Raising money

Raising money

We brought four entrepreneurs together to spill the beans on everything financing. When’s the right time to accept money? How do you pick the right investor? When is it time to exit? Our panel of business owners tell all

Adam Deremo

Adam Deremo, co-founder and managing partner of Awake Chocolate, a company that creates and sells chocolate bars with as much caffeine as coffee. He and his two co-founders came up with the idea in early 2011 and by the spring they had a physical product. The founders invested $100,000 of their own money to pay for trademarks and the prototype, but they also raised more than $1-million between 2011 and 2012 to help pay for space and inventory. They’ve since raised another $1.5-million, including some money from David Chilton, who invested after their appearance on Dragons’ Den. “We have an awesome working relationship with him,” says Deremo.

Connie Clerici

Connie Clerici, president and CEO of Closing the Gap Healthcare Group, a company that offers health-care services to people in homes, workplaces, schools and hospitals. Clerici started her company 25 years ago with a $10,000 bank loan. She deferred her salary for seven years. While she had met with the occasional venture capitalist, she had no desire or need to take money. Only five years ago, when she wanted to start acquiring other companies, did she bring on board a business partner, who had money to invest in the business. “Now I don’t have to carry 100 per cent of the risk,” she says.

Mike McDerment

Mike McDerment, co-founder and CEO of FreshBooks, a company that creates and sells online invoicing and billing software to small businesses. He and his two co-founders started the company because they were frustrated with the lack of good invoicing software on the market. They initially funded it with money made from a consulting business they owned, but they also maxed out credit cards and lines of credit. While they took some money from family and a few angels, they refused to take VC funding until this year. In June, though, they did raise $30-million from three different partners.

Philippe LeBlanc

Philippe LeBlanc, co-founder and CEO of Flixel, a digital technology company that enables photographers to create “living photos,” still pictures that incorporate some video-like moving parts. LeBlanc started the company three years ago and immediately raised $250,000, even before having a product. “It was done on the strength of a presentation,” he says. The cash allowed him to build the first version of his product and customers soon followed. He’s raised more money from venture capitalists since. He also counts Tyra Banks as an investor.

BB: You’ve all taken money at different stages. How do you decide when’s the right time to receive funding?

CC: My phone frequently rings off the hook from private equity venture capital. I finally went to one of those meetings and when I walked out my advisor said, ‘They need you way more than you need them.’ So it wasn’t a good move. VCs generally want out within five years, and I my business is a longer-term investment. However, it was when I decided that it was time to do acquisitions that I brought on a financial partner to share in the financial risk.

BB: What’s it like to give up part of the company after owning it all yourself for so long?

CC: It’s like a new marriage. At first you’re euphoric. You just want to be together. Then you have to learn how to trust each other. For me, I won’t compromise my integrity for anybody. If you tell me it’s all about making a buck, we have a problem, because
health care isn’t just about making a buck. You have to learn how to trust each other.

BB: Phil, you received money from the start? Why?

PL: We went in with the mindset that funding is going to help accelerate our product and our growth. We’d give up a piece of the pie, but it was then our job to grow that piece of the pie as quickly as possible, otherwise you’ll be left with a much smaller pie. Of course, there was risk and we knew that from the get-go. We knew our vision would probably change along the way and we accepted that. And it did. Part of the strategy was to bring on people who offered more than just money and who could bring in different points of view, because we were going into uncharted territory. There were times where things didn’t go the way that some investors wanted it to and we didn’t get them on following rounds. But then we found other investors who saw our vision, and some of the moves we made turned out to be the right ones. Ultimately, it’s the management team who have to live with these decisions.

MM: People get it wrong with their understanding of why they’re raising money, what the timing is for them and the overall expectations being aligned. We almost raised $300,000 for a third of the company a decade ago. It would’ve killed us. We would be out of business now. We just wouldn’t have had as much to show people now. Ultimately, we weren’t ready. I didn’t know enough about my business, let alone managing investors.

AD: The absence of outside capital bought you time to figure it out?

MM: That’s right. But sometimes presence of outside capital buys you time to figure things out because if you don’t have certain things in place, then you’re in trouble. What (I mean) is that’s really a personal decision. You have to look within yourself and ask, ‘What is right for me?’ Here’s how we made this decision [to take $30-million]. I have two co-founders and we try to ask ourselves at a gut level, ‘What do you want?’ There was a time when we were too afraid outside influence would distract us, but now we know what we need to do [with the money], and it’s about scaling the business. A lot of people think that raising money is success. They think it’s the finish line. They think they’re raising money because somebody else wants them to build a product, but that’s not true. People are investing to get three to 10 times their money back.

AD: For us, the decision has always been around the struggle of having enough capital to grow the business versus the desire to own as much of the company as possible. With that in mind, we have a very specific and clear purpose every time we take money, whether it’s debt or equity. Mike’s right – the idea that outside capital is the finish line is misguided.

BB: So did you give up control of your company?

AD: We own a little less than half. The rest is owned by a group of individual investors, but we’re the largest shareholder by far, which, I think, helps. We also have the right to control the board. We found a group of investors who were really comfortable with allowing us to make all of the operational decisions.

