“If given a problem to solve in 60 mins, I would spend 50 mins on asking the right question and 10 mins on the answer.”  - Albert Einstein.

Last week I read an interview with Mike Lazaridis, who originally came up with the Blackberry concept…

Lazaridis wants to make something clear: innovation is not born of one moment or one story or even the result of taking risks. “Really good entrepreneurs only appear to take risks because you don’t understand how they made the decision to go from point A to point B,” he says. “They usually make these decisions because they do a tremendous amount of homework.”

That’s something a lot of people need to read. It bugs me when people try and define entrepreneurship as some superhuman power and it does what we define as ‘entrepreneurs’ a disservice.

But there is another category of people who really need to take note of Lazaridis… and a lot of them class themselves as entrepreneurs.

Developing a product or building a business isn’t about giant leaps of faith - it’s about, as Einstein puts it, getting the question right. You need to know who the customer is, what their problems are, how they want them solved and how (much) they want to pay for that solution before you get serious about developing it.

This isn’t just a problem with software or cleantech,  it’s very much a problem in healthcare too - whether it’s talking to clients about its clinical need, how equipped staff are to use it or how the procurement team want to pay for it.

Once you have all this in hand, you can confidently go about developing the solution. And since you’ve been talking to your prospective customers, you can estimate well what the uptake will be without even having a product or giving a hard sell. That’s entrepreneurship - no magic tricks, no ‘house on the line’, no disproportionate risks - just taking advantage of opportunity.

I stopped reading fiction when I was 17 and started to realise that I got much more of a kick out of taking some tangible skill or knowledge away from books than just reading them for fun.

I’ve turned in to quite a big reader over the past couple of years, partly because I’m starting to think I did the wrong degree at University (I did Politics, Philosophy, Economics) and I’m now trying to make up for it.

But something that’s annoying me when I read more MBA-themed books, something like Mind of the Strategist or Competitive Advantage, is that I can’t read them in isolation - whenever I’m reading the book I’m linking every sentence to one or two situations I’m currently working in and scribbling notes all over the place.

The point of this blog isn’t to try and resolve my problem, but to highlight a real point in managing relationships.

I see a lot of people in one week, which means that people either have to be fairly unique and interesting or pop up frequently for me to connect them (or apply their skills) to other situations I come across. What’s this got to do with books? The only thing I think about when I’m reading them is ‘how does this apply in practice’, and the freshest opportunities in my mind act as case studies, why? Because I’m engaged with them all the time - and they become the pick of the bunch. I’d have to re-read the book to apply it to different (less ‘popular’) situations.

The key to building strong business relationships therefore isn’t in putting together contracts, JVs or formal associations, it’s about maintaining conversation and keeping on people’s minds, which in turn builds trust, familiarity and business.

This is where, I think a lot of developers/innovators/start-ups go wrong. If you start talking to potential clients/customers with a view to building a relationship early on (and I mean early on), you know their needs and how you can fill them - moreover you’re moving closer and closer to the organisation who, because of this, could call you on the off chance you can develop X, or if you know someone that can - and maximise you’re ‘relationship opportunity’.

Markets only work when people talk, and the more you talk, the bigger your market.

Back to my books…

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.

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.

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.

Before posting anything on the job market, Marc needs to spend time assessing whether he is the right person to take on the CEO role. Although he has been the only impetus and driving force behind the product development to date, he needs to understand that recruiting a CEO, rather than someone employed just to deal with the above tasks may be the most sensible option for him, however hard it may be to let up control.

Assuming that Marc eventually comes round to the fact that there may be a wide range of experienced industry candidates that can build on his development success, turning the product into a business and allowing him to concentrate on further product innovation; the task of recruiting a CEO to the business is one to be carefully approached.

There are a number of factors to consider here: experience, drive, connections and salary. Although what follows may seem slightly contrary to part 1 of this blog-series, remember that these are entirely different cases.

Experience
Marc needs to be sure that the candidate has experience in building a business from a product, as demonstrated by prior achievements, that will prove constructive for the ensuing task. A CEO needs to understand the needs of a business at this stage, and be able to steer the product into a particular market or industry.

