By John Hancock
Over the past few months we have started working with clients who are seeking venture capital to launch their publication. In 2006 I raised $650k in two tranches and have been able to add a few ideas to the mix which I am told have been helpful.
If you are in the same boat, perhaps some of these considerations may be helpful for you. I might even have some legals I can dig up somewhere – I recall the cost at the time for one document was around $20,000 (!!), but the investors were happy to pay. You will also want a company structure that facilitates investment. I am sure all these sort of documents are out there and if you know some good templates, please share in the comments section below.
I believe the real assets of any startup publication lie in:
- Distribution channels – how compelling is your model, how many subscribers are you likely to have at the end of 6months, 12months, 24months?
- Your experience in publishing – if you don’t have a lot of experience, do you have a team on board that does?
- The strength of your relationships with industry stakeholders and the likelihood of them supporting your publication via content, advertising and subcriptions
- Your idea – yes, sadly even the best ideas for a new publication come after these other considerations, in my opinion.
Putting your idea last by no means undermines its brilliance. Thing is, everyone has a good idea and ideas float around dinner tables and bars in their millions daily. Investors see a LOT of ideas and we all know the stats for successful businesses – something like 80% of new businesses die in first 12mths, 80% of the remaining 20% die in the second 12mths. And that includes good old fashion enterprises like cafes, pool cleaning etc. The metrics for innovative, entrepreneurial businesses are even tougher. So ultimately, your ability to deliver on your great idea is what the investors will value most. I’m sure you’re aware of all this anyway, but it’s always worth throwing stuff out there because something might help someone. Coming to a valuation is an interesting exercise and there are various ways of doing it, various rules of thumb etc. At the end of the, the value needs to be your ‘walk-away’ price – what you would take today if someone said: “I’ll buy your idea and your connections and you go enjoy yourself” or “I’ll buy your idea and give you a salary for 12-months to make this fly.” A valuation thus becomes a mix of variables, including:
- The passion behind your idea – that always tends to play first for the entrepreneur and can create a wonky path for all, because passion/desire is difficult to monetise
- The likelihood of success/failure
- The skillsets an experience of stakeholders involved, including those you would have on your board
- The likely turnover of the company at the end of 12-months. In Australia the annual turnover x 2.5 – 3 is a generally acceptable buyout valuation metric
- The ability to scale an enterprise and flip it – your information memorandum today should include your exit plan. Tech companies tend to flip 18-24mths. While yours is not all tech, a 24 month plan to flip will excite most investors, especially if you can get the exit sale price somewhere between 5x – 10x of the investment you took (jargon is pronounce “ten-ex”). A ’10x’ is every investor’s dream return, ie ten times what they put in.
In-kind contributions from an investor can be highly valuable, but it is difficult to get dollar investors to agree with commensurate in-kind share allocation – everyone wants to see the cold hard cash, ‘skin in the game’. So, if you have someone who has plenty to offer but no dollars, you can offer ‘earn-in’ options, rewarding hours with equivalent shares. If you are considering preferred and ordinary shares and options, your accountant and lawyer will be your best help.
Getting the underlying company structure correct from the beginning is extremely important, especially if you want to make it easier for future investment and/or sale. Note too, that you don’t need to necessarily raise all the capital in the first ‘tranche’ or round. You may want to split it, raising just enough to get you to the next level, which might be 6-months away. After a successful startup period you can offer another round with a higher valuation. That’s how we did ours and our second valuation, (which is only truly a value if investors accept it and invest), was 4x our initial valuation.
So in 6 months we had sufficiently hit targets and demonstrated a strong enough likelihood of success that the company value increased fourfold. Remember though, a valuation is only what people are prepared to risk for a given period until they get their return on investment (ROI) on exit. Be sure also to look beyond the money. Are your investors the right type of people for you and your business? Do they truly get your vision? Have they voiced all concerns? Do you sense they are on board with where you want to take the business, or might they have some different ideas? It is best to get all this stuff out and on the table before any documents are signed.
The end of our own story is that we were in serious negotiations with 2nd tier media companies at a valuation of 8x at 20 months, but then the GFC landed and everyone pulled their heads in. So, if I were you… I’d be looking first the true assets behind your idea and strengthen those as much as you can. The stronger your position, the more likely you are to get a valuation closer to what you want. Investors will shoot low, you’ll shoot high and at the end it will come down to how many good cards are at the table and who wants to play. Investors like to have fun too.
Besides your business plan, market statistics etc., other things you can do to strengthen your position with investors include:
- Create a proposal that you can float around your local media channels for possible cross-pollination and branding.
- Draft basic agreements for any stakeholder partners, eg. people who are going to help you get your project up, advertisers willing to commit to 6-12months in advance etc.
- Reach out to individuals you think would be great to have on your Board of Directors
- Create 3 tables of poor, average and strong growth cashflow. Nothing complex, but realistic
- Create a small example list of companies that would be potential buyers – always be thinking about your exit strategy. Regardless of how much you love your idea, most investors want to be in and out within 24-months.
For those fortunate enough to successfully garner investment, be sure to hold onto your vision and, within reason, control. The golden rule of this game is that those with the gold make the rules, so you want to be sure you have like-minds all on the same page when you start the marathon. Above all else, have fun! This is an exciting time in your life and investors invest mostly in people. If they can’t see bursting excitement and enthusiasm from you they will unlikely find it anywhere else in your proposition. Good luck!