Finding the funding path: ThePost.ie


TCH Archives > Sunday Business Post > 2006/09/03 > Finding the funding path

Finding the funding path
Sunday, September 03, 2006 -
No two software companies will follow exactly the same course when it comes to progressing their businesses, but there are ground rules with which everybody can work.

The first is that when it comes to raising funds, the trick is to persuade a venture capital firm that your company has what it takes to become a serious global player.

Paraic O’Toole did exactly that when he became chief executive of Automsoft in 2001.

The company had been ticking along since 1997 as a provider of advanced manufacturing intelligence systems for process industries. Developing a specialist database software for oil, gas, food and utility companies, it was trying to break into a niche sector that two providers had dominated for 20 years.

In 1999 Automsoft raised €2.5 million from Cross Atlantic Capital Partners, a first toe-in-the-water of venture capital (VC) funding that was needed for product development.

Guinness and Cadburys were among its first customers but Cross Atlantic soon grew concerned about its investment.

The firm had arrived at an all-too familiar crossroads for Irish software companies - one that was overcome when a deal dropped out of the sky. In 2000, the firm won a contract with a global pharmaceutical company that was looking for a solution to help store and manage large volumes of process data.

‘‘I’d like to say it was good planning but that deal was absolute luck,” said O’Toole. ‘‘No matter how wonderful a business man you are if you don’t get a couple of breaks along the way it’s going to be tough to make it.”

Automsoft was a very small player, employing only eight people at the time, but its ability to deliver a niche product suddenly gave it a foothold in a global market. But what made a huge company turn to a small Irish firm for mission critical software?

There were several reasons, according to O’Toole, not least the fact that the product was stable and well built. It also helped that Automsoft was given a specification and turned around a prototype in just six weeks. The deal it would sign would be worth a modest €60,000, but its real value was in opening up an opportunity.

Despite the win, the company’s future was still on a knife edge when O’Toole joined.

Cross Atlantic was having to explain to its investment committee why it was thinking about putting more money into a niche business, but all that was about to change. ‘‘We had one big customer but more importantly we had the indication of a market opportunity,” said O’Toole. The contract had opened O’Toole’s eyes as to what would be a key selling point when it went looking for a second round of investment.

Potential customers were being asked to operate in an increasingly regulated market around electronic storage and the production and process of records.

It played perfectly to Automsoft’s strengths.

‘‘A new regulatory market was emerging which was hugely important to us,” said O’Toole. ‘‘There is a lot of inertia in the industries we sell to because their business cycle is so long. The lifecycle for a drug is 7-14 years, for example. Drilling an oil well can take a long time before you even get to the oil. Selling anything into these sectors is going to take time unless there’s a crisis of some form, whether it’s regulatory or environmental.”

To drum up the second round of investment he worked with Davy Stockbrokers on an investment memorandum and did ‘‘the beauty parade’’, pitching the company’s wares to VC companies.

From his previous roles as vice-president in Cambridge Electronics, O’Toole had good contacts in Britain which was where he started to look for investment.

‘‘I knew them and they had a lot people that knew me, people they could call to kick my tyres,” he said. Irish VCs weren’t an option at the time. ‘‘They weren’t that active and we wanted people with more of an appetite.”

Finding anyone with an appetite would prove to be a challenge because this was 2001 and the technology market had just suffered a catastrophic crash. ‘‘It was a desert and everyone was suffering from enormous levels of pain,” said O’Toole, but he was confident he could succeed.

The product solved a particular business problem, albeit for a selective amount of companies in a niche market. It was the regulatory piece that completed the jigsaw. After trying out the presentation to friends in the business world, he honed his pitch and went to the market.

After seven months and nine meetings with VCs that would eventually come onboard, he had raised €6 million.

IDG Ventures and Penta Capital joined Cross Atlantic.

Describing the pitching process, O’Toole said that you didn’t tell lies but you gave your story the most positive gloss that you could.

‘‘One VC told me that they’d never seen a business plan that delivered in terms of the revenue projections; nor did they expect it to. Entrepreneurs come along and present a violently optimistic picture of their business.

“When the investors look at the figures they dilute them by 60-70 per cent.”

He also made the point that it was not just number-crunching.

‘‘VCs are buying into the credibility of the people sitting in front of them, and they are also buying into their gut instinct.

“They invest in things for emotional reasons in the same way we buy things for emotional reasons.”

Going forward, O’Toole is looking at other companies and product sets that would fit well with Automsoft. Embarking on the acquisition trail means going back to the investors with a very detailed proposal.

‘‘We’re now into the strategy development stage where we have to be able to demonstrate the financial benefits of an acquisition,” he said.

‘‘You always have to be thinking about the next step.”

Paraic O’Toole is chairman of the ISA funding group where he works with Ireland’s software community, helping them avoid investment pitfalls.