Drive
A CEO has to have aspirations and positively encourage a team to reach them.

Connections
To reduce the time lag in bringing the product to market, strong industry connections will help significantly. The ability to call in favours from friends throughout the industry is something that comes at a high cost if it doesn’t already lie in the business.

Salary
Since the CEO is driving the business forward from now on, holding its success on their shoulders, I would suggest that their remuneration package should reflect this to a certain extent.

Most important of all, Marc needs to connect and communicate well with the candidate from the off. Trust is very important between the two and will be the main factor in the ventures success.

James has developed his web-based product to the boil and is aiming for a big launch after the company attracts investment. He feels a sense of urgency to recruit a well experienced team who are each at the top of their game, and has been in discussions with potential members who have each asked for an equity share and large salary. James knows that only the investment can sustain these levels, but feels that the people and their experience will drive his product to success.

In recruiting a team before investment, James must be aware that he, not they, will be the focus of any potential investment decision, and his management skills at this stage could make the difference between 2 months or 12 months looking for investment, just by attracting experienced or successful names to the company at any cost does not class the business as a good investment proposition.

James’s predicament is very common, he has been living the business idea and concept since it came about and harnesses complete trust in its success, however, the key to recruitment at this stage, is that everyone on the team must subscribe to this vision. One big hint to this is negotiations over remuneration… If potential staff command a hefty salary, possibly with preference shares thrown in (target-based or not), you can be sure that they either do not understand the needs of the business, or that they are far from sharing confidence in the business.

Think clearly here, would you trust this person with your business?

This comes as a shock to most people, but I would say that the maximum salary for someone working in a start-up with specialised skills is £30k pa with a performance based equity package, and even that is a bit steep.

The one thing to remember is that investors are putting their money into the success of the business, and will not subsidise the extortionate wage packet of an over-egoed employee. In the same vein, it is the business, not just the team that will influence the investor’s decision, and if the current management (i.e. James) does not understand that the start-up or the product itself is not currently strong enough to support the business, the investor has no choice but to close the file.

This doesn’t mean that a start-up can’t recruit good people, James just needs to realise that good people don’t always come with years of industry experience, connections or large salary requirements…

<<Part II - finding the right CEO>>

MBO – Management Buy Out

This is a transaction through which some or all of the existing management team, often with the support of a new investor, buys control of the business from the existing shareholders. MBOs are popular among venture capitalists and banks because they can rely on the experience and knowledge of the management team which is already in place – who better to know where the skeletons are hidden?

MBI – Management Buy In

In an MBI, new management, usually backed by new investors, buy their way into a business. These teams are led by one or more managers who know the industry well and may spend some time researching potential targets before deciding which company to buy into. Just as in MBOs, investors rely on the experience of the incoming management and having a committed and motivated management team (one that owns shares) is a great comfort to investors.

BIMBO – Buy In Management Buy Out (honestly!)

In this context at least, a BIMBO is not only attractive but very respectable. It’s a transaction which brings together the best of an MBO with the best of an MBI – incoming management combines its talents with the existing team’s, again usually with the backing of new investors.

IPO – Initial Public Offering

This is the first transaction through which a company raises money from “the public” and it usually involves the preparation of a prospectus. The Companies Act and the Financial Services & Markets Act regulate how businesses can raise money and companies must carefully plan a public fundraising following the advice of specialist professionals.

Float / Quote / Going Public / Listing

A UK-based float, quote, floatation or quotation involves the offering of shares to be publically bought and sold on an exchange like the London Stock Exchange (LSE), the Alternative Investment Market (AIM) or Plus Markets (the old OFEX). Listing is often used to mean the same thing but there in order to be listed the company must appear on the “official list” which covers companies on the LSE’s main market but not on AIM.

M&A

See “Merger” and “Acquisition” below.

Acquisition

Different people mean different things by “acquisition”. Often it relates to the outright sale of a business (100% of the shares) but under the rules of the Financial Services Authority an acquisition can take place even if fewer than 50% of the shares are sold; their test is that day to day control of the business changes hands.

