Out of Limbo – Post-mortem of a fundraising excercise

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!