By Christine Kern, contributing writer
Financial experts weigh in on how to raise capital for software companies.
Nearly 150 channel executives gathered to address the topics of raising capital, partnering, and marketing at the inaugural ISV IQ Live! Conference held February 24 in Santa Ana, CA. One panel, An Insider’s Guide To Raising Capital” featured four financial industry experts who shared their insights on how to raise capital for software companies.
Panelists included Chris Hill, Regional Director of Commercial Finance at Bridge Bank; Marc Cole, CFO of Super G Funding and SaaS Funding; Ken Hubbard, President at Private Capital Network; and Anthony Guagliano, Managing Director of M&A at The Gores Group. The panel was moderated by Business Solutions President Jim Roddy.
Hill started by explaining that Bridge Bank sees all types of software companies as a good fit for their investment, saying, “We like to have a good, solid management team. We like to see their vision of the future and make sure there’s sustainability in the model. It’s very hard to do a loan to a company that’s not sustainable as we need to understand your investors, your threshold, and when you’re going to hit profitability. Also, if you’re at profitability, how sustainable is it?”
Cole added, “In terms of software, we love recurring revenue businesses. That’s the hallmark of what Super G does, and so we started Software-as-a-Service funding about two years ago” and have brought it to all types of software.
Guagliano underscored Cole’s position, adding, “Our recurring revenue is the key to the game here.” Once funding gets to later stages of the business life cycle financials come into play, but in the early stages, Guagliano looks for “the right people to get behind and the right management team to support.”
Meanwhile, Hubbard said his company likes “good, smart people that are running it. We don’t need a full team. We like to see a little bit of what Bill Gross from Idealabs likes which is you’ve got to have a market that’s ready for a product or a service. If you haven’t seen his TED talk, it’s a great way for a startup company to view the market and view how they’re going to raise money.”
When it comes to determining whether or not an ISV company is a good fit for investment, revenue is key. As Cole says, “The product has to be commercialized. It’s got to be beyond just ‘selling to your friends’ stage. We need evidence of commercial success.”
Hill also reiterated the need to see revenue, saying, “We can’t be a pre-revenue funder.” And for Hubbard, flexibility of the management team is essential. He explained, “When we’re trying to talk to them about valuations and things like that, if they’re hard lining, we know that’s how they’re going to be throughout the cycle of our investment and our relationship. We look at a company that’s got a proven model. So, if you don’t have a proof of concept, then it’s going to be pretty hard to get in front of our group.”
Meanwhile, Guagliano eliminates those companies he deems inauthentic, saying, “Unfortunately, I think some people come in and think it’s about selling. There is a salesman aspect, but at the end of the day, we’re going to spend two weeks, two months, a year, whatever, learning about your business before we invest dollars. We’re going to figure everything out. So if you come in that first meeting and you’re cheesy, to use my word, it just doesn’t resonate with me at all.”
There are options for those companies in the pre-revenue space noted Guagliano. “In our system, we bring in about four companies a month to look at,” Guagliano explains. “They do a 10-minute pitch, 5-minute Q&A, and then we do a cocktail party to loosen up the purse strings. As that process goes on, a lot of our investors will get to know the CEOs and sit down and talk with them at a later date and invest.”
Pre-revenue companies also need to find a champion, and it’s personal, according to Guagliano. “It’s a personality match that you’re looking for. Since there is no background on your company, there isn’t anything they can grab onto,” he says. “They have to like you and trust you. The trust is more powerful than the like, frankly, and it will take our investors anywhere from as little as 45 days to as many as six months before they actually get comfortable with a CEO who has no record.”
When it comes to making investment decisions, Cole explained the crucial element is cash flow. “Technology is not as important to me and it’s over my head,” Cole said, “but that’s okay because it’s validated by the fact that you’ve got commercial success. If I’m looking at a business and you’ve got $100, $200, $300 thousand a month of recurring revenue, then other people have validated right now that the technology is efficient.”
For Bridge Bank, Cole said, “The model needs to make sense, but it’s the character of the people I work with every day that pay me back. I need to be comfortable and not have that smarmy feel. I need to see that these people are authentic, driven, and passionate about their business.” And for Private Capital Network, Hubbard said the key element is the ability of the market to pull the company along.
As the investment process proceeds, investors will ask questions designed to reveal the character and depth of the individuals they are dealing with to uncover the potential of the investment. Hubbard explained he begins with questions that demonstrate how people communicate and how well they explain their thoughts, but then moves to due diligence which investigates how well the presentation matches the business and the business plan.
He explained, “We have people who run giant farms who invest in high tech companies that they don’t even understand. But they do it because the CEO was very clear and set everything up linearly so they could follow the track and it made you believable and them confident. So we have all types of questions, however consistency seems to be the thing that rules the day.”
When it comes to finding the investments, Hubbard advises every CEO to “lean in, lean forward, go after the money and, if it doesn’t work down that road, there’s a thousand roads for money. It’s just the CEOs get locked up a little bit because they’re doing so many things at one time. Don’t wait.”
Finally, here’s some advice about what not to do when searching for investors. For Hill, it’s about overselling. He says, “Please be realistic about the expectations. I love to see a projection that people beat every time.”
For Cole, his advice is to be concise. Provide a four-page executive summary of your business plan, a one-page financial snapshot, and be realistic about the valuation and terms. And Hubbard underscores the need to present a full snapshot of the company, not just a sales pitch on how wonderful your product is for the world. “The product is one piece of the company and we want to hear all those pieces,” he explains.
Ultimately, before you attempt to raise capital, you need to be informed. Guagliano says, “Between angel and friends and family — all the way up to private equity — learn what all those are. Seek out the people in your network who know this stuff and call them, have conversations without trying to actually go and raise money. To raise capital, even if it’s your first time, you should have a really good understanding of what you’re doing, how the market works.”
ISV IQ Live!, powered by Business Solutions, was held February 24, 2016 at the DoubleTree Orange County Airport in Santa Ana, CA. An east coast version of ISV IQ Live! is scheduled for October 6 at the City Avenue Hilton in Philadelphia. For more information or to register go to www.ISVIQLive.com.
ISV IQ Live! sponsors include BlueStar, Epson, Vantiv, Worldpay, APG Cash Drawer, Cardknox, Cayan, Clearent, Datacap Systems, Moneris, OpenEdge, Posiflex, Sterling, Bixolon, Elo Touch Solutions, Honeywell, Zebra, HP, Infinite Peripherals, Intel, Star Micronics, the Association of Software Professionals (ASP), and the Retail Solutions Providers Association (RSPA).