THE CHALLENGE: Why VC funding may not be right for your business
TitanFile Inc. may yet be a giant. Co-founded by Tony Abou-Assaleh in 2011, the company offers secure file-sharing that helps groups to collaborate.
Law firms are among its target customers. In addition to communicating with their clients, lawyers need to negotiate contracts with other parties, which may have their own legal counsel, says Dr. Abou-Assaleh, who is the company’s chief executive officer. “Suddenly you have several people involved in here are revisions and comments going back and forth. That’s really the kind of communication that we want to facilitate.”
TitanFile offers what he calls “transparent security” for clients who are typically not very technical: “We take all these mental overheads out of the equation by automating all that.”
TitanFile recently hired a sales and marketing team, and Dr. Abou-Assaleh says the company is on track to reach $1-million in sales within nine to 12 months. The three-year goal is $10-million.
So far, the 10-employee company, which has offices in Waterloo, Ont., and Halifax, has grown through investments as it built its product. It started out with $250,000 from Halifax-based venture capital firm Innovacorp. Last October it announced a package of $1.1-million in financing from Innovacorp, members of Halifax’s First Angel Network and government sources.
Growth won’t come cheap for TitanFile, whose clients range from financial services firms to municipal and state governments. The company expects to retain each customer for more than three years, but acquiring them means high upfront costs. The sales cycle typically lasts six to 12 months; besides sales and marketing staff, expenses include online advertising, marketing and industry events. This puts a strain on cash flow and TitanFile’s ability to scale and grow quickly, Dr. Abou-Assaleh explains.
While he is confident in a long-term payoff, he can’t decide whether to grow through revenue or pursue another round of financing. “The revenue that comes in, it comes in trickles, and you need to spend more to grow fast enough,” Dr. Abou-Assaleh says. “On the other hand, if you get investment when you don’t really need it, you may be giving away equity and doing a disservice to existing shareholders.”
He has other concerns as well. A company must be on a strong growth trajectory before venture capitalists will put up Series A financing. Dr. Abou-Assaleh wonders, “If we do have high growth, then do we really need that VC money?”
Also, he knows that fundraising is a full-time job. “If I am out there trying to raise a round, it will take about six months of my time doing nothing else but that,” he says, unsure that now is the right moment. “If we are on a good trajectory and things are doing well, would this distraction compromise our growth, at least in the short term?”
The Challenge: Should TitanFile spend the time and energy seeking another round of financing or try to grow by revenue alone?
THE EXPERTS WEIGH IN
Eugene Bomba, senior manager and Canadian emerging-company services leader, PricewaterhouseCoopers LLP, Toronto
There are other forms of potential financing that are available to a startup with traction. You might consider mezzanine-type debt or sub-debt, where it could be a balloon repayment at the end of a two-year term and paying interest at 13 per cent or 15 per cent or something along those lines. It might not be the most ideal, but you can still get a heavy amount of cash up front.
At this point, why not have a lead person in a finance role? With the number of investors you’re dealing with already, should you be leaning more on your chief financial officer, who should be doing more in a market-facing role? Or you could technically outsource that deal to someone else to task them with doing the financing and paying them on a contingency.
You could offer the job to someone who’s a really good strategic CFO or COO type who could run with the responsibilities. It costs maybe a little bit of equity and a little bit of salary to bring that person in, but that person could be someone who has a whole lot of other contacts in the financing space as well. And bringing that person on board could also be a good signal to the market to say, “Wow, they just landed an A-plus player who has some experience already.”
Marc Elrick, principal, Critical Path Group, Calgary
Really it should come down to speed-to-market. To execute on their growth strategy and build their installed base of clients, that’s going to cost money. They’re going to need to hire a sales force, expand their sales force. They’re going to need some dry powder to get that done.
If they can work with an existing group of private equity investors and get the growth capital they need quickly, and move faster, that may have an impact on how they do in the long run. Because it’s a competitive space, and if a competitor has a war chest that they can use to fuel their growth, and TitanFile doesn’t, it’s not going to be much of a race.
What you want to do is take a look at the long-term cost of capital. Bringing on more equity sooner – having that war chest to fuel your company’s growth – does something pretty significant. It gets the financing monkey off your back. Because most startup, early-stage CEOs or founders are double-hatted. They’re trying to build their companies and at the same time they’re always trying to raise money, which is a huge distraction. If you can just dispense with that distraction, all your energy can be focused on the company build-out, and the results will be dramatically better.
James Dean, CEO, dPoint Technologies Inc., a developer of energy-recovery products for builders, Vancouver
VCs have a track record of not really looking out for the interests of the company and trying to squeeze the founder’s ownership position out. He should be a bit cautious of that.
One strategy for TitanFile could be to see if there is a partner out there that likes the business they’re in, likes the technology and can help them grow.
We hit a growth point where we needed to go out and raise more money. We were lucky enough to find what I would call a strategic investor. And so it was somebody who was bringing more than just money, and in our case it was a customer and a channel partner. They’re the biggest basic player in our industry in Europe, and they liked our technology and said, “Hey, not only do we want to buy your stuff, but we believe in what you guys are doing and we want to invest in the company.”
It might be interesting to create a map and say, “Who are some of those other partner software companies where we could fit in with their product? They would become our channel partner, maybe invest in us or maybe even at some point acquire us.”
THREE THINGS THE COMPANY COULD DO NOW
Seize the moment
Secure growth capital quickly. Rivals may be well funded, so there’s no time to waste.
Find a partner
Look for someone who offers more than money. An investor that’s also a partner could help accelerate growth.
Consider alternative financing
Funding arrangements that don’t involve giving up equity will let you keep more of the company.
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Interviews have been edited and condensed.