake at flotation. In his previous venture the early-stage investors had retained an interest, which had proved a drag on the share price.
Again, as with Cambridge Silicon, at the flotation Wilson had a clear idea what he wanted to use the money for – having already lined up a number of possible acquisitions.
The company has since bought Ruda Holiday Park in Devon and Sea Acres and White Acres, both of which are in Cornwall.
More importantly, advisers like the fact that the management has already shown it can build up a business and float it, providing a potential exit for all shareholders.
‘You need a management team who have experience of handling these sums of money,’ believes Mark Fecher, a director of Devonshire Corporate Finance, part of Kingston Smith accountants.
‘There’s a big difference between managing a business with a turnover of £10 million and one which is four times as large.’
Andy Ball, a senior director at LDC, emphasises that he is looking for ‘a leader who has a solid management team behind him.’ He thinks management quality is more critical than the type of business carried out by a venture. ‘We would prefer to back a good manager in an average business than an average manager in a good business,’ he comments.
Buy-outs are first choice
Perhaps this is why he, along with many venture capitalists, prefers to concentrate on backing management buy-outs (MBOs) when committing large sums of money rather than on situations where companies require development capital.
Parkdean’s Wilson is, after all, using the funds to buy out owner-manager-run operators, changing the management system of his target parks.
LDC’s Ball focuses on MBOs. Last summer, he backed the £55 million deal which saw managing director Phil Hoskinson buy North West-based fashion retailer Ethel Austin from its original owners.
‘This company was already turning over £130 million but since the deal was concluded sales have jumped over 250 per cent, primarily by changing some systems and the way the company did business on a day-to-day basis,’ explains Ball.
The deal was relatively low-risk believes Ball because ‘benchmarked against its competitors the company was performing badly. This gave us a great market opportunity.’ LDC came across the business when it was originally put up for sale.
Ball says a significant change was to appoint Jim Martin as non-executive chairman to act as mentor to managing director Hoskinson. ‘He was chief executive of listed mail order retailer N Brown, which has recorded 20 years of profits growth. He delivered real clarity of thinking.’
VCs value products over services
However, Cambridge Silicon’s O’Donovan is building up a business from scratch. If you want to follow this route O’Donovan says you should concentrate on making a product rather than providing a service.
‘VCs like to invest in product businesses rather than service companies even though these tend to be riskier propositions. This is because the returns tend to be greater,’ he comments, citing US giants Sun Microsystems and Qualcomm in his sector as classic examples of VC-backed product makers.
LDC’s Licudi agrees that the fact that Cambridge Silicon was making world-class technology in a rapidly expanding market made the enterprise an enticing investment proposition.
Biotechs can attract large sums
Phil Adams of investment banking outfit Altium Capital, previously part of venture capital house Apax Partners, says that biotech companies can frequently succeed in raising large sums of development capital. ‘You need a large amount of money upfront to set up a laboratory and conduct clinical trials.’
For instance, LDC has backed Cyclacel, a biotech concern based in Cambridge and Dundee, as part of a syndicate that invested a total of £34 million two years ago. The company was founded in 1996 by Sir David Lane, a respected cancer expert, and is attempting to develop genetic-based treatments for the disease.
More recently, in Oxford last summer, James Noble, the former finance director of British Biotech, managed to raise £11.5 million for his biotech venture Avidex, which is trying to find therapies using T-cell receptors, part of the body’s immune system.
In both these circumstances, the management team boasts significant experience and the potential is enormous.