The path of raising finance for the entrepreneur is always a precarious balancing act.
As the owner of a company which has made this journey, I fully appreciate the issues that owner-managers face regards debt or equity. Often, it is not a choice of either or but rather which to use at the right time.
Warwick Music developed the world’s first plastic trombone. We raised £15,000 of seed finance to build the prototype and further development funding both via venture capital. As is often the case, development took longer and therefore sales did not really begin in earnest until 2010.
Our route to market had always been to target one of the world’s three main music instrument wholesalers. In our case, we were fortunate that our preferred ‘bidder’, Conn-Selmer Inc. (part of Steinway) snapped up worldwide distribution in early 2011.
This in itself created a new challenge for us – working capital. We manufacture in China where payment terms are essentially ‘no money, no product’. Our original investor, a regional VC-fund, was fully invested and out of cash.
Lesson 1: Always make sure your institutional (or angel) investor has further funds to support your business as the only certainty in business, as already indicated around our development plans, is that things take longer than planned.
So we worked with our customer on payment terms and managing deliveries very carefully. Cash management in this phase was vital. We could not over promise and under deliver.
Lesson 2: Talk to your customer; they are human beings too.
Eventually, after we sold 40,000 units in our first year, our customer wanted to renegotiate payment terms. At this point, the bank proved to be a new route of finance. The business was established, we were making good revenues and profit. An equity deal did not make sense to shareholders.
We were not happy with our existing bank and so we re-banked the business and at the same time looked at invoice finance. In our case, the new bank worked very hard to understand our proposition and complexity of the transaction: we were manufacturing in China, and then shipping to USA, Japan and Europe, but due to the distribution model we only had one customer.
Lesson 3: Perhaps a new bank has the desire to win your business more than your existing one.
The bank recognised the solid management expertise and a trading track record as well as our strong customer. And at the end of the day, the invoice finance product makes money for them. It fits our model well and has enabled us to scale our growth in line with customer orders – unlike the fixed sum of a term loan.
So over 5 years we have used personal funds, VC-funds and bank invoice finance and each has been vital in order to support and accelerate our business growth. All come at a price, but without cash our vision of making the world’s first plastic trombone would still be just a dream.