Saturday, April 09, 2005

Funding Your Software Venture

When my partners and I started ASE Services, Inc. in 1980, there wasn't a lot in the way of Venture Financing available. Instead, we relied on good old fashion bootstrap financing. We didn't know what bootstrapping was at the time - all we knew was that we were starting a business and had no money - so we found clever ways to make it work. First, we started as a services business offering local IBM sales people a way to bring manufacturing resource planning consulting and programming expertise to new prospect situations in order to help IBM "close the deal" against HP and Digital (who were starting to win more deals locally through partnerships with companies such as ASK.)

None of us had any formal sales experience but we did know what we were talking about and knew it better than anyone else in the area. So we started consulting, writing code, installing packages, then selling and supporting packages. We outsourced our work to subcontractors until there was enough load to add them full time and grew our business this way so that during light load times we could turn off the valve. I remember going several months initially without a pay day and using my credit cards for cash advances so that the mortgage was paid and my family ate.

Bottom line was that we did whatever it took to get the business running and to keep it growing and within a year we were all making more than we had ever thought possible. We built a repeatable sales model, hired reps and pre-sales consultants (a crucial role we thought we invented in 1980) and became the largest VAR of SSA's Business Planning and Control System - BPCS(TM) and several years into it had a $20million local business which was acquired by SSA 6 months after their IPO. ASE had more MRP/ERP clients in New England than any other software company including IBM with MAPICS. We had a vision of "owning the market" and achieved it.

We never had any VC money, nor angel funding. We bootstrapped out of cash flow by being totally up front with customers. We earned the right (with our expertise and full service and guaranteed success approach) to ask for payments in advance. By earning a reputation for excellence (won IBM's customer excellence award) and for delivering on our promises, we were able to convince customers we were the best path to success and they were willing to "partner" with us. We delivered more value with less risk and the business grew. We never had to touch the $50k line of credit until it was time to build a building to house our operation. We obtained a "no money down" loan from the state (Mass.) industrial finance authority at 75% of prime for $1mill to build a 15,000 sq ft building which we leased back to ourselves (the lease ran coterminous with the mortgage and when we sold the business the lease went with to provide us with a nice cash flow after the deal.) The mortgage transaction cost us $50k in legal fees - well worth it.

There are many ways to raise money which are outside the now traditional angels and VC channels. Start by looking creatively at savings, friends & family (but understand the implications if you fail), credit cards, home equity loans, bank loans, federal and local government money, SBA, IP licensing to an OEM, line of credit, bank loans, pre-pay or down payment terms, outsourcing with terms that pay when you get paid, partner marketing co-op funds, suppliers, etc.

You need to earn the right to go to Angels, Angel Groups and VC's. You need to show you have the right stuff for today's typically gun shy investors. Most investors have returned to the basics of looking for companies that have a more proven track record for success. Companies with experienced management teams, developed products, large markets, and paying customers (who are willing to stand up and be references) and companies with value proposition proof points. You may ask, why would I need money if I had all that going for my company already? Maybe you don't - you can bootstrap if you have the time. But if time isn't your friend, then you need to think about outside funding.

IPO's are another source of funding. SSA went public at approx. $60mill in revenue and used the money for rapid expansion (100% growth for a few years.) I have been fortunate enough to have benefited from IPO's with SSA, Effective Management Systems, Firepond, PrimeResponse & Eyretel. In each case we loaded up the war chest for growth and it gave us the strength to land major contracts with companies concerned about viability. A very small number of companies actually make it to an IPO and even a smaller amount survive the post IPO expectations. It can also an expensive way to raise money. Now with the SOX Act, it can easily cost $2mill/year to stay public. And valuations "ain't what they used to be", although they are still higher than what you may get from other sources.

Another approach is one we used on my second journey with SSA. I had returned, as Americas president, when the company was stagnated at $350mill. In revenue and was in the midst of a technology transition from AS/400 focused to being on a distributed object computing architecture (that's another story...) This time we used convertible debt to raise $150mill in the second round of financing the company went out for in 1999. SSA had gone the first six years on a boot strap, then grew from '87 thru '98 with nothing more than the IPO raise. Now it was faced with extinction due to the drain of R&D and lack of entrepreneurial spirit in the company (especially in sales and marketing.) So in a addition to the raise we got back to basics in the field. We focused the sales force on verticals and geographies as well as the install base. We removed the marginal players and added "A" level players. We installed CRM tracking infrastructure to manage the sales pipeline and sales process. We cranked up the marketing and focused back on a TEAM selling approach. Within a very short time we were growing again (at 35%/year for the next several years) which helped cash tremendously.

In addition we got the boot straps out again and came up with additional ways to raise cash from customers, royalties, suppliers etc. Pre-paid multi-year maintenance plans, technology change insurance policies, co-op marketing, cross-sell and up-sell campaigns, resale of complimentary products, increased focus on services revenue and consulting....all of these thing helped SSA survive a very challenging time.

SSA was not able, however, to raise enough overcome poor R&D execution. At that time,SSA suffered from an inability to deliver on the technology transition in the time frame that was promised. The result was that the company created it's own chasm to cross and was faced chapter 11 and subsequently acquired, at a bargain price, by investor group who took it out of Ch11 and took it private. Now SSA is growing by investing in acquisition of products and customer bases at good prices and is once again profitable and attractive - demonstrating that regardless of how things are, if you are agile and funded properly you can find a way to turn things around. SSA recently filed for another IPO (or should be called an sIPO - second Initial Public Offering?!)

In any event, the message is to get creative when raising money and treat meetings with potential sources of funds as the sales call of your life time. And, especially if going to angels or VC’s, make sure you are prepared... anticipate their question, stay confident, know their background and funding objectives.... and make sure your “A” team is on their “A” game.

9 comments:

Anonymous said...

You lost me in the third sentence when you misspelled "clever" as "cleaver"!

Paul Lavallee said...

You got me on that one. Guess there are those who can spell and those who can build ventures. Always did need a good assistant.

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