Start up program

With high technology and digital media in mid-boom, it’s still a good time to invest in start-ups, whether funded personally, or by venture capitalists

If you have missed the cries of, “There’s gold in them hills”, you have probably been in orbit for the last five years. The Tutt Consultancy founder Simon Rhind-Tutt calls it the gold rush of our lifetime. He is, of course, referring to the tide of multimedia ventures sweeping across the design sector.

According to official figures, venture capital investment tripled in design and media projects over the last financial year. But this is just the tip of the iceberg. The sum is set to rise this year and disregards private funding to boot.

Ticegroup managing director Ian Cochran is in little doubt that right now is certainly the time for prospective entrants to be setting up, not just thinking about it. The market conditions are spot on, he says.

“I think the time to get in is now. The economy is strong. The US is strong,” says Cochran. With the cost of borrowing in the US and UK at its lowest ebb and Web stocks maintaining record valuations, conditions appear good.

The first thing to do is put together a proposal. “You need a strong business plan to explain what the idea is and what the business is for. It helps to have a track record in doing this, which many people don’t have,” says Cochran. The success rate of applications should not dissuade you either, he adds.

One financier is said to back only one in 100 serious start-up projects it considers. So the process is not for the faint-hearted. But then this sort of entrepreneurial risk is expected to generate giant annual returns, and that should be incentive enough in itself.

Funding can come from either public or private investment, although directly raising equity through the stock market is perhaps not relevant to the majority of designers.

The obvious option is convincing a venture capital (VC) company of the guaranteed profitability of your idea. This will obviously require a thoroughly researched business plan, and market analysis to identify revenue streams. VCs will not only expect a leak-proof business model, but projected internal rates of return approaching 40 per cent per year over three to five years. Certainly no mean feat.

“The only problem with going to a venture capitalist is that they want a big slice of equity for the risk,” says Cochran. Strings of some sort are certain to be attached, which may not suit many innovators.

But this route certainly secures quicker growth than financing from your own bank account. Radical and ambitious design managers looking to cause a storm could even try forging a venture capital partnership to buy out their own employer.

Nucleus Design managing director Peter Matthews, who has steered his consultancy from print design to e-business consultancy, warns that all VCs will be looking for an easy way of liquidating their assets. In layman’s terms, this means that underriding any deal will be agreements to float the business or find a trade buyer after only a few years.

Nucleus acquired start-up funding from a US venture capital company, for its e-commerce business Equire. This is known as “seed capital”.

Matthews advises taking time to ensure your proposal will suit the VC. Each will have its own preferences for project size, location and market sector. “You have to fit with their view of the world. For example, there is no point in talking to a US VC if your focus is on the UK,” he says. Your most competent staff will spend a huge amount of time on the process, he adds.

Other sources of funds can come from so called “Business angels”, who are generally private investors who want to invest in high return ventures. Finding one is a bit like looking for a needle in a haystack and a business art in itself. “It is all about networking,” says Matthews.

He advises that many accounting groups and management consultancies have their own networks of such benefactors, and obviously profit from such relationships. Lists are available from the British Venture Capital Association.

Going corporate could be another option. Lighthouse Global Network has acquired a veritable stable of design groups, pledging to retain their culture and funds for the sole purpose of growth. LGN chief operating officer Julian-Hanson Smith acknowledges that it is easier to find funding if you have a successful track record.

“High quality firms with a strong culture and fiscal profile will always find themselves on the wish list of groups like LGN. Put another way, funds for expansion come to them.” Unfortunately, the “track record” element excludes newer consultancies.

The latest trend in the digital media and hi-tech arena, and don’t let the name put you off, is finding an Internet start-up accelerator. These are a new breed of infrastructure businesses which have built themselves up to recognise worthy investments in multimedia-related work. One such start-up accelerator, or Internet incubator, is eSouk.

It describes its aim as “creating Internet businesses, bringing them to market very quickly and helping them to raise subsequent funding.” The Internet incubator provides seed capital of up to $500 000 (£333,000) and support for the launches. It will also look for substantial control, often recruiting senior management itself.

Its website contains a useful business proposal form, which is a good place to start gathering your thoughts (see BELOW). You will need to give consideration to the estimated market size of your proposal, its global reach, as well as the immediate capital requirement and income required to break even. Remember that investors will back the safest and most profitable ideas.

Again, there are no shortage of proposals being received by these “shell” companies either. Tokyo Mitsubishi Derivatives analyst Darren Vinton says many have been swamped with interest.

