Tuesday, May 27, 2008/
Raising money in a tough market is never simple, but here are five tried-and-tested scenarios that make it easier. BRENDAN LEWIS
By Brendan Lewis
In mid 1999, I had a multimedia business called Carradale Associates. Apart from building websites, we were starting to do some cool work in online animation and getting some fairly interesting insights into online business.
One of those insights was that an online auction business would do well in Australia. At that stage, eBay was in negotiations to come to Australia and the market was pretty much empty. A quick search and I came across an auction model that sold excess stock for quality brands that was run out of Chicago. Their key IP was dynamically timing of the release of goods to the website to maximise profitability.
Anyway, my business partner and I went to pay them visit, and signed a licensing deal. A week after arriving back in Australia, we had $2 million sitting in a bank account that we raised from investors – $2 million in seven days with almost no documentation. How easy was that!
Since that moment in time though, raising capital has been tough. I don’t work in the venture finance industry but I have always been a student of it, and I have watched with interest many, many people try and raise capital.
Some win, some lose, sometimes it’s been me who’s the winner or loser. I have felt though that certain patterns have appeared that don’t seem to get mentioned by the venture finance community. They always talk about the deal, but I have been looking at more the human side of raising funds.
Last week I was approached by two different groups that wanted me to introduce them to “potential investors”. Both had nice pitch documents and a good story, but it occurred to me that if you’re asking for introductions at the time you need the money in today’s market, you are probably not going to have a happy ending.
My observations over the last 10 years on the five ways to successfully raise money are:
1. Get lucky
No, I’m not being silly. Plenty of people have bad business ideas that are badly presented. Unfortunately one in a thousand of these people runs into someone who has cash burning a hole in their pocket. They get funding regardless of the quality of the deal. Unfortunately the one undeserving person who gets funding gets remembered by all and held out as an example of what you can achieve. The other 999 are forgotten. That said, it’s hard to deliberately get lucky though.
2. You have a sensational story
Your opportunity is fantastic; great profitability, unique and protected, globally scalable, low risk and validated in the market. This seems to be what the investment community is really looking for. However you have really got to ask yourself; if I could tick all the above boxes, why would I give away equity? Why not just get debt financing.
3. The market is booming and you are in a hot segment.
During the dot-com boom, if you had an interesting story (see my initial experience above) you can get money without a business plan (despite what advisers say) and it’s not just technology businesses. It wasn’t that long ago that any mining company only had to mention uranium to have someone throw money at it. The trick here is to pick a market that’s booming, before looking for a problem to solve – not the other way round.
4. Develop the relationship before asking for investment.
A number of people I have spoken to over the last couple of years have had long term relationships with their investors prior to investment. In most cases they have targeted potential investors well before the investment event and have provided regular updates on basically “how we are doing what we said we would”. So if you want to raise money in a year’s time I suggest you start developing a relationship with likely investors, so that your credibility is a given.
5. Get a trusted hand.
It appears that if all else fails, a good way of raising funding is to give away equity first. If I had something that was risky, needed money and I had no credibility, I would offer Alan Moss a free carry in the business.
Almost anyone in the market will invest in something that the ex-head of Macquarie bank is involved with. Of course Alan may not be interested, but there is a very large number of high profile, credible people who are happy to be given equity in return for their profile and credibility being used to raise funds. The key here is negotiating how much you give away and what the triggers are for it.
Most venture finance people I know are happy to tell me this is either complete bullsh?t or only a tiny part of the story. However I am happy that it explains all the investments I have seen to date, including all the ones where sophisticated investors have done their dough.
And the reason we raised $2 million in seven days in 1999? We were in a hot segment in a booming market. My business partner was a “trusted hand” and we tapped on his existing relationships. It cost me 50% of the equity but it was a lot better than 100% of nothing.
Brendan Lewis is a serial technology entrepreneur having founded : Ideas Lighting, Carradale Media, Edion, Verve IT, The Churchill Club, Flinders Pacific and L2i Technology Advisory. He has set up businesses for others in Romania, Indonesia and Vietnam. Qualified in IT and Accounting, he has also spent time running an Advertising agency and as a Cavalry Officer with the Australian Army Reserve.
To read more Brendan Lewis blogs, click here.