Former star of The Apprentice, Nick Holzherr, has recently announced that his new company, Whisk, has successfully secured a £170K investment from a consortium of investors. The investment deal was brokered by Midven, a Midlands-based venture capital fund manager that focuses on early stage and growing SMEs and local lawyers at Shakespeares advised Whisk on the deal.
Gary Davie, partner and corporate lawyer at Shakespeares, who acted as lead adviser to Whisk, said:
“Most start-ups are reliant on some amount of capital to get started but sourcing it in today’s market can be extremely difficult. All the enthusiasm in the world is not going to convince a cautious lender to part with their cash if the projected earnings of the business are fanciful and there is no track record or collateral to speak of.”
At the outset, drawing up an investment agreement which strikes the right balance between the interests of both the investors and the entrepreneur is critical to any start up, particularly in today’s market. In the case of Whisk, the investors were happy to take Nick’s profile into account when considering the valuation of the business and the investor protections required but this wouldn’t necessarily be the case for other start-ups.
Duncan Kerr, investment director of the Early Advantage Fund at Midven, commented:
“Entrepreneurs have become more realistic and are prepared to moderate their expectations when it comes to the business valuation. This is positive, but still sometimes it is not enough.
“In the case of Whisk, Nick Holzherr’s profile and media interest generated in him and his business idea since leaving The Apprentice was a factor we were prepared to take into account when assessing the business valuation.
“We were also impressed with the business plan and the market research undertaken. Having experienced business angels on board to help guide the business in the early stages was also a critical factor when brokering our investment.”
Even when investors have expressed their interest in making an investment, securing it can be tricky if the entrepreneur is reluctant to address some of the sensitive areas that need to be discussed.
Gary Davie added:
“In all the excitement of setting up a new business, it is common for first-time entrepreneurs to be overly-optimistic about how things will transpire but of course investors expect a certain amount of protection and this needs to be written into the investment agreement.
“The entrepreneurs also need to consider what is necessary to protect the business and its value moving forward and to agree a contractual framework for the business building in things like restrictive covenants for key members of staff; veto rights for stakeholders; and appropriate contracts for use with key suppliers and customers. Intellectual property protection should also be considered at an early stage.”
The quality of the business plan is usually the first thing that comes into question when investors are considering a new investment opportunity. Common pitfalls include overly-optimistic forecasts, a tendency to under-estimate the time it will take to get the business to where they want it to be and a lack of follow through on sales. According to Gary and Duncan, most of this can be put down to a lack of experience.
For this reason, having an experienced management team on board when seeking capital investment is usually beneficial. For Whisk, the involvement of a group of business angels to act as non-executive directors, each with experience of running tech-based businesses, was a compelling factor that helped to secure the investment.
Duncan Kerr added:
“It is fairly rare for early stage business propositions to have a structured management team on board and the fact that Nick was well on the way to agreeing one when we started talking was indication of his savvy approach.”
“All start-ups seeking investment should make sure they have got access to experienced business support in the early stages. It’s not sufficient to have some grey-haired people attending a board meeting once a month. Start-ups need boards that are prepared to get stuck in at an operational level if and when required.”
In a high-risk climate for both businesses and investors, ensuring that attractive mutual incentives are agreed up front can make the difference between business success and failure. According to Gary Davie, this should be achieved as part of the negotiating process. He concluded:
“Investors are experienced at supporting early stage businesses and need to realise value from their investment within a certain timeframe. Entrepreneurs need to feel that their shareholding is sufficient to drive their enthusiasm not just today but in the future. Open and honest negotiations are the key to harnessing the entrepreneur’s drive and vision for the benefit of all stakeholders.”