Out of Limbo – Post-mortem of a fundraising excercise
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on June 14, 2011
Edit: For an update to this post, see Changing The Game.
It’s been something of an open secret over recent months that we, KashFlow, have been in a process/undertaking a strategic review/considering our options/[insert-preferred-euphemism] in recent months.
So I thought I’d take this opportunity to update you on what’s been going on and where we’ve got to. Be warned, it’s a lengthy post and probably only worth reading if a) you’re likely to be doing something similar soon with your business or b) you’re a nosy buggar.
Some Background
I started KashFlow as a side-project when I was working as a one-man web development agency. The short story is I couldn’t find anything accounting software on the market that suited my needs as a small business so I built my own. The longer version can be found here and more about my personal background here.
The only investment we’ve ever taken was a tiny amount of seed funding from Lord Young. He has since become our chairman and proved himself invaluable as a mentor to me in growing the business.
The timing was perfect. We had a chance to make our mistakes out of the spotlight and by the time SaaS became the norm (it is now, right?) we found ourselves with a mature accounting package and as the leader in a market with new entrants debuting virtually every month.
Apart from a short-lived flirtation with a CTO last year, my senior team has just been Michelle who runs our OrbitAccounts division and Dominique who runs the office day-to-day.
By the end of last year we’d got to the point where we were bringing in over £1m in revenue and was continuing to grow very fast every month. In fact, from what I can gather from their published accounts, we’re still generating more revenue from the UK than our closest and extremely well-funded competitor.
What started as a side-project had grown into a real business with thousands upon thousands of small business relying on us to provide their accounting software.
The Process
We certainly don’t need an injection of capital to survive. The company makes good money, has no debt and I’m finally drawing a healthy salary. But I had to make a decision: did we want to be just a lifestyle business or did we want to retain our position as a leader in the field of SME SaaS accounting software (and develop other applications)?
To do the latter we’d need to inject some rocket fuel to really accelerate our growth and build out the management team. There’s only so much the small team we have can realistically take on. There have been, and still are, too many opportunities that we’ve just not had the mental bandwidth to take advantage of properly. With a couple of well-funded competitors in the market, it would only be a matter of time before we were eclipsed if we stuck to our current cashflow-funded, organic growth.
I decided it needed to be the latter. I know what needs to be done to rapidly grow the business but lacked the resources to do it quickly. So we decided to find a “strategic partner” to work with.
We’ve had a lot of interest from VCs over the years and I’ve always shunned it. We could have gone down that route but I thought it made more sense to speak to other software companies because as well as cash they’d bring industry expertise and an existing customer base.
As one specific company our industry had indicated they were keen to work with us we decided to explore that option and solicit interest from others.
So February saw the commencement of lots of meetings with lots of different companies. Some already in SaaS, some wanting to get there, some without a clue about SaaS (although that’s not how they saw it!)
We had expressions of interest from a handful of companies. But none were perfect – either in their vision of the future and how we’d work together or in the structure of a deal.
A recurring theme was companies wanting to take a minority stake in the company now (fine) but reserve the right to buy the remainder of the company of the future at a price agreed today (not fine!). I know I can build the company to be much more valuable in the suggested time frame than the future price they were putting on it. I suggested to my favourite of these companies that they instead have an option to buy us on a multiplier of turnover at that future date – the multiplier being similar to the one used for the original minority purchases. It wasn’t accepted.
The “half-in, half-out” approach just doesn’t work. It seriously limits our options in the future and would make any future fundraising difficult.
In Limbo
By the beginning of this month we had no potential partner on the scene that looked like they could do a deal that was acceptable to me. But we still had more new companies getting in touch every week saying they’d like to meet to discuss the possibility of working together.
The process had been going on for what felt like ages and there was no end in sight. Whilst the SME side of the business just grows and grows with minimal effort, we still haven’t found that magic formula for the Orbit/accountants side of the business and it still needs ongoing attention that it just hadn’t been getting.
I’d delayed decisions on hiring people and strategic technology decisions until we knew the outcome of the process.
I was pissed off, frustrated and annoyed – both at the lack of progress and the fact I’d let it drag on so long.
I was reminded of some recruitment advise I was given years ago: if you interview 8 candidates for a job and none are outstanding, always remember you have a ninth option: none of the above.
So I have decided to put an end to it. No more meetings – yay! I can’t tell you how good that feels.
Lessons Learnt
Whilst frustrating and time consuming, the process hasn’t been a complete waste of time. It’s been really useful to get an outsiders perspective on what we’re doing well and what we’re not so great at. I’ve made lots of good contacts and perhaps most importantly I’ve learnt lots of lessons:
A bigger team is essential. I knew we’d done quite well to get where we are with no funding, but what I hadn’t appreciated is that I’ve done it with no co-founder(s). If I had people I could reliably delegate entire functions to then I’d have more time to do what I should be doing as CEO. The role I’m performing at the moment, with day-to-day responsibly for the strategy AND tactics on virtually everything isn’t what a CEO should be doing.
We shouldn’t have delayed strategic technology decisions. We should have pressed ahead always on the assumption that we wouldn’t be doing a deal. The hiring decisions are a trickier one. I’m not sure it’s right to encourage someone to join the senior team knowing they may quickly be surplus to requirements in a couple of months time.
