If I’m ever asked what one of the more stressful periods of my life was, I would have to say that raising funds for a business, that was in the nascent Video On Demand (VoD) sector, during the worst economic recession seen in our lifetime is right up there.
It was early 2007, London was booming and I had decided to be a part of marketing’s future, not its past. That meant making the leap into many unknowns – entrepreneurship being one of them. I left a well paying advertising job in the West End and this also meant leaving behind a dedicated P.A., car service, regular international travel to meet clients and shoot commercials in exotic lands, nice hotels and restaurants, and tickets to sports events and rock concerts often with backstage passes to meet the team or band. My new reality was taking the 295 bus to an empty room in West London. This room contained 3 flatpack IKEA desks, 1 digital camera, 2 posh Englishmen and 1 mad South African. Collectively, we were going to become the future of media.
Arriving full of enthusiasm at 9am with a spring in my step, my state of unbridled optimism was soon tempered by an inability to assemble my IKEA desk. By 11am, my knees and back were on fire, the desk frustratingly wonky and there were still half a dozen screws left-over. I collapsed into my chair and contemplated what I’d let myself in for. Oh, and I nearly forgot to mention there was no salary.
My second task was figuring out where to find our working capital and why these lucky people would want to fund us. The first part was easy, in 2007 the VC market in London was frothy and people, just like me, were leaving their corporate gigs (in droves it seemed) and getting funding for all sorts of ventures.
The second part rather less so but I had in mind a business model, based on my experience in advertising, where I had seen clients and their budget’s increasingly turn away from the brand agency (us) and towards digital (them). This us and them became all out war as clients were attracted by the fast production cycles, immediate customer action, and analytical nature of digital advertising versus the slow burn, high risk, difficult to work with experience of a brand agency. Brand budgets were being cut drastically and the moniker “dinosaur” was joked about in meetings a little too often for comfort. Still, I had a high degree of confidence that I was the right side of the ledger. I was following the money and now just needed to find a way to capture it.
In the meantime our newly minted video channel had started to generate content, in those days the format was 3 minute review shows covering technology, gaming and film. These were all shot, edited and uploaded onto a simple website by the aforementioned South African (who it turned out was a wonderful, warm and very patient man) and quite quickly attracted 30,000 views and quickly built up to 50,000. We were swimming with the tide. However, a short time later, the viewership plateaued so another strategy was required.
I settled on an advertiser funded programming model, where companies could throw off the constraints of the 30 second TV spot, target their commercials much more precisely and really align the content to the product
Now, all we needed was our first customer and after some searching, we got them – a fledgling men’s grooming brand called Bulldog who were willing to take the plunge with us. One of my partners set off to nab the talent (we had promised that the episodes would be fronted by a well known comedian) and within weeks we were ready to roll the cameras and shoot our first series.
We now had our proof of concept so with a colourful and energetically themed Powerpoint in hand I went out into the large VC community in London in search of funding for the next 6 months. I still remember thinking to myself ‘this shouldn’t be hard….’
By the 5th meeting I was beginning to feel uncomfortable. By the 15th the butterflies had set up a permanent camp in my stomach. Every VC’s response was the same – “no”.
It soon became clear that either our pitch was off, or we were in the wrong part of the business or they just weren’t buying us as a team. Even more frustratingly, every VC appeared to be an expert on the sector and would spend most of the meeting telling us why our product wouldn’t amount to much, or that we were a couple of years too early, or that they had already invested in the sector and didn’t want further exposure.
Then the outlook darkened. A hedge fund friend quietly warned me that if I had any money in several major banks to consider withdrawing it. While there had been murmurs and reports of financial trouble ahead for some time, no one wanted to be the first person to turn down the music and switch on the lights when everyone was having such a good time.
And then it happened, the Global Financial Crisis hit the City of London like a Tsunami crippling many of the VC’s and with them any chance of our funding. It was financial carnage and we were in a desperate situation – no one wanted to listen to a pitch on VoD channels when banks were going to the wall.
So I was left to answer the question – how do you raise funds in a time of financial crisis? Now, there are literally hundreds of online guides about raising capital on the internet and I’m not going to create another one here but what I would like to pass on are some of the approaches I found useful. Not all them were used in the above instance, but in subsequent fundraising campaigns I have utilized them all at one time or another. Also, I won’t be covering things like term sheets and MOUs – that’s for another day, and this is an overview to help get you thinking about how you would go about raising money.
Here are my 10 tips to think about when fund raising:
- Get your house in order. Ensure that your registered company is cleanly owned, that you’re seeking money against a reasonable valuation, and the IP resides in the company. No licensing the IP in from another company for example. Make it easy for people to see what they’re investing in.
- Know who you are pitching to. A venture capital company may not necessarily be the best way to raise money. Often people who are high net worth and/or friends and family are better to tap into than a VC. Especially if you are a first time entrepreneur and/or are looking for seed funding or less than $500,000.
- A little is harder to raise than a lot. You read that right. Often it’s more difficult to raise money in the $500k to $1m range then it is to raise $2m, $5m or $10m. So be prepared to spend a lot of time explaining the product and educating your potential investors on the industry you want to enter. Also, companies don’t grow in a smooth curve. Make sure your growth curve and capital calls aren’t linear, build in some volatility to your numbers.
- No fancy funding structures. This is the first thing that investors will shy away from. Avoid, if you can, words like convertible notes and suchlike. These are great instruments for retaining shareholder equity and a boon for the person raising your capital but they can end in tears for your shareholders.
- Have a clear value proposition. Often the people who are going to invest in your company will look at the value proposition as if they were a customer, so make sure that what you’re asking them to buy into is clearly articulated. Often potential shareholders will be discussing your proposition with others and they must be able to articulate what you’re offering and why it looks so attractive.
- Does the opportunity match your skills and ambition? You must be clear about this because if you aren’t, it will shine through in your investor presentations.
- How can scale be created? This is a favourite topic for all potential investors and you must have a very clear answer as to how you’re going to scale and how you’re going to manage the resources required to generate and manage that growth.
- What are the forces that are influencing your market and where are they concentrated? This is particularly relevant for retail – understand, and be realistic here, in great detail whether you’re part of a trend, a fad or a longer term opportunity.
- Can you recruit the right talent? You may have the best idea in the world but if you can’t put the right team together then your pitch will go no further than a PowerPoint deck. Know what the availability of key team members is going to be in the future and whether you’re going to have to pay a premium for a particular skill set that is material to your growth and success. This is particularly relevant for software where many a great idea has struggled to be executed because the right talent couldn’t be found or that talent was so expensive it became an uneconomic to build the product.
- Do you really believe in what you are doing? This sounds pretty obvious but it really is something that will shine through in your funding pitch. If there is any discernible crack in your commitment or belief this will be spotted a mile away. Be aware of cultural differences here. What feels like bragging to some people is seen as supreme confidence in others. This is not the time to be modest.
Now, back to ChannelFlip, which in the end we did get the funding for. Our pitch wasn’t perfect, the numbers were wildly optimistic and the amount we needed wasn’t reached, however we were underway. Soon, the rides on the 295 became more enjoyable, the empty room became a buzzing studio where the desks had to be pushed against the wall so we could film additional episodes. Fans would drop by and offer to help for free and in short order more advertisers and media stars joined us, all wanting to be a part of the internet video revolution. While the car service, P.A., international travel and perks never returned I didn’t care, the adventure we were on was more than enough of a reward.
One VC believed in us and saw the potential and he stuck with the business until it’s sale 18 months later to one the largest media companies in the world. Thanks Nick.