How we built a business out of recession - chapter 37 - banks and investors
The story of CitNOW*
This is the 37th chapter about CitNOW, the company started from a kitchen table in Winnersh, Berkshire. If you’d like to read from the beginning, here’s a link to chpt 1. Each chapter is a 5-minute read. It’s an early draft of a book.
CitNOW was founded by Andrew Howells and Donna Barradale in 2005, although the company was only registered in 2008. In February 2018, we sold the company to Tenzing, a UK private equity company. It has been sold again since.
The search for cash never went away until we finally did a deal with Santander. For much of our journey, banks had been a disappointment. Like Goldilocks and the Three Bears, we were either too big or too small. When we were small, the only sensible overdraft we could negotiate, let’s be honest, there was no negotiation, was a secured loan with not one but two shareholders’ houses sitting plumply on the signed paperwork.
Every meaningful discussion with a bank seemed to include a feigned reluctance to take charge of a property, especially one any children called home.
But my hands are tied, if you really want to do this, these are the terms of the overdraft agreement.
It seemed essential to turn up suited and booted with a 5-10 minute presentation about the company, with plenty of car manufacturer logos on our laptop or printout, which we knew the bank manager would recognise. But it was still a tickbox exercise with a few questions from them, thrown in to show willing and get us to the point of the meeting. They weren’t qualified to determine how sound the business was or would be, so they reverted to a belt and braces approach and took any guesswork out of the decision-making process by asking for security - houses would have to do. Somewhere in their training manual was a reminder that 90% of all new businesses fail. So as a business owner, any argument for cash, outside the well-beaten pathways of there not being enough, had better be compelling.
We continued to receive our fair share of rejections. It was as much a reflection of the junior audiences we could attract at the bank, and not because our business wasn’t worth investment, albeit with risk attached, too uncomfortable for most.
Not long after our big UK breakthrough with BMW, we were turned down again, even with a healthy burgeoning order book. I can’t remember which bank. I want to think it was HSBC, who did at one point, sack us off because the computer literally did say NO. That was the reason they gave anyway.
We were caught scrambling as a result, because we could get no credit from the hardware distributors supplying us the Apple iPods. Having to pay cash upfront, more often than we liked, was causing problems. This despite most BMW dealers being prompt payers on shortened 14-day terms for the CitNOW kits we supplied with a day’s training.
It was galling. The phones were now ringing, not with new sales enquiries, although they were increasing; it was more likely because BMW and Mini dealers were chasing us to find out when their hardware and trainer would arrive. Suddenly, we were experiencing something utterly novel to us - pent-up demand.
Inevitably, we spent too long on high street credit. In the end, out of frustration and because we were over trading, we started looking around for an investor. We immediately bumped into that old nursery rhyme again, the Goldilocks principle - the idea that something is best when it’s not too big or too small, but just the right size.
We were looking for an investment somewhere between £350,000 - £500,000. Significantly higher than our overdraft facility, (about £100,000) but not enough to excite that many investors. Angel investors do exist at this level, although many prefer the bigger leagues, with the promise of more stable returns and fewer failures. Angels can quickly burn through four or five company failures before they get a winner. Yet they apply the same processes to every opportunity to try and ensure a better success rate with fewer duffers.
We, or more accurately, Alistair, met with at least three interested parties. Others never accepted an invitation to meet after seeing our introductory pack. Like the banks, rejection is expected and isn’t necessarily a reflection on the business. The ones that requested meetings typically had a good experience with something automotive or software as a service (SAAS). Or maybe they had a case of FOMO (fear of missing out), we looked that good on paper.
Unlike the banks, investors are more likely to know what they want. Without the security of an asset like your house, the due diligence process is significantly longer, and there are many more hoops to jump through. Any offers, even for a relatively small amount of capital, are conditional on a significant stake in the business, 20-25% is not unusual, often with a seat on the board.
The meeting went very well with the investor who turned up in a racing green, two-seater Jaguar soft-top. He actually wasn’t the principal investor. He worked on behalf of some high network individual, and between them, they ran an investment company.
I thought he was smart for no other reason than that he was prepared to take the time to visit our offices in Wokingham and have a couple of hours with the board rather than listen to Alistair blathering. Nothing was particularly formal, no stilted presentations. He saw it more as an opportunity to say hello and ask questions. Maybe he wanted to see whether he liked our vibe. Could he work with us? It certainly allowed him to play dumb, listen to what we had to say, add a bit more colour to the numbers and potentially pick up on any red flags.
While many might see the addition of an investor to the board as a significant drawback, Donna and I definitely didn’t for all the obvious reasons**.
In the end, three companies made offers, which were all a little bit too greedy for our liking. At the same time, we also become aware of a potentially friendlier face, who had recently sold a very successful automotive business and might now be looking for a new investment opportunity.
*CitNOW was our company’s trade name before we sold it in 2018.
** If you're wondering what reasons I’m talking about, you need to read previous chapters.