Thursday 27 October 2016

It's raining cash for tech start-ups

You can't move for bumping into tech entrepreneurs who have raised €1m before their firm even launches. Is this a mistake, asks Sarah McCabe

Published 06/09/2015 | 02:30

Software solutions: Ronan Percival of Phorest, the biggest provider of salon software in the UK and Ireland
Software solutions: Ronan Percival of Phorest, the biggest provider of salon software in the UK and Ireland

Ronan Percival is neither manicured nor coiffed. The low-key 30-something computer engineer doesn't look like a person who is revolutionising the beauty salon industry.

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But his company Phorest, based beside achingly-hip cafe Brother Hubbard on Dublin's trendy Capel Street, is the biggest provider of salon software in Ireland and the UK. His moment of inspiration came via a friend who owned a beauty salon, who was having trouble managing appointments and marketing. After spending a couple of months front-of-house in the salon to identify its needs, Percival built a software solution.

He founded Phorest after selling Demonware, the gaming software company he built with Trinity College classmates Dylan Collins and Sean Blanchfield and sold to US gaming giant Activision for €7m in 2007. The three Demonware alumni all went on to do impressive things; Collins sold a few other businesses and now runs SuperAwesome, the world's biggest digital advertising agency aimed at children, while Blanchfield built PageFair, the software business which helps companies get around online ad-blockers.

Percival, meanwhile, built a business that now employs 65 people and has revenue of €6m year. It is expanding into the US and has just opened a New Jersey office. He has done almost all of this without taking on any investment, building up the business by reinvesting profits and his own money, so-called "bootstrapping".

He is one of a growing cohort of Irish technology businesses who are saying no to investment offers and doing it the hard way, the old fashioned way. Start-ups have become obsessed with raising money, Percival believes. "It has reached bubble proportions," he says.

"If you read the tech press over the last few years, then you would think that there is only one proper way to build a company, that the first thing you have to do is raise money. And when you have done that? Raise some more. A lot more. And then go again. The guys that succeed are hailed as superstars, and rightly so in many cases as the chances of succeeding this way are incredibly small.

"At Demonware I was actively involved in raising a €750,000 initial seed round in 2003. It was an amazing experience at a young age but there were some things I didn't enjoy about the process. In particular, the momentum of the company revolved around getting hold of venture capital funds and selling the idea of the company to them rather than building a product and selling that product to customers."

Percival's next business, he decided, would be revenue-generating from the beginning. That meant Phorest launched with a minimum viable product which he added to as the money started to come in, rather than crafting the perfect piece of software before going to market. "This isn't about a lack of ambition; I want to build Phorest into the biggest salon software company in the world. But one where I am in control and not constantly justifying my decisions to investors. I also want to ensure that I make sustainable decisions. Most investors have a time limit on their investment; venture capital funds want a sale or an IPO in three years so they can get their money back. That forces the chief executive to make choices that make the company look good in the short-term, but are not helpful long-term."

Phorest did eventually take on money, raising €1m from angel investors in 2011. "But because we had built up a decent business at that point, we were able to raise money from a position of strength and not give up too much control."

Peter Coppinger shares Percival's sentiments. Co-founder of Cork-based Teamwork, he is just back from Barcelona's MicroConf, a conference for start-ups who want to fund themselves and not raise any money.

Teamwork develops and sells task management software. Founded seven years ago, today it brings in revenue of €10m a year and employs 40 people. It has just signed up Disney as a client. It has never taken on any outside investment. "We are approached by people and companies interested in investing in Teamwork every day," says Coppinger.

"But it has never even entered our minds; we have always wanted to be our own masters. The last thing I want is monthly board meetings where I have to explain every move to investors. If we had taken on money, sure, we could have hired people and expanded faster. But I think we would have on the whole burnt through it very quickly and wouldn't be any further ahead than we are today."

Some might say a lack of financial drive plays a part; it is true that Percival and Coppinger both insist they are not motivated by money. "We are a profitable business but it just isn't about the money to me," says Percival. "The pleasure of it is growing the business, employing all these people myself, doing it in a sustainable way on my terms. Yes, it's not as sexy as raising €10m and getting a huge valuation, but I am proud of it."

SuperAwesome founder Collins sees both sides of the coin. He is both an entrepreneur and an investor; full-time boss at SuperAwesome, where he has just raised €7m, but also partner at venture capital fund Hoxton Ventures. He has been arguing with Percival about this topic for close to a decade.

"I sit on both sides of the fence. In terms of why it is useful to bring external investors in for young companies - professional investors will have seen many, many more companies and mistakes than a founder will and that is genuinely valuable. They ask the hard questions. When you are running a company you are so focused on the details that it is very difficult to zoom out and think bigger picture, think strategy.

"Don't get me wrong - there are definitely terrible investors. They distract you, they ask you for too much information, they can't tell the difference between reporting and building a company. 99pc of investors walk into the room promising the world in terms of networking and connecting founders with customers, and most of the time that is nonsense. But the help they give on the recruitment side is very useful."

He disputes the idea that investors push managers into making short-term decisions. "Founders go in with their eyes open and understand what the investor's business model is. The fact that investors want a return on their investment and a way out is not a surprise. And there are lots of ways for investors to exit their investment beyond a sale."

"Personally, I hate the word 'exit'," says Cian Cotter. University College Cork graduate Cotter is a partner in Insight Venture Partners, the New York venture capital fund that has just completed large deals with two rapidly-growing Irish software companies, taking a €75m stake in Dublin banking software company Fenergo and a €45m stake in Limerick waste management software business AMCS.

Like Collins, he denies that investors force companies to think short-term or focus on a sale or IPO rather than building a sustainable business.

"'Exit' sounds like the end of the business - and it's not. In my experience, getting bought or going public isn't the end of a company. Exits don't happen unless the entrepreneur is on board, unless they want it."

But he admits that raising money isn't always the right choice for a young company. "We don't invest in companies until they are at the €20m, €30m stage, and we frequently come across businesses who have reached that size and have never raised money. That is really fantastic and makes for a very compelling business case," says Cotter.

The real decider for companies, he adds, is need. "To put it simply, the whole process of raising money starts with one question: does the business need capital? If the answer is yes, if your business cannot move forward and create greater enterprise value without money, you are going to have to come up with it. And very few people can raise it themselves.

"It is true that the earlier you raise, the more diluted the founder's stake is going to be. But the venture capital funds, in those situations, are not getting fantastic deals either - they are taking on a huge amount of risk.

"I don't think we are in a bubble. Yes, there is a lot of money chasing great companies. And yes, five and 10 years from now, the industry will undoubtedly look back and see lots of investment decisions where the company was valued way too high and everyone lost out. But it's not a bubble. Nothing even remotely comparable to the late Nineties."

Dean Gammell is weighing up the pros and cons at this very moment. His Westmeath software company The Group System helps hotels and event companies connect with groups and make group bookings. He has bootstrapped the business for two years and is now starting to be courted by would-be investors. "From day one I wanted to have full control of the company. I did not want to answer to anyone else. But we are reaching a point now where we need a cash injection to move forward.

"It is a necessary evil, it is not something I am keen to do. But if I didn't, I would be doing both myself and the company a disservice. Sometimes, as a founder, you have to do unpleasant things, like dilute your control over your business to raise funding. If it is necessary for the success of the business, you do it."

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