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Series A to Z
by Mark Smith

I was disturbed recently when some of my colleagues suggested that I should watch the TV Series Silicon Valley – apparently (though I thought unfairly) I reminded them of one of the characters…… suffice it to say I was amused by some of the plot lines and realised that whoever had written this must have had some exposure to the world of investment even the episodes had familiar names ‘The Cap Table’, ‘Fiduciary Duties’, ‘Proof of Concept’ etc etc.

So it got me thinking, so far in my career I’ve seen two booms and one bust in tech. Anyone who went through the year 2000 with a tech firm will know what I mean. Right now we’re still in a boom (though with some wee wobbles along the way – with banking fiascos and Brexit silliness muddying the waters) and I’m still in tech – so I thought it might be useful to share some lessons learned. In an earlier piece I described the lessons gained from the very early stages of a tech firm, how your start, how you grow, investment from friends and family and crossing the profitability line. This piece takes a look at what should have been a Silicon Valley Episode called ‘Series A’ where you take the plunge and get your hands on some ‘proper money’, so let us begin……..

Lesson 1: Get with the jargon. I’m a straight talking bloke, I don’t say ‘like’ unless I like something, I never ask if I can ‘get’ something when I actually want to ‘have’ it and I never start a sentence spoken or written with the word ‘so’. But that said – when you’re planning on raising some money you need to know what you’re talking about, knowing the difference between VC and PE, what a Cap Table is, whether you’re EIS or SEIS, know what a term sheet is, know your secondary from your primary and so on. Now this comes with a warning. I drink cappafrappaflat whites in Shoreditch haunts (I’ll be the grumpy old man in the corner in the ill-fitting suit) and I overhear younger more beautiful people bandying around these buzz words. KNOW YOUR BUSINESS FIRST, I think loudly in my mind. Stringing investment buzz words into a sentence will not impress a Venture Capitalist (that’s the VC one above, if you wish to be patronised) if you don’t know what your burn rate is, how your cash flow works, or have no idea what you spend on your hosting. So don’t get caught out – do your homework, (not by watching Silicon Valley) then get with the language: now you’re ready!

Lesson 2: Don’t try and manage the fund raise yourself. This is not an entirely true statement, it is reasonable and good to keep in with investment sorts. I have lots of friends and acquaintances in the investment world, people I’ve bumped into at events, people I’ve been introduced to and so on. That’s helpful. But raising significant sums of money is a time consuming task and one that you’re often better off doing using a ‘corporate financier’ (a fancy term for people who know people and who know business). The way we did our last round was to have a ‘beauty parade’ (Series 1 Episode 9) where we asked three firms to present to us how they would make it happen. Two were from the Big 5 and one was from a smaller firm. All were impressive (top tip: keep friendly with these people even if you don’t commission them, it’s a Series A because there is a Series B, C, D etc) but one was the best fit for us and we selected them. So what next……

Lesson 3: Brilliant Business Plan. You always need a good business plan – a decent exploration of your business and its strengths and weaknesses. Don’t kid yourself that there are none of the latter – if there were none you’d not be raising capital would you?! Take a good long hard look at yourself – do some modelling (not that kind silly) and present a decent business plan. What happens next is your corporate financier takes that plan and shreds it before your very eyes – as he/she will know what the investment community actually need not what you reckon they will like. That takes time – about a month or so. Then you need a little list…..

Lesson 4: A little list and perfect pitch. There are actually loads of investment possibilities out there – lots of firms are looking for good places to spend their cash – they ain’t earning much at 0.25% over base and there are lots of tax benefits for early and not so early stage investments in the UK just now. But you do need to do your homework – make sure that your business ticks the investment company’s boxes, make sure that the firm is in the right part of their own investment cycle (as a fund opens = good, just as its closing = bad, just after it’s closed = daft) and make sure that you are eligible in their eyes. Your corporate finance guy, let’s call him Edward to save the ink, will do this and you will end up with 10-20 firms to get a ‘teaser’ too (teaser, beauty parades – blimey this is all very Freudian….. moving on……). The teaser is a 1-2 pager than outlines what you are – a summary if you will, and also needs the right financials (historic and projected) to make you look interesting. We ended up going out to 15, had meetings with them all where we delivered the perfect pitch (that’s worthy of a whole new blog – so I’ll leave the how’s and why’s to another time), and we had around a dozen second meetings – more depth, bigger meeting with more of their and your team and bingo we had 7 ‘term sheets’. Out of the 15 companies 7 said they were game to invest…Result.…..

