So our hero creative company has planned and prepared and made a winning pitch. If this was a romantic comedy the scene would fade to black and the credits would roll.
But this is real life. The successful pitch is not the “happy ending” of the story. It simply heralds the beginning of the next phase: due diligence, signing the deal, getting the investment, executing the business plan and then “living with” the VC investor.
In the featured film in this Act 3, CAF Chairman Thomas Dillon emphasises the long term relationship that starts with an investment. As he says, this is “patient money”; like any long-term relationship, “both sides have to work at it.” He outlines some of the main provisions that an agreement is likely to contain and why a fund may want to seek such protection. This is the start of a partnership; the founder is now part of a wider team and needs to remember that instead of working for himself or herself they are working for a team of shareholders.
So what is due diligence? Thomas describes it in our featured film as ensuring “that what we’re investing in is what it says on the tin.” It verifies that the foundation of the business plan is solid. For creative companies in particular, it allows the fund to check that any Intellectual Property (patents, copyright, registered and unregistered designs) is owned or licensed as required. Karen Stokes, FD of CAF, outlines the stages required, from a handshake at the end of the pitch, “Dragons’ Den” style, to the part you rarely see on the television: the business of doing business with an investor on board.
What sort of information does the investor need to see? It will want to know about anything that could affect its investment, both adversely and positively. (Whilst not definitive, this checklist, provided by law firm Glovers, can give an overview of the main categories of information and paperwork that a business will ordinarily need to provide).
The list is quite extensive but – as Karen points out – if the investment manager or external advisor has done his or her job and the business is well organised, this sort of information should be to hand. How long does this process take? “It depends on how organised you are.”
Karen also mentions a number of requirements after the deal has been signed and the investment cash is paid over. Depending on the nature of the fund, it may appoint someone to the Board of the business to oversee its growth. As Thomas explains in the featured film above, CAF has a supportive but “distant” relationship with its investee companies. Both Karen and Thomas spoke about maintaining a balance; the need to keep the fund informed of developments in the business but not for the fund to run the business for the founders. Crucially, the relationship is one of openness. When the company hits challenges, the fund may well be able to assist. “We need to know the plane has a fire at the back before it hits the engine at the front!” says Karen. Investors can only help if you are honest about the challenges you are facing.
Veejay Lingiah of Artbrand Holdings is clear that the process of investment readiness has worked well for his company. The investment document, while lengthy, was useful as it “outlined the expectations” that the fund would have of Artbrand. With investment manager Keith acting as “a bridge between our world and the world of finance”, they planned Artbrand’s growth strategy. Investment allowed them to go after bigger clients and have the infrastructure to support those clients once they had won them. Keith now brings an “informed objectivity” to board meetings. As a result, Artbrand have doubled their turnover since investment.
Realistic expectations, an open approach and welcoming the informed objectivity of a non-executive director are all aspects of making the investment work for a business.
There are other, formal requirements. For example, certain fees may be payable. CAF requirs payment of a fee on signing, a small monthly fee to cover the costs of monitoring and the timely submission of management accounts, board minutes and other data. This discipline can have a very positive effect on the business and its owners. For Jonnie Turpie of Maverick TV, the oversight of the investor helped the founders make the change from “lifestyle” business to, in his words, “a proper business”. Fulfilling the financial reporting structure enhanced the attitude to growth and, crucially, enhanced the creative opportunities for the company.
So, mindful of the need to maintain a healthy relationship with the investors of the company, what does an investment make possible for a creative company? Here, Jonnie tells us what they did with that investment and what became possible for them.
With new premises, better equipment and some financial stability, Maverick were able to grow their business. The process had injected some new financial savvy into the business and Jonnie points out that a key advantage of operating with the fund was to “introduce creative industrial players to financial players”. From this strong base the company was well placed and equipped to deal with the changes in their market place that came about due to legislative changes. When the possibility of exit showed up, in the guise of an approach from All3Media, Maverick were ready. From being investment ready for the CAF fund, they displayed a new investment readiness – they were in the right place to participate in a consolidated marketplace.