Merger

A merger is just a transaction which merges the businesses of two companies into one. Often however, a “merger” is really an acquisition in disguise; we see Dooey Ltd “merge” with Cheetham Ltd and a few months later the new group “merges” with Howe Ltd but before long the Dooey Cheetham and Howe name gets shortened to Cheetham and the mergers are revealed as a series of acquisitions.

Divestment / Demerger / Company Sale

These terms all mean the sale of a company (or part of a company) but they depend from which side you’re looking. A parent business may divest or demerge part of itself but from the point of view of the bit that’s sold off, it’s a company sale.

Company vs Business

Often these words are used interchangeably and usually that’s fine but there is a useful distinction: A “company” is a particular legal entity which then undertakes “business”. A sale might be of part of a company (ie - some shares) or it might be of part of a business (the company’s customers, products, intellectual property, &c.) and these would be very different transactions.

Trade Sale

This is the sale of a business to another company involved in the same area; it may be a competitor, a supplier or another business with a complementary technology. It’s often an opportunity for founding shareholders to “exit” by selling their shares and it’s much more common than the other oft-quoted exit options of floating the company or buying shares back from investors.

Types of Investor

The types of investor listed below are covered in one of our other posts – click here to go to that one.

• Friends & Family
• Business Angels
• Seed Funding
• Development Capital
• Venture Capital
• Private Equity

Types of Money

The types of investment and funding listed below are covered in one of our other posts – click here to read it.

• Equity
• Debt
• Factoring
• Invoice Discounting
• Asset Finance
• Bridging Loans
• Specialist Finance
• Grants

Types of Development

The following types of personal and business development are covered in one of our other posts – click here to go to that one.

• Coaching
• Advising
• Mentoring
• Non-Executive Directors

If you’d like to discuss any of these terms in more detail then do please give us a call or drop us an e-mail and we’d be happy to talk further.

MBO – Management Buy Out

This is a transaction through which some or all of the existing management team, often with the support of a new investor, buys control of the business from the existing shareholders. MBOs are popular among venture capitalists and banks because they can rely on the experience and knowledge of the management team which is already in place – who better to know where the skeletons are hidden?

MBI – Management Buy In

In an MBI, new management, usually backed by new investors, buy their way into a business. These teams are led by one or more managers who know the industry well and may spend some time researching potential targets before deciding which company to buy into. Just as in MBOs, investors rely on the experience of the incoming management and having a committed and motivated management team (one that owns shares) is a great comfort to investors.

BIMBO – Buy In Management Buy Out (honestly!)

In this context at least, a BIMBO is not only attractive but very respectable. It’s a transaction which brings together the best of an MBO with the best of an MBI – incoming management combines its talents with the existing team’s, again usually with the backing of new investors.

IPO – Initial Public Offering

This is the first transaction through which a company raises money from “the public” and it usually involves the preparation of a prospectus. The Companies Act and the Financial Services & Markets Act regulate how businesses can raise money and companies must carefully plan a public fundraising following the advice of specialist professionals.

Float / Quote / Going Public / Listing

A UK-based float, quote, floatation or quotation involves the offering of shares to be publically bought and sold on an exchange like the London Stock Exchange (LSE), the Alternative Investment Market (AIM) or Plus Markets (the old OFEX). Listing is often used to mean the same thing but there in order to be listed the company must appear on the “official list” which covers companies on the LSE’s main market but not on AIM.

M&A

See “Merger” and “Acquisition” below.

Acquisition

Different people mean different things by “acquisition”. Often it relates to the outright sale of a business (100% of the shares) but under the rules of the Financial Services Authority an acquisition can take place even if fewer than 50% of the shares are sold; their test is that day to day control of the business changes hands.

Merger

A merger is just a transaction which merges the businesses of two companies into one. Often however, a “merger” is really an acquisition in disguise; we see Dooey Ltd “merge” with Cheetham Ltd and a few months later the new group “merges” with Howe Ltd but before long the Dooey Cheetham and Howe name gets shortened to Cheetham and the mergers are revealed as a series of acquisitions.

