Funding Your New Media Venture

Report on an NMK evening seminar in March 2002

Speakers: Stephen Upstone, Firststage Capital; Chris Allner, ProVen Private Equity; Martin Heath

Stephen Upstone began the evening with a sober overview of the current climate for investment in the UK’s digital media sector. He described how TMT (Technology, Media and Telecoms) stocks have all been badly hit, with the result that both the rate of IPOs and acquisitions are down 70% on 2000. Venture capital investment was down 65% in 2001, largely because investors are having to wait longer and longer to get their investment back, while start-ups are struggling to bring in the revenues they need. In addition, many backers are now directing time, resources and funds into their existing portfolios rather than actively seeking fresh investments.

However, Stephen also made it clear that there were signs of the tide beginning to turn. The last quarter for 2001 saw the first increase in US investment in 18 months and there is still a surplus of funds to be invested, as over the last two years considerably more money was raised for investment than was actually spent. In particular, Stephen felt that investors were still interested in ventures where there was a clear revenue stream and they could hold intellectual property that could be readily protected and exploited. The overall message was, therefore, that there still are opportunities for attracting funding, but people need to be more focused and commercially realistic in the way that they proceed.

Stephen went on to briefly outline three main sources of equity funding:

• Business Angels: Private individuals who are usually experienced and wealthy, and have a personal interest in the venture or relationship with the company. They tend to invest between £50k to £500k at the seed stage.
• Venture Capitalists: Professional investors who have borrowed money to invest in a quick, high-yielding return. They may invest a £1m+.
• Corporate Venturers: Companies investing in a project, often for strategic reasons rather than for just a return on the investment. They may invest a 1£m+.

It is important to realise that all of these investors can bring much more than revenue to a project. They bring business experience, useful contacts and creditability, helping you to attract staff, clients and further investment, while a corporate venturer will often bring an immediate revenue stream by taking you on as a client. It is therefore imperative than in approaching potential investors, you have a clear understanding of who is most suitable for your needs, what they can offer and what they want in return.

Stephen was followed by Chris Allner, Director at ProVen (www.proven.co.uk) and an experienced financier, who has been funding and brokering investments for more than ten years. Chris likened capital investment to the fuel in a business’s engine – it is what keeps an enterprise going, moving it forward smoothly and efficiently. He identified three critical factors which can be found in enterprises that receive successful investment:

1. A desire to succeed and make money. Successful entrepreneurs tend to be ruthless and single-minded in their desires and objectives, and they are always looking to keep costs low while looking for opportunities and profitable exits.

2. A balance of confidence and realism. While VCs often tend to be over-confident and gung-ho in their outlook, an entrepreneur must be able to temper enthusiasm with caution. Chris advised the audience to build the worst-case into their business models – take 30% off cashflow predictions, and do scenario planning around possible disasters.

3. Enterprises need to develop those advantages that cannot easily be eroded by competition. Defencible intellectual property, unique content and brand values are such examples – assets a business can hold and exploit in the face of international competition, and can form the basis for long-term revenue streams. In particular, Chris urged the audience to make full use of the ‘unfair advantages’ of brands – these can be powerful global commodities, which differentiate and protect a business’s products around the world.

Chris went on to outline some tips for all those seeking funding, especially in the manner in which they write and present their business plans:

• Business plans should be short, easy to read and readily understandable. Most VCs get dozens of business plans a week, and if they cannot grasp the concept quickly, they are unlikely to proceed with it.
• Avoid in-depth technological discussions: most VCs do not understand, and are not even interested, in how a product works – they want to know what it does, and what problems it will solve.
• Emphasise the strength and expertise of your management team – it is often the VC’s primary consideration.
• Recognise the risks involved – don’t try to tuck them away, but rather make it clear that you have analysed and understood the competitive landscape for your enterprise.

Finally, Chris echoed Stephen’s optimism about the current state of the investment market and went so far as to predict that in years to come, 2002 would be regarded as a ‘classic year’ for investors, in which great opportunities for highly profitable returns could be found at reasonable prices.

Chris was followed by Martin Heath, a ‘serial entrepreneur’ who has enjoyed considerable success in the music, video game and media industries. For Martin, creating a business is an act of faith, and entrepreneurs often tend to be more interested in their own greatness rather than balance sheets and management issues. Martin gave an entertaining and insightful description of his entrepreneurial career, from manufacturing toy soldiers at the age of 14 through to setting up interactive TV and software companies. With regards to funding, he gave three important lessons:

• Do as much as you can without financial investment. Build up your business gradually, funding growth from the cashflow and do not approach VCs or other investors until you are sure that your business can only develop further with capital.
• Good businesses attract finance on their own, and entrepreneurs should be more concerned with getting sound business and management structures in place rather than devoting their energies to winning investment.
• Finance should be used to grow a business, not to create it. You should have a viable business already operating before you seek investment, rather than the other way round.

This event was produced in association with:

FirstStage Capital is a corporate finance house that specialises in securing funding for early stage technology companies. The company designs fund raising strategies, identifying the most appropriate investors from venture capital, corporate venturing and business angel sources. To find out more about FirstStage Capital and to read articles giving advice on how to go about raising venture capital, please go to www.firststagecapital.com.

Presented in association with

Further Information

Click here for further information on writing a business plan and obtaining funding, provided by c2Ventures Limited.

Profiles

Stephen Upstone, Director, FirstStage Capital
Stephen Upstone has responsibility for deal origination at FirstStage Capital, a corporate finance house that specialises in securing funding for early stage technology companies. Stephen focuses on raising funding for technologies employed in the media and marketing sectors. Prior to FirstStage Capital, Stephen worked for brand and media consultancy Michaelides and Bednash, where he was involved in developing brand strategy for beeb.com and beeb.net. Previously, Stephen worked in advertising for McCann-Erickson and Lowe Howard-Spink. www.firststagecapital.com

Martin Heath
Martin is a successful entrepreneur and business angel investor, who has had success in a range of different businesses but always with the same objective; building companies valued on their intellectual copyrights. His businesses have ranged from the record industry, software, the games business, music publishing and television. He has had broad experience from start up stage, to buying and building companies, through to managing companies inside media corporations. His modus operandi has been consistent: spotting new opportunities in media or technology niches, building or buying a company to exploit the opportunity, proving the revenue streams, and trade selling.

Martin’s high-profile successes include the founding of leading independent record company Rhythm King, the establishment in 1990 of games company Renegade Software, and the founding in 1994 of innovative digital media agency Perfect World. In 1999, Martin co-founded Worldpop with Peter Powell, a cross platform media company targeting the teen audience.

Chris Allner, Investment Director, Proven Private Equity
Chris joined ProVen London as Investment Director in 2001 responsible for sourcing, completing and monitoring equity investments. He was educated at Oxford University where he gained an MA in Politics, Philosophy and Economics and has over 18 years experience in the VC/Private Equity market. Prior to joining ProVen, Chris was a Director of Bridgepoint Capital (formerly NatWest Equity Partners) where he was more recently responsible for the Southern regional office, previously being an Investment Manager with Charterhouse Development Capital and having commenced his career in venture capital with 3i. ProVen specialises in investing long-term private equity in established, small to medium sized businesses with good growth prospects. It has particular expertise in media, brands and enabling technologies.

Have a look at the original event description.