Drab to Fab

Money-Raising Makeover: Growing Up Is Hard to Do

After nine years in the Marines and the National Guard, Brad Cunningham left military service in 1996 to start something new. The discipline and planning skills he learned in the military have paid off: His company, 8-year-old eBridge Technologies Inc., has won numerous awards for its innovative software design and IT services. But Cunningham, 38, is now engaged in a surprising fight for the financial capital that eBridge needs to grow.

Based in Greenville, South Carolina, eBridge seems poised for greatness. With A-list customers like Fujifilm and Liz Claiborne, the company's annual revenues are approximately $700,000 and have been growing steadily at 20 to 25 percent per year.

While the company has great technology and a solid financial base-80 percent of its revenue is recurring-it flounders when it comes to signing new clients. Its nine employees are overwhelmingly involved in customer support and application development. Says Cunningham, "You get bogged down in customer service and improving the current product, and don't have time to concentrate on sales."

The long-term answer, Cunningham believes, is to raise some significant growth capital and hire a small army of sales and marketing people. "I'd like to hire a business development manager for channel sales, a senior sales and marketing person, and a couple of sales and [administrative] people, plus collateral, trade shows and advertising [to support them]."

But such bold battle plans come with a big price tag. Cunningham estimates that the total cost for his aggressive growth plan will be about $1.5 million. Advisors and investment bankers told him that he should be ready to part with 30 to 35 percent of the equity in eBridge to get the money. That pegs the current company valuation at about $3.5 million. Armed with that advice and all the confidence he can muster, Cunningham is on the hunt for an investor.

With limited resources, the first thought was to search for capital close to home. "We went to our local [entrepreneurial development council], which includes corporate, academic and entrepreneur members," he says. That network led to a good-size list of prospects: high net-worth individuals, and VC and private-equity funds. Cunningham whittled the list down to the most likely investors-those who had been active recently and who could appreciate his own entrepreneurial spirit. "We focused more on angels, thinking that VCs would require a lot more [planning and negotiation]."

Road Trip

But the list of active investors in Greenville was not long. Cunningham's local leads quickly petered out, and eBridge was left looking to regional cities, including Atlanta and Charlotte, North Carolina.

Traveling on a shoestring, Cunningham began pitching his business plan to angel forums as far afield as Nashville, Tennessee. "They all told us that if we were located there, they'd fund us; but they didn't want to reach past their local sphere," complains Cunningham. And relocating the company didn't seem like the right answer.

Near and far, the story is the same: Investors aren't enlisting. "We've made close to 100 pitches," Cunningham laments. "We've been blown away by how positive people are about our business model, our customers and our products. But nobody's opened a checkbook."

Many investors, he says, would like the company to post higher revenues before investing. But that's a Catch-22 for eBridge. Without the investment, sales efforts are limited. Without the sales, funding opportunities seem scant.

For now, there is no Plan B. "If the money's not there, we'll just keep doing what we do," Cunningham concedes. "But we're watching some of our market opportunity go by."

What's the solution? We talked to the following experts to find the best way for Cunningham to attract investors so he can get eBridge on track to faster growth.

The Entrepreneur

Mac Lackey founded, built and sold two technology businesses and is currently a founder and managing partner of BlackHawk Equity, a private investment and consulting company in Charlotte, North Carolina. Here's his advice:

"One immediate challenge Brad faces is his valuation. A true market value for his company is probably closer to $700,000-about the same as his last 12 months' revenue-and it could be even less. Lowering the valuation will lower one barrier that is keeping investors away. Brad should also be prepared to put more of his own money into the deal. Many investors like to see 25 to 35 percent of a founder's personal net worth invested in the [company].

"Finally, to attract angel investment quickly, eBridge could look for a smaller amount of money-say $250,000-using a 'guaranteed note.' Guarantee the repayment of the investor's money by tying it to business and/or personal assets. Use the money to prove you can get some new sales, and then go for more money with the momentum you have created.

"I think eBridge can lower its capital requirement and start doing some things that will generate momentum before going after bigger dollars. If Brad really believes in the business's potential, he should take on some additional risk personally and prove it. Once he's seeing some good results, efforts to raise larger amounts of capital will be much easier."

The Advisors

Rich and Jeff Sloan are the founders of Birmingham, Michigan-based StartupNation.com and Sloan Ventures, a venture development firm that has raised more than $60 million for its portfolio of companies. Here's what they suggest:

"Some key attributes are lacking and may be contributing to Brad's fund-raising challenges, including: 1)a clear vision to dominate his niche, 2)a track record of exciting revenue growth with existing customers, 3)rapid growth in the overall customer base, and 4) a sustainable competitive advantage. More than any of these, though, eBridge's fund-raising woes result from the amount of funds they're seeking. At $1.5 million, Brad may be caught in fund-raising 'no man's land.' It's less than interesting to VCs and may be too high for angel investors in this risk-averse market.

"We recommend two possible options for this round of financing:

  • The Blended Round: Lower the equity portion of the raise to $750,000, a better amount for angels. Then, if your current receivables or other assets are insufficient as collateral, get a line of credit from a bank for the remaining $750,000 by asking your angels to act as guarantors.
  • The Aggressive Round: Raise $6 million to $12 million on a much more ambitious and exciting 'niche domination' business plan to entice VCs to participate. Identify a lead VC to help you organize the meetings with co-investors to fill out the round."

The VC

Mark Dunkel is managing partner of the Southeast Technology Fund, a $120 million VC fund in Atlanta that invests in software and IT companies. Here are his comments:

"There are many emerging technology companies, like eBridge, looking for capital, but few investors still have the stomach to invest in technology after being hammered by the tech bubble. The best advice for Brad may be simply to be patient. Eventually, things will turn around, and he'll find the right investor at the right time.

"There are two areas that eBridge should continue to work on. One is the management team. The adage that 'money follows management' is truer today than ever. While Brad has a solid personal background, there is always room to add executive team members with recent experience building large software companies. Investors love to see people who have done it before.

"Finally, eBridge could beef up their investor presentation in two ways: 1)Show more clearly how revenues for each current client have grown over the years, and 2)illustrate the strengths and capabilities of the software more succinctly. I felt those areas were worth highlighting in the company's pitch documents."

Update: Cashing In
Since speaking with our experts about raising money, software design and IT services firm eBridge Technologies Inc. has made significant progress. The Greenville, South Carolina, company posted a profit in 2003 and is already projecting 25 to 30 percent revenue growth for 2004. And while eBridge president Brad Cunningham is still looking for more money, he seems to be getting more interest from other sources, including venture banks and VCs.

"We have really had a better response from institutional investors than angels," says Cunningham. That was a welcome surprise, since most of his fund-raising efforts last year focused on individual investors.

Now it looks like the "aggressive round" strategy that Rich and Jeff Sloan-founders of StartupNation.com and venture development firm Sloan Ventures-suggested may be a real winner. Not only is Cunningham in discussions with a VC and a major venture bank, but other software companies have also expressed an interest in licensing or buying his product.

Meanwhile, Cunningham has recruited a seasoned CFO/financial consultant and has also signed up an outsourced sales team. And here's the icing on the cake: One of his products is now available direct through IBM's Web site and in IBM's global solutions catalog-an honor reserved for very few IBM-approved software packages.


David Worrell is author of the e-book Finding Funding.

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This article was originally published in the April 2004 print edition of Entrepreneur with the headline: Drab to Fab.

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