Lesson 5: The devil is in the detail. You’d think that a term sheet would detail some simple arrangements for valuation, investment money coming in, % stake acquired and it would be as simple as Dragon’s Den right? Nope – it’s actually where your Edward becomes invaluable. The terms can sometimes hide all sorts of nasties, unexpectedly high deal costs, odd preference terms – where in the event of a sale suddenly lots more disappears then you might like and even how the voting on important matters actually works. So get your Edward to explain all this and then you can make a good choice.

Lesson 6: Making the wrong choice right. Here’s an odd one. It’s not necessarily the highest offer that wins………There is a tension in a business when you already have shareholders who have invested at price X, if your term sheets have various offers at 5x or 20x that price. Then there is a temptation for the shareholders to want to go with the highest, not necessarily the best offer. This is a really hard one to fix. The problem is that when you take investment you are nailed down to the rowing bench of someone else’s trireme, and they will be banging out the rhythm to tell you how fast to row. Your shareholders, in this contorted analogy, are passengers on the top deck having a nice(r) ride. But if you hit a rock they step gingerly off and you drown. This is exactly the experience we went through, the best offer wasn’t the best offer for the exec (us), for reasons that don’t need to be shared here, the fit just wasn’t the right one. Fortunately, the philosophy of being nice to everyone on the journey paid off again as one of the ‘lower’ offers was from an excellent investment firm with a thoroughly decent gent. So you need to be bold. This challenge was the only one that gave me sleepless nights. The pressure from the shareholders was simple enough to understand but dealing with your instinct that the team mix wasn’t right was very difficult to rationalise. I try in business to be as analytical as I can be when making decisions – but even when I drew up a score card of pros and cons between the two firms, I came up with a draw. So at the end of the day I went with instinct and I’ll know in about 5 years if I was right!

Lesson 7: Don’t lose track of the business. Investment is exciting. It’s probably the highest odds gambling you’ll ever do. You’re taking all your business chips and pushing them onto red or black. Get it right and you’ll win, get it wrong and you lose. It’s a buzz and it’s addictive. BUT the chips that you own are your business, don’t, for gawd sake, lose track of that. My recent experience has taken some 8 months to complete – you’ll hear as low as 3 (lies, all lies), average 6 (mostly true) long as a year (not uncommon). It is terribly easy to lose yourself in this process and forget you run a firm and the challenge is that your very business plan becomes under siege during the process as trading continues whatever happens. This is made worse by a plan often having the incoming cash influencing the trajectory so you have the Catch 22 ‘not being in plan’ but that’s because you’re still doing the deal! So don’t dwell too long at the roulette table – get back into your company and make sure all is well.

Lesson 8: Always be honest. Can’t over emphasise this – when you do a Series A deal and you’re raising millions of £ tell the truth, the whole truth and nothing but the truth. That applies to everything, deals, contracts, your and your colleague’s pasts, how many pencils you’ve bought, everything. It will come under the spotlight during due diligence (another buzz word you need to get) – and if it doesn’t there’s something amiss. Tell any porky pies and you will come unstuck. It’s a strangely cathartic experience to lay everything out for inspection, there is a ‘disclosure letter’ part to the process which is the place where you write down all your fears and paranoias, and a decent investor will trust you if you reveal the lot – warts and all. I’ve seen deals crash because of a break down in truth telling (none of my own, reassuringly) and I’ve heard horror stories of this happening right at deal closure and the company not only losing its deal but picking up 100’s of 1000’s in deal costs to boot.

And finally do trust your instincts. Our own deal is a little more complex than usual as we have two VC’s jointly investing. That is quite unusual at this stage of the game – more common on large rounds. I did it because I liked both the investors and each had different qualities I admired. They also complimented each other which was helpful. I also think that the types of people they will provide for our board (see trireme owners above) are cleverer than me and far more experienced in maximising value for shareholders. Whilst I’ve IPO’d one business during the dot com era I’ve been head down since then building new businesses – the guys we’ve chosen are expert at the shareholder maximising bit and who knows just how far this boat will row. Now best get back to the bench…

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