Divestment / Demerger / Company Sale

These terms all mean the sale of a company (or part of a company) but they depend from which side you’re looking. A parent business may divest or demerge part of itself but from the point of view of the bit that’s sold off, it’s a company sale.

Company vs Business

Often these words are used interchangeably and usually that’s fine but there is a useful distinction: A “company” is a particular legal entity which then undertakes “business”. A sale might be of part of a company (ie - some shares) or it might be of part of a business (the company’s customers, products, intellectual property, &c.) and these would be very different transactions.

Trade Sale

This is the sale of a business to another company involved in the same area; it may be a competitor, a supplier or another business with a complementary technology. It’s often an opportunity for founding shareholders to “exit” by selling their shares and it’s much more common than the other oft-quoted exit options of floating the company or buying shares back from investors.

Types of Investor

The types of investor listed below are covered in one of our other posts – click here to go to that one.

• Friends & Family
• Business Angels
• Seed Funding
• Development Capital
• Venture Capital
• Private Equity

Types of Money

The types of investment and funding listed below are covered in one of our other posts – click here to read it.

• Equity
• Debt
• Factoring
• Invoice Discounting
• Asset Finance
• Bridging Loans
• Specialist Finance
• Grants

Types of Development

The following types of personal and business development are covered in one of our other posts – click here to go to that one.

• Coaching
• Advising
• Mentoring
• Non-Executive Directors

If you’d like to discuss any of these terms in more detail then do please give us a call or drop us an e-mail and we’d be happy to talk further.

Friends & Family
Usually, the first investment a company receives is from this informal (but not necessarily unregulated) source.  Your wealthy aunt or old boss may put a few thousand pounds into your business but chances are they’re doing it because they like you, not because they’ve carefully considered your market positioning and the value of your business.  If that’s the case, they’re not a Business Angel.

Business Angels
These individuals will spend most of their time investing or managing their portfolio. They will usually invest between £50,000 and £500,000 but they may act in groups (syndicates) to invest more than this.  They will almost certainly require some involvement in the business, often as a Non-Executive Director or Chairman.

Seed Funding
This is the institutional equivalent of the Business Angel.  They also invest in early stage and start up companies and they also expect some involvement.  They may be in the form of funds managing other people’s money or may be companies investing in their own right (like Epiphany Capital).

Development Capital
Making investments of up to £5 million, these investors expect the companies they back to be relatively mature.  They will often want to see customers on board, profits coming in, and sometimes look for a turnover of several million pounds.  Nonetheless, the money they invest is intended to make big changes in the business, like launching new products, capturing a global market or buying other companies.

Venture Capital
Actually, all of the above is “venture capital” which just means investments are high risk and the investor expects the companies to provide impressive returns.  Usually the term is reserved for the professional investment companies, individuals who describe themselves as “Venture Capitalists” tend either to be Californian or to fancy themselves for the next series of Dragon’s Den.

Private Equity
Unhelpfully, all of the above is also “private equity”, the term just means that the investment buys shares (equity) in unquoted (private) companies.  However, when an investment company describes itself as a Private Equity House, it usually means they invest large amounts, £5m to £5bn, and they expect less risky but often less exciting returns.  These investments typically give the founders and early investors an opportunity to sell their shares and enjoy the gains.

Epiphany Capital works most closely with the first four above.  We help businesses from start up, bringing the experience and skills which entrepreneurs and their friends & family don’t have.  We help businesses to plan strategically, map out their crucial first steps, make the best use of limited resources and know when, and how, to move to the next stage.  We work with Business Angels, knowing how to increase their interest and reduce their risk.  We work with seed funders (indeed we are one ourselves) and we are also a corporate finance house advising on investments of any size.

Please give us a call or drop us an e-mail to discuss how we can help.

Equity
The most straightforward way to raise money is to sell shares.  On the one hand, you don’t need to repay equity investments, on the other hand, you’re giving up the right to some of your company’s financial success.  The crucial thing to remember is that it’s better to own 60% of a successful business than 100% of a failure.

