David Kennedy is a partner in the advisory division of KPMG, and works out of both its Calgary and Toronto offices. He has 20 years of experience advising small and large companies on financing and mergers and acquisitions. We asked him for his take on StormFisher's fundraising experience and what other entrepreneurs can learn from it.
You also had the opportunity to ask Mr. Kennedy a question directly, about StormFisher or your own business situation. His answers to select questions appear at the bottom of this page.
Is it unusual for a company as small as StormFisher Biogas to get a private-equity partner?
In my experience, it is somewhat unusual for an early-stage, pre-revenue company to attract a significant private-equity commitment. However, if the investor specializes in a niche, it may understand the business at a sufficient level to counter the pure start-up risk and proceed at a level of investment normally associated with a later-stage company.
Do you think they did the right thing in going with the big bucks from Denham Capital Management rather than a smaller investment round?
The more traditional way might be to raise several smaller rounds of "friends-and-family" or angel money, then graduate to an institutional private-equity investor later - once the business plan is more substantiated. The downside to this approach is that you never get out of fundraising mode.
One or two million dollars doesn't go very far against an aggressive business plan, especially one that involves heavy investment in capital assets. With a single large partner, the entrepreneur is able to focus on hitting the business plan goals rather than constantly sweating about where the money is coming from to sustain the business.
StormFisher won't reveal the details of its deal with Denham, but can you tell us what private-equity arrangements like this one typically involve in terms of strings, benchmarks and such?
Private-equity investors are sophisticated investors. So such deals typically provide for a range of protections for the investor, whether it's a control deal or a minority one. These protections would usually include representation on the board of directors and a meaningful say on matters such as annual business-plan approval, major capital expenditures, all matters around borrowing and issuing new capital, mergers, acquisitions or other business combinations, and executive compensation. Also, they may have buy-sell provisions, rights of first refusal or "drag along" provisions [whereby stakeholders agree to approve the sale of a company, a reorganization or other major decision when a set percentage of stakeholders support it]
Often, when a significant dollar amount is involved, financing commitments may be staged with multiple gates. In other words, success in phase one can be a precondition of phase two funding. This helps the fund manage risk by exposing incremental amounts of capital only as the plan objectives are met for each phase.
What are the usual pros and cons of gaining such a big investment partner this early in the game?
The advantage of a lot of committed capital for a growth-oriented company is the ability to focus on developing the business rather than repeated rounds of money-raising, which can be an immense distraction. Moreover, big partners with big capital commitments lend credibility to what might otherwise be an insubstantial entity. Many entrepreneurs struggle with the control issue through repeated rounds of financing, but end up in a minority position in the end anyway, either through a public offering or by aligning with a large strategic partner or fund.
The alternative is to fund as you go, with small amounts of equity capital, large amounts of debt and a continual reinvestment of earnings. It can take many years to build a successful business this way, but the upside is, you own all, or most of it, in the end.
Is there something in StormFisher's story that strikes you as either a notable misstep or smart move?
Aligning with an investor who really understands your business is a real plus. In this case, the fund managers can bring business contacts, candidates for executive positions, qualified directors, sales opportunities-as well as pure capital. They may see pitfalls or challenges coming well before you do, by virtue of their involvement with other companies in the same or complementary industries. They can provide informed feedback to your business planning process, and help you with key business decisions.
How should StormFisher's founders manage the ongoing partnership with their investor, to get the most benefit, and the least detriment, from it?
In most financial relationships, a strong focus on regular and forthright communication builds trust and leads to more effective dealings. While nobody likes bad news, negative surprises are even worse. Developing businesses have their ups and downs, but in the end, all stakeholders prefer to be involved and informed.
Do you agree with Bas van Berkel that Canadian investors have less appetite for risk than American ones?
No, not as a general proposition. There are aggressive Canadian investors and conservative American ones. By virtue of the sheer size and level of development of the U.S. private-equity market, however, the degree of fund specialization is deeper. So, in some cases, it's more likely you'll find a private equity fund that may have numerous investments in your field or industry, and as I mentioned earlier, this can help them evaluate risk and sometimes take positions that would look aggressive to another, non-specialized fund.
Mr. Kennedy's answers to select questions appear below.
Earl Brubacher writes: We are a company simular to StormFisher but have chosen to stay small and build max. 4-6 plants. This means financing each project as we go. What is your advice?
David Kennedy writes: Take look at the Canadian Venture Capital Association's website, www.cvca.ca. You may be able to identify some investors who are specifically interested in this space. Also, I would consider the companies which 'host' your facilities as potential equity partners. A lot of bigger companies are looking to increase their exposure to initiatives which are targeted to green thinking.
Noel Hulsman writes: There is a fairly corrosive discussion unfolding on the Comments page about the relative merits of MBA programs, with some people (essentially) arguing that they are a waste of time and money, and others insisting they provide a real value add. If I can ask you this, how much emphasis do you place on the MBA degree when you're hiring, and how important do you think it is in the workplace. I don't have one, but I maintain that you can tell fairly quickly whether an entrepreneur has one or not, when they're pitching their ideas to you, or explaining their business model. Would really welcome your insights. Thank you
David Kennedy writes: I don't have an MBA, and most of the people in my group have come up a different path, many CAs, Chartered Financial Analysts and Chartered Business Valuators. I don't have a strong opinion on the subject, but I have a hard time imaging and MBA is a "waste of time and money."