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Bounty Hunters
Published: From the May 2007 issue of PROFIT magazine
By: Tony Martin
Internet Link: Canadian Business - Profit
As the producer of a technology that delivers to cellphones
everything from ringtones to games to TV shows, Wmode Inc. had
a good shot at becoming a leading player in a red-hot sector.
But the Calgary-based firm needed a big capital injection to
get there, and its own efforts to raise enough cash had
failed.
That's when Wmode turned to a professional money finder:
Mike Middleton, founding partner of Q1 Capital Partners Inc.
in Toronto. Middleton is a financial intermediary, a
sophisticated breed of matchmaker who specializes in helping
companies find the right growth capital at the right price. He
was able to arrange not one but two matches: a $4.5-million
equity investment from Hamilton, Bermuda-based Teleglobe
International Holdings Ltd., which also became a Wmode
distributor, and, more recently, $5.5 million in venture debt
through Wellington Financial LP of Toronto.
"If we hadn't got the money, we'd be a very small
company in Calgary trying to market to the rest of the
world," says Bob Woodward, co-founder and CFO of Wmode.
But with the funding that Middle-ton helped arrange, Wmode has
doubled its revenue. It now boasts salespeople and customers
in Europe, South America and Australasia. Equally as
important, says Woodward, "although our global footprint
is still fairly small, it looks pretty good compared to our
competition."
Most entrepreneurs tap out the usual sources of capital—their
own savings, friends and family, and their bank—to get their
firm up and running. Finding the money required to get to the
next level often requires approaching professional lenders and
investors. But no matter how promising your business, or how
presentation-friendly your personality, chasing cash down on
your own is fraught with peril. It's an intensive process that
takes you away from running your company. It's hard to refine
your business plan and pitch without feedback from a seasoned
and objective third party. Finding money is all about knowing
where to look, and for what. You'll likely be starting from
ground zero in figuring out who to approach, and may not even
get in the door. And you likely aren't up to speed on all the
bells and whistles you should look for in a financing deal.
Finally, trying to sell your deal too often to too many people
will make your story stale and unsaleable.
It's for all these reasons that Wmode turned to a financial
intermediary, and why other growth-minded companies should
consider doing the same. But in order to match Wmode's
success, you'll need to do a lot more than look up
"financial intermediary" in the Yellow Pages. First,
there's no such listing, because it's a generic term with no
professional designation. And, second, it takes some
groundwork to find someone who's up to the task—and it's a
big task.
Financial intermediaries fall into two general camps, says
Salim Teja, vice-president at Brightspark Ventures, a
venture-capital fund based in Toronto. With the first camp,
it's all about a massive Rolodex and the connections to set up
a multitude of meetings. While this is obviously a necessary
step, it's only one and, perhaps more important, should not be
the first one taken. Teja suggests the best returns come from
working with the second camp: those who hold your hand at
every stage, from refining your pitch to assessing offers.
"Financial intermediaries should have the expertise to
capture what you need as a business, and how to market that
need," says Jason Sparaga, president of Spara Capital
Partners Inc., an Oakville, Ont.-based investment bank.
"They should help you understand your operation, present
your business in the best light and get the providers of
capital interested at the best possible rate."
When it comes to finding the right intermediary to work
with, you'll have to seek referrals from lawyers, accountants
and other professionals connected to your industry. You're not
after an overeager salesperson; you want somebody who
understands your needs and knows the financial community
intimately enough to know just who's looking for your type of
deal, and at what price. "You don't want somebody who
will [only] tell the world that you have a wonderful
company," says Dorothy Brophy, a lawyer based in Toronto
who handles the legal side of a lot of financing deals.
"You want somebody who will analyze your business, and
who is able to give you a lot of advice on the process."
It's no surprise, then, that experience is key. Reputable
professionals will be happy to lay out for you the industries
they've worked with and the deals they've pulled together. It
also has to be the right kind of experience. "There's no
such thing as one intermediary who handles all sizes of
companies and industries," says Middleton, who
specializes in software and mobile-technology companies, which
made him a good fit with Wmode.
Good money finders are also familiar with a wide array of
financial instruments. You're probably aware of, and may even
be involved with, angel investors and VCs. However, you may
have overlooked other, perhaps more suitable sources.
Financial intermediaries can help you consider and assess a
range of options, from financing based on your inventory or
accounts receivable to leveraging the equity in your home. You
might even be able to use an anticipated tax credit, such as
from the federal Scientific Research and Experimental
Development (SR&ED) program, as security for a loan.
A bounty hunter can also be invaluable in helping you grasp
a deal's fine points. "Often the business owner may not
know if they are getting a good deal or not," says Rob
Bird, a financial intermediary with The Commercial Capital
Corp., a Toronto-based investment bank. "We're in the
marketplace, and understand pricing, terms and conditions, as
well as trends and current pricing levels."
When shortlisting capital consultants, be sure to get
specific answers to your questions about the process,
including how long it will take and which milestones the
intermediary hopes to reach and when. "You have to make
sure they take the process, and you, seriously," says
Teja. A solid rapport is also critical, adds Sparaga:
"You have to be comfortable with them, and feel that
there's a bit of a connection." Also, success breeds
success: get referrals from other firms that the person you're
considering hiring has worked with, and quiz those references
about the process and outcome. Be wary of any professional who
isn't more than happy to provide names and numbers.
Once you've found a financial intermediary you connect
with, they'll likely spend two to four weeks getting to know
your business and analyzing your needs. In many cases, they'll
give your business plan a serious rewrite. The idea is to
anticipate investors' questions and concerns before you make
your pitch, not after, and to make your story bulletproof.
They'll also help you understand the differing concerns of
specific types of investors, and how to address those.
Your money finder will then set up meetings for you.
They'll use their contacts and knowledge of the financing
world to steer you to pre-qualified groups of lenders and
investors who want to invest in companies of your size, in
your industry, with the type of deal you want. Often they'll
attend those meetings with you, and even offer feedback on how
you worked the room.
A good financial intermediary can also serve as an
important communications middleman, says Woodward:
"Typically funders would say, 'I liked their
presentation, but we didn't really hear enough about this or
that,' and Mike could follow up because he knows these people
on a first-name basis."
Of course, none of this assistance comes for free.
Financial intermediaries typically charge a monthly retainer
in addition to a success fee. The latter can range from 1% to
5% or more on equity deals, with the retainer typically
winding up at about 15% to 20% of the success fee, according
to Sparaga.
To get your money's worth, it's smart to start sooner
rather than later. If you wait too long, you may find yourself
needing cash in a hurry. And if desperation is at the door,
you're more likely to buy the pitch of a fast-talking
salesperson who makes appealing promises to come back next
week with loads of cash. Warns Middleton, "You may jump
into a relationship and then you may not get the money or,
just as bad, you may get the wrong money."
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