There are various kinds of equity investors with different expectations and benefits (see our blog on funders).  For instance, a Business Angel may bring additional skills to your Board but a VC often has more money and can top up an initial investment if it turns out that you need more money.  Corporate Venturers (big companies which invest in businesses with complementary technology or services) usually know the industry extremely well but can be impatient in the face of small company dynamism.  Listing on an investment exchange (AIM, PLUS Markets, or the London Stock Exchange) may be the right decision for some companies but it’s fraught with difficulties and very expensive so you have to well aware of the risks and realistic about your chances.

Debt
Loans are often the easiest way to raise funds but they come in many forms and are rarely as attractive as they seem.  Equity investors will often want to put some of their money in as a loan so that they can get it back without having to sell their shares.  They should be sympathetic lenders and committed to the longer term but they can often ask high interest rates. 

Banks are the first port of call for most businesses but if your business doesn’t own property or other significant assets, they will probably ask for personal guarantees from the Directors (“your home is at risk if you do not keep up repayments…”).  You should think very carefully about giving a guarantee particularly if you have a spouse or any dependents who may suffer from the consequences.  The Small Firm Loan Guarantee Scheme is a form of bank debt where the DTI put up security for the loan on behalf of businesses which aren’t able to.  There are qualification criteria and certain industries are excluded but if you fit the bill, it’s worth exploring.

Bank money is “Dumb Money”, it doesn’t join your Board, introduce you to customers, or know your industry, it’s just cash; usually, you can get more from a funder than funds alone. 

Do give us a call or drop us an e-mail if you’d like to be introduced to debt providers or discuss the differences between them.

Other Finance
There is also an assortment of sophisticated finance arrangements like Factoring (where you sell your future orders for money now), Invoice Discounting (where you borrow against your orders), Asset Finance (where a loan is made to buy or lease particular equipment), Bridging Loans (made for a short time while other funding is arranged) or special solutions available to importers, exporters or companies undertaking research.

Epiphany Capital has strong links with investors, lenders and specialist finance providers.  We’ll be pleased to look at your business, help you decide which options best suit you, assist with planning the approaches, and then introduce you to funders.  Do give us a call or drop us an e-mail to tell us what you need.

“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: 

Start Up
Often a new business or entrepreneur will turn first to public sector agencies like Business Link or Chamber of Commerce, but there are also professionals interested at this early stage.  Universities and private sector specialists run incubators to help companies take the first few steps, they offer company formation advice, office infrastructure, administrative resources, financial management support and the best also help out with strategy development and fundraising. 

Raising Funds
Companies that need investment (and most do), whether to establish the business, complete product development, or launch into the market, have a range of options.  Usually the best approach is a carefully constructed mix of the following:

• Equity investment from individuals (Business Angels)
• Equity investment from specialist firms (Venture Capital)
• Commercial Bank loans
• Government-backed loans (SFLGS)
• Asset-backed lending
• Grants

Epiphany Capital can advise on these working with both parties to put together deals in the most appropriate way.

MBO/MBI
The management of a business may want to ‘buy out’ external shareholders or a new team may want to ‘buy in’ to the business and run it.  These transactions are very popular with investors who see them as a chance to invest by backing people who already know what they’re doing.  Several corporate finance houses in Manchester advise on these kind of investments (including Epiphany Capital of course) and finding a good  firm to work with is a crucial first step.

Acquisitions
Another need for corporate finance advice comes about when a company wants to purchase another business, often a competitor, supplier, or customer.  Usually this requires additional investment and someone to make initial, anonymous approaches.  This is another area where finding the right advisor who understands the businesses as well as the transaction, is vital to success.

Exits
For founding shareholders of a successful business, a well-planned exit is likely to be the most important financial event of their lives.  Whether they are selling the business outright, reducing their involvement or floating the shares, Manchester boasts many corporate finance houses specialising in these areas.

Epiphany Capital’s expertise is in supporting start ups and raising funds but we will be very happy to point you in the direction of the best advice in other areas as well.  Please just give us a call or drop us an e-mail to let us know what you’re looking for.