Published in the Irish Times on 16th July last..
“Have I got a deal for you!” asserted Jim Green, now at Composite Software, but back in 1993 of Sun Microsystems (now a part of Oracle), to my two IONA co-founders, Annrai O’Toole and Sean Baker, and myself. Having courted various venture capitalists, the three of us instead decided to enter negotiations with Jim for a trade investment which ultimately armed us with considerably more fire power than merely further deepening our balance sheet. With the subsequent explicit endorsement of the then Sun CEO, Scott McNealy, we achieved major industry wins with Motorola, Boeing, and Bell South and thus in turn many others.
Raising capital is the second preoccupation of most start-up CEOs. Fortunately for technology companies today in the software space – including web, gaming and mobile app companies – the amount of finance needed is usually relatively modest compared to capital intensive start-ups which produce physical goods, such as many semiconductor, telecommunications and bioscience companies. Using the internet and the web as a global distribution channel, alongside pay-as-you-go cloud computing, means that private “angel” investors and diminutive seed funds can now provide the financial base for such start-ups. Furthermore the Obama administration, in its recent Jumpstart Our Business Startups (JOBS) Act, has institutionalized crowd-sourced funding so that for-profit start-ups can legitimately raise seed investment from the general public: one wonders whether the Kenny administration can show comparable initiative in reforming Irish securities regulation.
I said the “second preoccupation”. The first is of course the necessity to find, entice and then keep great staff. I wrote about this in my previous article for this paper (25th June 2012). The two challenges frustratingly go hand-in-hand: you can’t attract talented people without convincing them that your funding is in place, and you can’t attract deep funding without convincing investors that you have hired great people committed to your vision and your leadership. However compared to say a decade ago, there is now in Ireland a stronger base for both early stage financing and experienced people looking for their next career opportunity.
If you are lucky, seed stage funding may be all that you need. Based on your initial investment, perhaps your sales will expand to the extent that you can use your cash flow from operations to successfully entirely expand your venture and conquer the global market as a billion euro company! Inevitably though, almost all start-up companies need further investment to expand their operations, not least in marketing and brand momentum. Secondly, most companies “pivot” to rapidly change direction, as they learn from the market that although their basic idea is good, they are addressing the wrong opportunity and so need to change direction – and inescapably need yet further financing to do so.
In my experience high quality investors have their financial muscle to sustain a company through the challenges of growth. A start-up rarely gets its proposition correct first time, and may need several rounds of finance as it grows and develops its strategy. Good investors work with a management team, not least through their personal industry networks and experience, and reward success whilst protecting themselves against any demise of the firm.
A common deficiency of risk capital in Ireland today is inadequate capacity for follow-through. The Innovation Taskforce (of which I was a member) correctly observed the deficit of early stage risk capital in 2010, which has now been modestly addressed by national policy changes. However I believe that the Taskforce did not suggest – nor indeed expect – that greater seed stage capacity would be at the expense of growth stage capital. In practice today, it would appear that several seed stage funds operating here have shallow pockets for expansion capital. When seeking out new investors to continue the momentum behind a company, it is now not unusual for CEOs in Ireland to find themselves in a difficult position as mediators between their current and potential new shareholders. New investors can bring substantial finance, and want the CEO and management team to be aggressively motivated. However those existing investors who have insufficient resources to further invest, potentially become sidelined and may as a result even attempt to veto the entry of the new backers.
To any start-up CEO in Ireland, I urge a clear investment strategy from an early stage. I see experienced serial CEOs in Silicon Valley lay out a precise multi-year investment strategy: raise this amount of seed stage capital now, in the full expectation that we will achieve this specific business goal by next year; then in consequence raise a Series A round at about this valuation; so that in two years time we will be able to achieve this second business goal and then be able to raise a Series B at this much higher valuation; and so on. Having a clear financial investment plan, they then select financial partners who can support their journey in full: most avoid a potential partner who has no stamina for a longer race.
“Have I got a deal for you!!” This should be the assertion from CEO to the investor, and not the other way around! The CEO should be selling an opportunity to investors, with a clear, transparent and credible plan for growth, and subsequent wealth creation for all shareholders. In our own case in IONA, Annrai, Sean and I were able to convince Jim of an even better proposition of how IONA and Sun could work together than the deal which Jim had brought to us. In the event, the three of us returned more than a hundred times Sun’s investment back to Sun after thirty-eight months.