BB: How important is it for the investor to bring expertise and advice?

CC: You have to have mentors. I have a group of advisory board members [who are not investors], and a group of personal mentors. I can just pick up the phone and say, ‘What do you think?’ We don’t always agree, but we all share the same values and constructive debates are a part of being great.

AD: We’ve had some experienced advisors, including family members. One of the partners’ families is pretty savvy as far as investing goes. They have lots of experience in this area and they were able to help us not make mistakes early on. Also, through good, old-fashioned networking we’ve been able to find investors who can contribute things beyond just money.

MM: I feel like I’m upping my game. I have that next level of leadership around me and I like that. I get some very concise and good questions. But some aren’t sharing day-to-day advice. I met with one investor and she said that she’d be perfectly happy if she didn’t hear from me between board meetings. We’d meet quarterly and that’s it. She is always around when I reach out or if I have a question, but ultimately she doesn’t want to be running the business. She wants to find people who have a business to back, and we’ve built our business up to a point where we’re all aligned.

PL: Mike, what happens next? Do you IPO in a number of years or go for an exit? There’s obviously an assumption of, ‘When am I going to get my money out?’

MM: We built a business to a scale that affords us options, and I don’t want to drill in on one particular option. We have a point where we choose to do that. I’m focused on building a company that has options, and everyone at the table knows that. The focus is on building a great, enduring company, and that’s something that will have options no matter what.

CC: You can’t underestimate the value of options. Everybody asks you about your succession plan all the time. What is your plan? When are you getting out? It’s something that has to feel right for you. You don’t want to stay at the dance for too long, but it doesn’t mean you have to sell. You could still be the majority shareholder and continue your life. You can’t devalue yourself. That’s one thing I have learned. But there does come a time when there might be somebody better than me to lead the company.

MM: There are a lot of entrepreneurs who sell and they think that’s success. Then they wake up two weeks later and go, ‘Oh my God! What have I done?’

CC: If you make enough money to live on, then that’s success. It’s not selling your company. That can be just icing on the cake.

PL: To add to what you were saying, having options becomes interesting if you get it to a level where you have a sustainable business. You don’t have to go public. You don’t even have to exit to another company. You can start getting private equity firms, buy out shares from people who want to be bought out. There are all different ways to crystallize your investment.

BB: What do you look for in an investor? How do you know you’ve found the right person?

AD: In our case I think it boils down to three things. One is the level of trust. I would never like money to change hands with somebody I didn’t trust. I wouldn’t be able to sleep at night if that happened. The second thing is that I want somebody who can bring more than just a cheque. Don’t get me wrong – people who write cheques are awesome and totally necessary, but a dream investor is somebody who can help make you better with things that are not just money. Thirdly, there needs to be a mutual understanding on the governance of the company. It was a dilemma for us that we needed money to get the company going, and we were able to manage that by finding a group of investors who were comfortable having a voice, but also knew that we had the final say. It took us a long time to find them.

BB: So there were investors who wanted a more final say?

AD: There were plenty of people along the way who said ‘I would love to put money into your company, but I need a seat on the board.’ We thought about it and said, ‘That’s not really how we’re set up here.’ We do have a board and it has outside
members, but they’re people who wanted on the board. And the company is still majority controlled by us.

PL: We’ve had a lot of angel investors along the way, but the way I look at it is that every situation is unique. I see what someone needs to do to make a deal and then we evaluate. Is it good for us to take that type of deal or not? Is that value going to make us better or not? In some cases, it was a perfect situation where we brought them in and this is what everyone was expecting and this is what was delivered. And we would have done things differently in other situations.

BB: So, now what? You hear about big companies that always seem to be getting investors. Do you start the process all over again now?

MM: I have a theory: If you raise money once, you raise money three times. That seems to be how it is. Granted, I come from the technology space, but you have a plan, and there are times when you want to be more aggressive so you raise more capital. Or maybe you want to build a product. We have enough capital for 24 months of development and then we have to raise another cheque

BB: So you’re already thinking about the next level?

MM: I think anyone who’s not is foolish.

BB: But for 10 years you didn’t take any money. So, why does the next one come that much sooner?

MM: It’ll probably be more opportunistic. These things are going at such and such a pace and scale, so why not raise more? We’re growing a really large business, and $30-million just isn’t that much money. It may sound crazy, but these are pretty capitalintensive businesses.

BB: Do you ever say, ‘I’m done? I don’t need more?’

PL: It’s about speed and opportunity. In the tech world, the big fish can eat the small fish really fast, and if you’re not growing, then things can become really difficult. You can quickly become a feature as opposed to a business. If you stick to just being a feature you’ll eventually get swallowed up, but maybe you can turn that feature into a business. That requires accelerated growth from customer base revenue and/or investment dollars.

CC: I think it depends on the stage in your life. I’m not getting any younger and there comes a point in your life when you start to think about succession. I don’t need another investor. Growing this business was never all about money, but rather it was doing what was right and what was needed. I’m in a place where I don’t have to sell to retire – I’ve also enjoyed having a double income family – but I am developing a succession plan that encompasses my family and my advisors.

- Bryan Borzykowski