He says that one particular business, eVestment, is said to receive hundreds of business proposals each week. He agrees that, like the venture capital groups cited by Cochran, the success rate of applications is often little more than maybe one in 100.

The website for eVestment explains that the group undertakes to act as sole or lead investor. “Our typical eVestment size is £100,000-£400,000, with syndicated investments falling in the £1 million to £10 million range. Where we take the active lead, we would typically expect to obtain a seat on the Board of the investee company and ideally look to either a flotation or sale in 12 to 18 months,” it states.

Such propositions tend to be about establishing virtual businesses rather than bricks and mortar consultancies, because clients (your assets) can walk out the door any time.

But many believe the tide is turning, as opportunities for establishing interactive consultancies which can talk business and brand strategy curve skywards. If the multimedia sector continues to grow, and AOL Time Warner is food for any sceptic, design groups can expect to find funds easier than those in other sectors.

Case study:

AMX STUDIOS

Malcolm Garratt of AMX Studios has some particularly sour experience of seeking venture capital funding in the digital media field, in the days before the industry found its current favour.

‘We spent a couple of years getting into [financial] difficulty while trying to keep ownership and control,’ says Garratt. AMX saw the value of on-line content and partnerships years before it was proved by the AOL Time Warner deal. Garratt can rightly claim that groups like his put in the R&D for a whole generation of new businesses. And they paid a price.

Garratt says AMX had no alternative but to work with partners at a financial loss because its vision, now paying off, was simply passed over by investors. While AMX was putting in time and money into what it rightly saw as solid investments, the conservative attitude of UK venture capitalists certainly did nothing to help.

‘We found it incredibly frustrating,’ says Garratt, ‘I don’t think that this country has the necessary investment heritage, which is why the West Coast of America has become so dominant. In my experience, Venture Capitalists here are extremely conservative. They have only started to get into new media because they have been advised it is the thing to do, but without really understanding what they are getting into.

They are a lot of blinkered people – either that or we were an extremely bad risk,’ he quips. The eventual solution for AMX was to sell a stake of the business to the Havas group.

Case study: STOCKS AUSTIN SICE

After ten years of self-funding from a bank account which never once strayed in to the red, SAS founder Nick Austin feels it could be time to pursue external fundraising opportunities in order to maximise the consultancy’s growth.

‘It’s not something we’ve ever done,’ says Austin, in reference to going outside for investment. It is a sentiment echoed by numerous consultancies, which have traditionally funded growth from cash flow.

‘We are very conscious that we want to control our own destiny,’ says Austin, after the experience of working under a profit-oriented regime at the publicly quoted Michael Peters Group.

But in its transition from print to multimedia, SAS now sees that to solely rely on internal funding to expand could mean losing contracts available now.

For the first time, Austin is considering options for raising capital from external sources.

‘There is a huge opportunity for us to grow now. When you look at the way it is going you can see we are doing some very exciting Internet projects. But each site requires a much wider range of people compared with the number of skills needed for print,’ says Austin.

He knows that double the work could come off the back of raising funds externally, but still debates whether such an expansion would be sustained by the market.

Austin concludes by saying that, having no venture capital contacts, he would look to his non-executive chairman for first time guidance.

Funders

Venture Capital Companies

For a full directory of venture capital companies see www.BVCA.co.uk, the newly relaunched website for the British Venture Capital Association. It features a fully searchable directory of association members and background information on investment trends.

Internet Investment Companies

Dawnay Day Lander (DDL)

www.dawnaydaylander.com – (UK-based)

Jellyworks

www.jellyworks.com – (UK) Jonathan Rowland

Ideas Hub

www.ideashub.com – (European)

Ci4Net

www.ci4net.com – (European)

IdeaLab

www.idealab.com – (Seattle-based)

New Media Spark

www.newmediaspark.com (UK’s first Internet incubator)

Business-incubator

www.business-incubator.com – run by Sun, Cisco Systems, Oracle and Exodus.

E-Capital Investments

www.e-capitalinvestment.com (under construction)

eVestment

www.eVestment.co.uk (under construction)

eSouk

www.eSouk.com

BVCA Investment facts and figures for last financial year

– Media investment tripled. £620 million invested in media design and photography sectors

– £5 billion invested in 1332 companies by UK venture capital firms

– Worldwide investment by UK venture capital firms increased by 18 per cent to a record £4919 million

– Investment in the UK increased by 23 per cent in 1998 to £3775 million, representing a near quadrupling over the past eight years

– Almost 60 per cent of companies invested in received under £1 million

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