How we built a business out of recession - chapter 38 - an angel called Angela
The story of CitNOW*
This is the 38th 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.
When we began, the high street banks were the only place to find credit for quite some time. We knew alternatives existed, but they only started to appear realistic once we’d moved into our bigger first floor Wokingham office, and our headcount must have exceeded at least 20 people, maybe more. Hiring Steve, our first Finance Director, signalled the start of the process, especially when we appointed a decently-sized regional accountancy practice in Reading.
They pulled strings to get the meeting with HSBC, and a small team of bankers, including a woman, rather than the usual solo suited men in their high street backoffices, devoid of windows, as if natural light might affect focus and decision making.
Rejection was typically a polite affair. Time was made regardless of the almost inevitable outcomes. Teas and coffees, offered by a Sandra or a Liz, who’d collected us from the other side of the tellers' divide, then passed us through a disguised doorway with a 6 or 8 digit security code.
The HSBC building was very different because light flooded in from the high floor to ceiling, tinted windows. If looks were its only credentials, this was a business, not a bank. It was one of their regional HQs outside Reading, cosying up to the Microsofts and the Oracles in Winnersh Triangle. Our meeting, like many others, was friendly enough. There were plenty of encouraging well dones when we discussed the glitterati, which made up our client list.
Answering significantly more financial questions was part of their process, building a more comprehensive picture of our business than we’d experienced before. One of the three quietly tapped away on his laptop, while the other two conversed. Nothing was decided there and then, but the temperature seemed to be cooling towards the end. We found out why a few days later.
Not trusting the humans in the room, fortunately, their watertight system, which was controlled by some innovative programme, highlighted one significant weakness in our business. We had next to no assets on the balance sheet, which made us a significant high-risk proposition they couldn’t invest in.
This is laughable if you’re a bank looking for start-up action, which they professed to be doing. Why bother with such a high bar if you’re looking for early stage investment and why does it take three people, when their skills as bankers were never needed?
A balance sheet typically identifies company cash, accounts receivable, short-term investments, and liabilities such as property and machinery. A rapidly growing software start-up is very unlikely to have a healthy balance sheet. All the cash from sales is spent on the growing number of employees, further developing and selling the products to even more customers.
That’s why we needed a bank which wanted to join us on the journey. Our two offices were rented, (there was an office in Stirling for our software engineers), any cars were on finance, cash went out as fast as it came in, creating a delicate balancing act until we could find a much bigger overdraft or an investor.
While Alistair’s rolodex was nowhere near as extensive as Gordon’s, he’d still worked in automotive since he was 16, which meant plenty of connections over the years. One of the reasons we didn’t take any of those first investment offers was because he’d already started a conversation with Angela. She’d been in the news and he knew her.
Angela was a well-known personality in automotive circles and not just because she was a rare female leader in the industry. She’d been the Managing Director of EMaC for 12 years, before she completed her sale having built the company into the UK market leader of pre-sold customer service plans.
Angela did us two big favours, the first of which was introducing us to Hamish**, who’d been instrumental in her deal. Hamish finally solved our cashflow problem when he introduced us to Santander Bank and their regional corporate finance team.
The deal didn’t happen overnight, it took months. They decided they liked the business, but as you might expect, they wanted a better understanding of the business, particularly our contracts, typically 12-month rolling ones. Given that this was a relatively short period, they also wanted to understand how much churn occurred.
Typically, it was pretty rare for a dealer to be counting down the days to the end of their contract. Those that did, were either not using the service, often because of other issues, or a competitor was trying to discount their new video solution heavily, provided the dealer signed up for their vehicle health check software. As usual, there was never a free lunch.
We made our contract a rolling one, because dealers didn’t want to be bothered with them. There was also a 90-day notice period, so we at least had a chance to discuss any problem and could try to resolve it, if someone wanted to cancel. In the earlier days, the biggest issue was always lack of use. Before the situation escalated, it was easy to predict where we needed to try and sell a training day or two.
I can’t remember exactly how much Santander lent us the first time. It was over £1m and the interest rate was 10%, plus management fees, lumps which suddenly seemed less significant once all that cash was deposited in our account. Hamish also anticipated the balance sheet objection, which was only resolved when Angela came on board as our first significant investor.
Finally we had something tangible, beyond our monthly revenue and average revenue per user (ARPU) - a lot more cash and a shiny new shareholder with lots of automotive experience. Of course, I also hoped she would exert her charms to help keep our CEO firmly in check.
I first met her at a trade show after she’d sold her company. Alistair had arranged it at my request, as by then, she’d expressed an interest in our business, Hamish was looking at a possible deal, and Alistair was beginning to chase. Aside from that unwelcome action, she felt comfortable in automotive and, of course, our customers were the same ones she’d had.
My meeting felt slightly strained, but I probably hadn’t been introduced as the best thing since sliced bread. Alistair had kept this relationship away from the board, as he had with Hamish and Santander until he couldn’t any longer. It would have looked odd and the bank had already requested a meeting with me and Donna.
I met Angela on her old companies stand. We didn’t have long, and our chat was competing with the noisy surroundings. It ended up being little more than a brief introduction. But that was okay. The ice had been broken. It was clear that she’d worked hard to achieve her success. Putting her cash on the line was a fantastic vote of confidence. We hoped to give her a healthy return and plenty of opportunity to be as activeas she wanted to be. Some of us were certainly listening.
*CitNOW was our company’s trade name before we sold it in 2018.
**Hamish Morrison is the joint CEO of BHP, an accountancy firm in Leeds. Hamish’s specialism is corporate finance, and I’m sure he wouldn’t mind me mentioning that here.