Partners Looked for (and Found) Capital in Right Places
What makes for success in the search for outside investors? Why do some business owners get the backing they need and others don’t?
For many business owners, job one is to believe that you can attract outside capital--often a formidable task, especially for those who have tried and failed.
To that end, it helps to hear the success stories of people who get the outside financing they need. Again and again, their stories show that you can get the financing you need if you:
* Understand what investors want and shape your own goals to answer their needs.
* Identify the investors most likely to find your idea attractive.
* Make a careful approach.
Paul Fiore and Daniel Jacoby followed this strategy in growing their Calabasas software company, Digital Insight Corp., which they founded in July 1995.
A maker of Internet banking software for credit unions and banks, Digital Insight did only $85,000 in revenue in its first six months. Revenue jumped to $1.5 million in 1996 and to $4.1 million in 1997. The company hit $8.2 million in 1998, and Fiore and Jacoby think they can do $17 million this year.
That is remarkable growth, and the story of the way the partners financed Digital Insight holds valuable lessons for any business owner who needs help turning a solid idea into reality.
Internet banking didn’t exist when Fiore and Jacoby started Digital Insight. A handful of banks struggled with online banking, hampered mainly by the logistics of supplying their customers with the software they needed to keep track of account balances, shift funds between accounts and the like.
Fiore and Jacoby’s software enabled people to do their banking over the Internet--a simple idea bypassing the inherent difficulties of other early systems.
They launched Digital Insight with $1.1 million in seed capital from the investors behind their employer, XP Systems in Moorpark, a maker of information-processing software and hardware for credit unions.
Eighteen months after starting up they raised an additional $3 million in outside capital in a tightly focused, intelligent campaign that took only 10 days to plot and 21 days to carry out.
How? They prepared themselves to find capital before they actually went looking for it. They learned to do business in the marketplace for capital before they approached any investors. In short, they did their homework.
“We made ourselves smart going into it,” Fiore says. “We learned that most of the time, business owners play a numbers game, printing 100 copies of their business plan and sending them to everybody they can think of.
“We didn’t take that approach. We printed only 10 copies and we handed out only five to investors who seemed most likely to be interested in our model.”
Fiore and Jacoby identified their most likely investors by networking extensively among investment bankers, stock analysts, accountants, business owners who had done financing and others involved in business finance. Outlining their plans and asking for referrals, they learned that investors tend to specialize, and that it would do no good to approach investors seeking opportunities in the biotech industry.
“Over 10 days we asked everybody we talked to whom they respected among investors interested in the Internet,” Fiore says. “We told them we needed $3 million and asked which investors were high on electronic commerce on the Internet.
“We sent out only five copies of our plan, and then we blitzed those investors with e-mail and faxes and voicemail messages. By the time we actually made contact, they already had an overview of Digital Insight.
“Three of the five got into a bidding war to finance us, and in 21 days we closed the deal.”
Clearly, Fiore and Jacoby learned the rules of the financing game, and they played by them. They understood how to approach an investor, what to show the investor and what to expect in return. They used time wisely--their own and that of the investors. And they didn’t look for capital in the wrong places.
Their story shows that there’s no mystery why some business owners find outside equity investors with relative ease, just as there’s no mystery why some have no trouble getting bank financing. No matter what kind of capital they seek, those who get outside financing focus their search so as to satisfy their own needs and those of the people whose help they seek.
“We had a very narrow window of opportunity,” Fiore says. “Our goal was to find out what would get the attention of people who had the money we needed.
“Investors get hundreds and hundreds of business plans a year, and they weed out most of them because they don’t fit the investor’s needs. If you find out beforehand what a specific investor wants, you make your own job a lot easier--and the investor’s.”
You have to realize, Fiore says, that investors face the problem of finding solid businesses in which to put their money to work--a difficult task, as is the search for capital for the business owner.
“We knew we were helping our investors solve their problem,” Fiore says, “just as much as they were helping us solve ours. In the end, it wasn’t clear who wanted to do the deal more--us or them.”
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Freelance writer Juan Hovey can be reached at (805) 492-7909 or via e-mail at jhovey@gte.net.