If we’d spent more time over the years fostering a relationship with some of the potential partners we spoke to prior to entering formal meetings, we’d have saved a lot of time. We’d have known which it just wouldn’t be a fit for (and not bothered meeting). For those it would have made sense for, they’d have known us and the business enough already to not need PowerPoint presentations and discussions covering the basics.
We should have been stricter about our time line and not let the progress drag out to twice as long as it was meant to have been. If you’re late to the party, you can’t come in. Although that’s not so easy to say at the time if you haven’t yet found the perfect partner.
I’ve realised other companies in the same industry AREN’T the ideal partners I thought they were. Yes they have experience and resources, but they also have their own agenda and there are too many issues around how you fit strategically into their overall plans (which they wont always share with you in full). With a straight financial investor (Private Equity or Venture Capital), you have none of that hassle. Both you and they have the same simple objective: to grow the company into a much bigger entity than it is today.
As a part of the above process we spoke to one financial investor. They usually do much bigger deals than we were asking for, but I got a sense of what it would be like to work with them. And (shock and horror!) they were smart, nice, intelligent people. Of everyone we spoke to they asked the most sensible, thought-provoking questions that showed they actually got what we were all about. So perhaps not all VC/PE firms are evil afterall.
So Where Now?
I’m even more determined to really grow KashFlow into a much bigger business and to maintain our current lead in the market. We still need capital to do that. All that’s changed is where that capital will come from.
So job number one is to give the business some attention over the coming months to make up for some of the neglect of the past few month. We’ve already kicked off on the technology project (multi-user permissions at last + much more) and I’m already looking at some senior hires.
Once that is all back under control and on course then I’ll probably be looking for a VC firm to take investment and guidance from to take this to the next level.
Roll on 2012!
13 Responses to Out of Limbo – Post-mortem of a fundraising excercise
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Really interesting Duane,
My wife uses your software (and has been for many years) – the decision to take on partners of any kind (VC or strategic) is always a difficult one, especially for the founder as it means giving up some form of control. But it seems like you also took away a great lesson of dealing with others who have not yet caught up with understanding your model.
The difficulty with strategic’s is they *always* want to nail you to the ground, they know the market, and they are are *scared* – why else would they invest? other than to keep an eye on you – and thus your problem with them wanting a clause to buy you out (this is standard practise) – but worse if you had got to final stages you would have found that the board seats they took would have been very divisive.
It seems you have already made the decision on VC’s – and I believe it is the right one, all I would say is ignore the european scene completely. Your sense will be that it is easier to take european funding, but you have the potential to be a global player and to get the funding + valuation you need to take it from East/West coast.
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Thanks for the comments.
@nik – good to hear your wife is a customer.
Someone I met through this process was strongly urging me to go the US VC route and he’s offered to help both as an investor/advisor and with intros (he built a software business and sold it for >$3bn so has their attention)My problem at the moment is entering the US. I’m an undesirable due to my dodgy past. I’m trying to sort it with the embassy.
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George O Connor
Thank you for giving a peek into the mind of a tech entrepreneur – I appreciate all of the graft you have put in – but now must be way way to early to sell – why not hire an experienced COO who will be process trained and can take on some of the heavy lifting. It would be a dreadful shame to sell at this juncture.
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Andre Kwakernaat
Duane, Never give up, stay focused and great things can happen.
Andre Kwakernaat
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Thanks, Andre. Congrats on your deal.
Knowing you and Twinfield were in a similar position to me not so long ago is inspiring. -
Hi Duane,
As an American citizen, my dodgy past is irrelevant. Do you need an invite to Florida for your embassy letter?
So what’s Mr 3bn’s number then, perhaps we should skip UK and go straight to US?
Seriously though, thanks for sharing. We regularly have similar pfaffing about ourselves, it’s a head wrecker.
Very glad to hear your doing well cashflow wise.
Aileen
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Mark Davies
Interesting post Duane. Kashflow has come a long way and has loads of potential. If you can continue to foster the right attitude in the company then I’m sure you will realise that potential.
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Duane,
Excellent post on what is *always* a painful process.
Selling Pure360.com and personally doing the whole due diligence process was a fantastic experience and it seems you’ve learnt a lot from yours.
See you down the pub (our local) for a full debrief!
Thanks,
Darren.
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Tim
Thanks for entertaining a nosy buggar Duane.
There is one thing that puzzles me in the story. I didn’t really get why you thought it would be a bad idea to talk to VCs in the first place, considering they do this kind of stuff all the time. -
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Thanks for sharing your experiences Duane. Have the guts and determination to take an SME to the next level is admirable.
From a consumers point of view, increasing the technology is crucial but hopefully not at the cost of the user friendly, non-accountant interface. Also, those who have used the demo are generally impressed but always ask about the size and status of your business. Whilst they might not like Sage, they know they are key players and will be around for a long time to come.
So overall, your news of growing the business to be a leader in your field is very welcome. You’re going to need a lot of support and ingenuity, but I wish you all the luck in the world.
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See what all the fuss is about
Interesting post!
Every funding/acquisitions/acquiring takes a massive chunk of time out of the operational availability of the company. Something you never plan for, as it looks so enticingly straight forward at the beginning especially when the company is doing well. Only when you look back you realise just what it has cost in time and risk you run on day to day operations.
Great software, good luck on the next step