Raising capital isn’t an easy decision for an entrepreneur. In order to expand rapidly, do you give up equity and control to get the investment you need? Or do you take the slower growth track, where sales fund your company’s growth and you get to keep 100% control of your baby? South African-born software company Everlytic chose to go the funding route. Finweek interviewed managing director Walter Penfold about Everlytic’s recent capital raise and what they learnt from it.
Everlytic is a communications tool that integrates email, mobile and social media. Sam Hutchinson and Josh Adler started the company in a Johannesburg garage some 10 years ago. Everlytic has expanded into a wide range of countries including Argentina, Chile, Brazil, Kenya, Ghana and Nigeria, with more emerging markets to follow.
To help them scale rapidly, the entrepreneurs very recently raised an undisclosed but sizeable amount of funding. There were some valuable learnings that came out of the funding process. Penfold shared these with us in the following interview:
Why did you raise capital?
“To fund further development of Everlytic and to enable our international expansion. We could have grown steadily with our own cash flows but we were eager to scale rapidly and the money gives us the freedom to do that.”
Who did you raise the capital from?
“From an FNB-backed fund called Vumela. They are an innovative BEE Private Equity fund whose strategic goals align well with ours, because we want to build a great company.”
How did you do the valuation?
“We are not a startup, but we think like one. This means that we plough every cent back into the company to try grow the top line as fast as possible. We are not interested in slow steady growth. This makes it problematic to use the normal valuation mechanisms that rely on multiples of EBITDA [earnings before interest, tax, depreciation, and amortisation] or similar. “With us, it was more a case of presenting our track record and painting a vision of the future that would bring good returns for all parties involved. We did this with a detailed five-year plan, which is not just a spreadsheet, but a realistic picture of what the future could look like. On top of that we always had a number in our head, and if the offer was below that we would have simply walked away.”
Any tips that helped you in the negotiations?
“We got all the hard negotiations done upfront with an indicative term sheet. The hardest part is always the valuation. The entrepreneur always thinks her business is worth more than it is and the investor always wants to pay less. If you ask for too much, then the investor has to start getting creative with performance warranties and other risk mitigation mechanisms. Rather come up with a realistic figure and don’t get greedy. If the business works, everyone will make money, so don’t worry about the pennies. Remember it is better to have a slice of a watermelon, rather than owning the whole grape.”
What did you do differently that made you successful in raising capital?
“We were lucky enough to be mentored by a Silicon Valley veteran who helped us understand the true value of our business and how to put together a mindblowing pitch deck to demonstrate it.
The pitch deck is arguably the most important document that you will produce when going through the capital-raising journey. Investors make up their mind in the first 30 seconds, so you have to blow them away. The other important thing is to have a good balance between confidence and humility. Back your business passionately but always remember that you don’t know it all, and that you will need help. Investors back the jockey, not the horse, so first sell yourself before you sell them your idea. They need to know that they will be able to work with you for the next three to five years and that you will be willing to listen, learn, and change.”
What are the learnings for other entrepreneurs who are raising capital?
“We learnt that it is as important for the investor to buy into you, as it is for you to buy into them. We must have pitched to over 20 investors through a period of about a year and out of all of them, there was only one that truly matched our needs. We learnt that it is very important to understand how the investor will work with you post-investment. So in every pitch we interviewed the investor as much as they interviewed us.”
Is there anything else that you think is important and worth sharing?
“Raising capital is hard work. It took a year and much blood, sweat and tears. Unless you are a start-up looking for seed capital from an angel, you are going to go through rigorous due diligence and many rounds of negotiation. When we eventually got to signing, the agreements stood almost a metre high. It took us an entire afternoon to sign everything. So the lesson is to make sure you have the bandwidth to dedicate the time you will need, and make sure your business doesn’t suffer while you are off pitching to investors.”
Raising funding is a very personal decision that you as an entrepreneur must make for yourself. It is important to think very carefully about whether your company really needs the capital, or if you can manage without it. If you do opt for the capital-raising route, never forget that you have the asset that the investors want. So, as Penfold said, you can always walk away.