June 25, 2012 12:11 am

The funding road less travelled

Alert Me: angels and venture capital

Pilgrim Beart and Adrian Critchlow, the founders of Alert Me, are serial entrepreneurs and already knew the drill when it came to raising money for their new venture. Mr Critchlow had been one of the founders of Active Hotels, a European online hotel booking service, which was sold to Priceline, the travel website, for £90m in 2004, and there was enough money left from his share to produce the first prototype of the Alert Me software.

Alert Me makes systems that allow people to remotely monitor their homes over the internet. This system has a number of uses, from acting as a burglar alarm to checking energy consumption.

More

On this story

IN Blueprint for British Business 2012

The founders immediately started demonstrating the concept to contacts in the angel investor community in Cambridge, UK, to see if they could attract seed funding. It is relatively easy to contact investors in Cambridge, where organisations such as Cambridge Networks regularly bring together start-up companies, mentors, and investors. Cambridge Angels, a group of around 30 rich individuals, is very active in providing funding and have backed many local businesses, including Arm Holdings and CSR, the chip designers.

“Being based in Cambridge, the founders knew all the angels, although none of these pitches is ever easy, even if you know everyone,” says Michael Black, chief finance officer.

The company raised £5m from angels and a US hedge fund, which was enough to get the first products on to the market. These were security systems sold to individual homeowners. But more money was needed to develop software that could be used for smart meters and home energy monitoring.

Getting the first venture capital company interested was the hardest, says Mr Black. But the founders had a contact at Good Energies, a private equity group investing in the energy sector, and this gave them an opening to make a pitch. Once one VC was interested, it was easy to get others on board.

“The VCs were very helpful in introducing us to other VCs. They like doing things collaboratively, and once you get into one conversation it is easy to ask who else you should talk to and get an introduction,” Mr Black says.

Negotiating with the VCs took so long that the company began to run out of cash. Fortunately, Alert Me was able go back to its angel investors for a few hundred thousand pounds in bridging finance.

With several venture capital companies sniffing round the business it was not too difficult to persuade the angels to put up the extra cash in return for additional shares in the company, says Mr Black.

“We had VCs showing an interest in the company and a term sheet. There was not a lot of cash, but it wasn’t something to be worried about at that stage. If you have no VC interest, then you need to worry,” Mr Black says. Subsequently, the company secured £8m from venture capital investors and signed a deal to supply British Gas customers with energy monitors.

. . .

Slightly Mad Studios: Crowdfunding

Ian Bell, founder of Slightly Mad Studios, turned to crowdfunding when he could not get a deal with a publisher to finance the racing computer game the company was developing. Mr Bell and his team had made two popular Need for Speed: Shift games for Electronic Arts, but EA pulled out of commissioning a further sequel. Mr Bell approached other publishers, but progress was slow. He began to think he might do without a publisher completely.

“We were getting tired of the model where the developer does all the work designing and building the game and then is lucky if they even get a royalty. We decided we’d try something different, a combination of crowdsourcing and crowdfunding,” Mr Bell says.

Mr Bell and his senior development team put in around €1m of their own money and are raising the remaining €2.75m needed for the project from the general public.

People who are interested in the new game pay a fee to have input in the development process. Depending on the amount – between €10 and €25,000 – members receive a range of perks, from advance builds of the game, to designing the look of the race cars and having their names included as drivers.

“The people who have spent the most money love showing off on the user forums about how they are playing with the coolest new gear,” says Mr Bell.

The company has raised €1.25m in this way since October. If the remaining money does not come through, Mr Bell says he will sell smaller versions of the game on online games sites such as Xbox Live Arcade to raise enough funds to finish.

The advantage of funding a game this way, says Mr Bell, is that it gives the development company more control.

“Usually, in order to get a deal with a publisher, you have to give away everything you have. We are retaining the ownership of the intellectual property we are creating,” Mr Bell says. “We don’t want to give away ownership of the IP, or slices of the company, and we want to retain our artistic freedom.”

The downside is that crowdfunding is legally still a grey area. The Financial Services Authority admits the rules are vague, and different laws apply depending on whether crowdfunding is done as a donation or as an investment with an expectation of a return. Slightly Mad Studios took legal advice to ascertain that what they wanted to do was within the law.

Although members could receive some money back from the company if the game, which is expected to come out at the end of next year, sells more than 80,000 copies, Mr Bell has to be very careful not to call this an investment. Fees will be paid to members as independent consultants to the company, not as shareholders.

“It is not an investment. They buy a development pack and then we pay them fees. We have shown people what they will get if there are no sales – it is zero.” He would like to see the UK clarify the rules on crowdfunding, especially as such schemes were recently given the green light in the US.

“The current legislation came from a good place, in that it is trying to stop salesmen from making promises and just taking people’s money. But the laws are from a long time ago, and this is now legal in the US. It puts the UK at a disadvantage if we can’t use it too,” Mr Bell says.

. . .

Incadea: Listing on the public markets

It is rare for technology companies to list in London these days, but Incadea, a German-based business that provides software for car dealerships, decided to join Aim in May in a float that raised £17m and valued the company at £47m. Werner Leinauer, chief executive, said the listing was not so much about the money but about raising the company’s profile and making it more credible.

“It has always been my dream to bring a company to market. It raises the company’s profile and makes it seem more stable,” Mr Leinauer says. He adds that many of the big car manufacturers who use the company’s software – including BMW and Volkswagen – expect them to be listed.

“If you want to be a global player, you have to be listed,” Mr Leinauer says.

Despite the company’s Austrian and German roots, he opted to list in London because the German market did not offer the same levels of liquidity.

As the money was not the primary reason for listing, Incadea’s management team decided to raise a smaller amount at a higher valuation, rather than selling a bigger part of the company for more cash.

The £17m they have raised will go towards helping the company expand in emerging markets such as China and Brazil, where the number of auto dealerships are multiplying as the new middle classes become able to afford more expensive cars.

The process of listing was gruelling, Mr Leinauer says. It took around 18 months of planning and culminated in the business model being “ripped apart” by 66 potential investors during a month-long roadshow.

The economic crisis and current stock market volatility do not concern Mr Leinauer too much. Compared with the hype surrounding Facebook’s IPO, Incadea’s modest listing slipped on to the market barely noticed. It is therefore likely to have a less turbulent time, Mr Leinauer says.

“I am happy that we are getting a valuation that is low profile. We are a bit underestimated but we won’t face problems that companies that have been hyped are facing,” he says. He is hoping that, if the company manages to reach its target of €100m in revenues by 2015, it can move from Aim to a bigger exchange such as the Nasdaq.

Copyright The Financial Times Limited 2014. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.