July 26th, 2010
We recently started to work with a really exciting company - an innovative quasi-product/service in a high growth market with large brands as their main customers and fantastic growth prospects.
Their model was quite heavy on forward revenues, so their upfront fees really just covered the costs but the follow-on revenues (that would kick in after around 12 months) were very attractive - even more so when the business was scaled up, which was their intention.
The founders were both driven entrepreneurs with heavy experience in their industry and with the clients they worked with. They even had a detailed idea of who would buy the business from them in 3/4 years. All in all, it ticked all the boxes of team, technology and market, and looked like a great opportunity for a growth investor.
But there was a problem - after we got going they got a call from their angel investor, who was a high net worth individual with a number of business interests, to tell them that he had found a massive whole in one of his other investments and needed to plough cash into that at the expense of their company. Nightmare.
Not only had they now run out of cash, but it was almost the end of the month and they had an obligation to make at least one of their staff members redundant (with the others voluntarily holding-off for a while) which in turn would see the business turn insolvent. On top of that, they couldn’t sign the deals they needed to with a set of new clients with this hanging over them, and they had to warn their existing clients that they might not be around for much longer. The company was forced to cease trading within a week.
To look back on this as a case study… where were the key risks in the business? They had massive markets, great customers, energetic and experienced operational management, popular technology, a fantastic brand and reputation with clients - each part of this business had been carefully crafted to mitigate commercial risks, apart from the financial side.
Obviously reliance on one investor (especially an angel) was a mistake, but there are two, more important issues that I think were involved:
Firstly, the business wasn’t leveraged at all, there was no soft money anywhere. Debt has recently become a bit of a dirty word, associated with failure and insolvency, but pre-crunch it was seen (and available) as a useful/critical tool to employ there needs to be a capital outlay for something fairly secure that will pay back nicely in the future. A lot of small businesses don’t like using debt because they don’t want to spend their lives worrying about how to pay it back - but that’s because their probably thinking about using it for the wrong reasons.
Which leads me on to my second point… CEOs shouldn’t need to have to worry about paying back debt, they shouldn’t have to worry about dealing with the financial management of the business at all - because they probably won’t be any good at the micro-management it needs.
One thing I’m not saying is that every start-up in the world needs a finance director, what I am saying is that every serious business needs someone clever, unemotional and experienced controlling the purse.
And by the way if you are looking for an FD, or some financial guidance - we know a few really good people.
March 4th, 2009
Growing a business isn’t easy, and moving into new markets is always a big issue. Here are a number of different pitfalls that I’ve recently seen early stage companies fall into in their expansion…
Just because the business has proven demand in one area, does not mean that this success will be repeated elsewhere.
A very simple example of this would be an ice cream van may do very well on a housing estate, where kids tend to play out in the street together in the summer; but fail to sell a single 99 in more affluent parts of town, where although there are the same number of potential customers, they are all playing behind high gates, in a swimming pool at the back of someone’s garden - even if, by some chance these kids do hear and respond to the ice cream van once, there is no guarantee of repeat trade. Mr. Ice Cream Van man needs to understand his market, their habits, preferences and nuances fully before spending a penny on expanding into it, effectively treating it like a ‘re-startup’.
Despite putting away a healthy profit from the existing business activities - large human and capital investment will probably still be necessary to keep both sides of the business afloat.
This is a point that is frequently under-estimated, much to the regret of many expanding ventures. Since the business is effectively re-starting-up elsewhere - the same effort, sacrifices and resources need to be in place as at the initial launch of the business. So if you required £250k to start-up in the first place, you are now making £60k per annum profit (well done), and have worked out that you realistically require £150k to expand into the French market - simple maths would tell you that you need an additional £90k. Simple economics and management would tell you that you need more.
When you are moving into new markets you still have to fight off any challenges in your existing territory - be that competition, internal staff issues, day to day operational glitches and the like; these need to be managed with the same focus and effort with or without additional markets in the picture, and this comes at a cost, probably in recruitment of someone to oversee the existing business.
Added value will also come from expertise in the new target market, and someone with an understanding of small business expansion. You are not just looking at finding someone with a pot of cash, you’re looking for the right investor.
Planning for investment at this level takes time, as does getting to know an appropriate investor and agreeing on the investment’s terms. Leaving your company the time and space to do this will be an important factor in its efficiency, simplicity and future success.
October 29th, 2008
Part two of this series by Tim Dempsey focuses on finding a CEO.
Marc is an inventor who has spent a couple of years building a robust product that is finally ready to go to market. The problem is that Marc is just that, an inventor, and realises that he has no clue how to run a business, manage a team, take control of finances or sell the product itself. Marc understands that he needs to recruit someone to do all this, but is completely perplexed on where to go next.
more…
September 1st, 2008
“Anthony Wilson says that for a big City, Manchester is just small enough. It’s true. People know each other, collaborate, cross-pollinate. Ideas can mix and match.”
Jim McClellan, Esquire Magazine, June 1997
In this respect, the professional community is no different from any other aspect of Manchester’s unique social character (although the Happy Mondays have had less of an impact there). The city’s network of Corporate Finance experts is big enough to serve the UK’s second financial centre but just small enough to knit together and cooperate well. It can be divided into a number of areas: more…