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Saturday, 27th April 2024 |
| Looking for the next Iona |
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| Philipp Matuschka on the practical steps required. |
W hen I turn up looking for finance as a consultant on behalf of third parties, I’m a bit
of an odd fish to start with. Most consultants of this nature come from some sort of an accounting or corporate finance background whereas I come from 14 years programming and management in the software industry. It will come as no surprise that the companies I consult for are all software companies.
The very first thing you have to be clear on is why you are starting a company. Do you want to build your own place of work for the next 20 years, called a lifestyle company, or do you want to get rich in the next five years. If it’s the first then this road, and I suppose this article, is not for you.
Everyone is looking for the next Iona. That counts for the people starting new companies, for the consultants like myself and for those providing finance, either on their own account or on behalf of third parties. This has resulted in the entire community being blinded. They all want to hear that a small company today can turn over say £5m in two years, £25m in 4 years and be quoted on NASDAQ with a market capitalisation of £100m or more in 5 years. Have the vision by all means, never lose sight of that vision, but remember the realities. Very few companies will make it to that level, some will make it half way, some will never make it beyond a local market and many will fail.
The real knack is to identify those that will make it half way, i.e. to the £25m or so turnover. Remember that this is still a very respectable turnover in this country. While this is unlikely to make your company attractive for NASDAQ, it will position you well to be bought up by some big brother type organisation which needs to fill a gap in its product or market portfolio. The proceeds of such a trade sale can leave you able to afford a house on Sorrento Terrace, even at today’s prices, with some change for a holiday or two.
The venture capitalists (VCs) are far more excited by technology providers than by application providers.
It’s understandable in so far as these have a far higher chance of becoming the next Iona and they usually have considerable IPR, which can be protected using an appropriate legal mechanism. But what good is technology without an application. If twenty years ago you had been offered a balloon, which in the middle of an accident would explode in your face, you would have laughed. Today you wouldn’t even consider your new car if the airbag weren’t standard. The Internet is similar in some ways. Can someone explain to me why I sit every night staring into my screen looking for something useful on the Internet? But yes, bit by bit there are useful applications appearing. These applications are the future and will be provided by those ‘half way’ companies I spoke of.
But now you’re up against another problem. Funders of whatever nature, will perform due diligence on your company and idea. Largely this will fall into four areas: financial, legal, product and market. While the first three are largely routine, it’s the fourth that will make all the difference. Does a need exist for your product and have you got a valid method of getting it out to the market. The problem with these questions is that the answers are usually sought by reference to successful case studies. So on the one hand you’re being asked to be innovative and different and on the other hand you are being judged on the proven successful route. This can be maddening beyond belief.
To be fair the venture capitalists have been great in providing inspiration. They want to see Irish companies succeed and are very happy to give guidance and direction, even to companies they don’t want to invest in. If you go away and apply your own ingenuity to the advice given, they are perfectly happy to look at your plan a second and even a third time. If they think it isn’t worth a second round, they’ll usually tell you straight away.
The VCs need to see a good product, a strong management team, a trading history and evidence of an existing US entry vehicle. For one of my recent clients, showing interest from the US based ISPs (Internet service providers), changed the VC dialogue from passive interest to a more active role.
The next step is to convert the US ISP interest into a letter of intent or even better a contract. Then the true negotiations with the VCs can finally begin.
A general guide to the steps leading up to obtaining finance would be summarised as follows:
1. Come up with a good product idea;
2. Investigate routes to market and
create marketing partnerships;
3. Begin creating the product;
4. Sell it;
5. Obtain finance. |
Philipp Matuschka is managing director of Induna Ltd. Induna provide management consulting to young Irish software companies and have recently created a partnership with New York company Intercope Inc. for the purposes of opening distribution relationships into the US. For more information: www.induna.ie.
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| Article appeared in the January 1999 issue.
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