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.”