You're talented, you're in a hurry and you've got a great idea for a money-spinning Web site. Just one problem - where do you find the cash to keep the business on track until the revenue starts rolling in? Raising capital to start or grow a business can be tough at the best of times, but anyone using the Internet as a prime source of income also has to cope with the problems associated with working in a new, and to a great extent, untried medium.
The friendly bank manager who understands the financial needs of the local DIY store may not be tuned in to the economics of the wired world. Likewise, potential investors looking for a safe haven for their hard-earned savings might consider the wilder shores of online commerce just a touch on the risky side. Nevertheless, the Internet is supporting a growing population of small-scale enterprises and many are successfully attracting financial backing.
The models for making money on the Internet have already been broadly established. They include advertising, retail, subscription services and access provision. However, small firms have to work hard for their slice of a limited pie.
In the case of advertising sales, the sums attracted by Web sites operating in the UK run to just a few million pounds a year, compared to the billions pouring into the TV, radio and newspaper industries. What's more, advertisers tend to prefer the big name, high-profile sites. To survive, small ventures need to find a niche.
For Hampshire-based Town Pages (www.townpages.co.uk), the answer lies in a localised approach. The company, which has been in existence for a little over a year, currently provides a free, Web-based information and listings service for several towns in Hampshire. Pioneered in Alton, the venture has since been built up on a town-by-town basis and now covers Basingstoke, Farnham, Winchester and Petersfield. According to Chairman and founder Andrew Lyndon Skeggs, the aim is to provide a one-stop shop, covering business, community, travel and entertainment information. Plans are already well underway to expand the service nationwide.
Town Pages sells advertising on its site to local firms and organisations at the comparatively modest rate of #25 a year. This generates a second source of income from the design and management of Web sites. By concentrating its efforts in specific locations, the company is able to attract advertisers that otherwise probably wouldn't think of using the Web to reach customers.
But it is a costly business. As an information provider, Town Pages has to be well staffed. To provide the current level of service, the company employs 10 people, with responsibilities split between editorial, design and sales. It's a hefty overhead for a venture still building revenue streams in a largely untried market.
"We had a private share sale," says Lyndon Skeggs. "It went very well so we had another." Additional funds were supplied by local businessman Kevin Leach.
But the next stage in the company's development will require even more cash. Using the town-by-town, region-by-region model, Lyndon Skeggs and his fellow directors plan to take the service nationwide. In addition, to access through the Internet, he also plans to set up terminals in a range of public places, from libraries to railway stations.
To fund the expansion, Town Pages plans to raise between #5 and #10 million via a flotation on the Alternative Investment Market, a division of the London Stock Exchange set up specifically for small firms and startups. Lyndon Skeggs sees a public flotation as the only way forward if the company is to achieve its goals. "The sums we are talking about are serious numbers, but we can accept nothing less than that."
Town Pages has yet to return a profit, a fact that Lyndon Skeggs sees as unsurprising given the rapid pace of expansion and the associated weight of investment. Nevertheless, he is confident the upcoming flotation will put the company in an ideal position to exploit the deepening penetration of the Internet.
"Everything is happening so fast - the Internet has expanded more quickly than anyone expected and soon people will be able to get access to the Web through their TVs."
If the experience of the Internet Bookshop is anything to go by, investors do seem willing to take a gamble with online ventures. When the company placed 1,000,000 shares on the privately run Ofex market earlier this year, the issue was five times oversubscribed. This meant investors who applied for the maximum allocation of 9,800 shares received only 800.
With shares priced at #1 each, the issue raised #1 million less expenses. Based on that share price, the company was valued at #6 million. At that point, Internet Bookshop had yet to turn in a profit.
Internet Bookshop, which currently employs 24 people in marketing, customer care and technical roles, was founded in 1994 by Darryl Mattocks with financial support from members of the Blackwell family. Although the sales have advanced steadily through the life of the firm, it rapidly became apparent that more capital was required to boost customer service, upgrade software and step up marketing. Put simply, if the company was never going to be in a position to generate regular profits, it needed greater investment.
According to marketing manager Dave Mutton, the company explored several options for raising cash, but the Ofex market, run by a firm of stockbrokers, was chosen largely because the share issue could be organised quickly. To alert potential investors, the firm posted its prospectus on the Internet and sent out a mailshot in electronic form.
"It was the first time ever that a prospectus had been put up on the Internet," says Mutton. "It was a logical decision to use the medium that the company trades in to sell its shares."
Presumably, it was the company's potential for growth that attracted the punters. In 1996, its turnover jumped to more than #500,000, compared to #100,000 a year earlier. Unlike its rival on the high streets, the Internet Bookshop does not have to keep vast quantities of books in stock as they can be ordered from wholesalers once the orders are received.
Given the global reach of the Internet, Mattocks's venture is not really in direct competition with domestic retailers. About 79 per cent of the company's sales are accounted for by foreign buyers. Nevertheless, with overheads continuing to outstrip revenues, the flotation has given the Internet Bookshop an opportunity to not only stay in the game, but also improve its services.
In contrast, specialist Internet service provider Cerbernet has resisted the lure of outside investment. Operating from office space above a music store in London's Denmark Street, the company's 12-strong workforce caters largely for the needs of corporate customers. In addition to providing leased lines, dialup and ISDN services, Cerbernet also offers Web site design and management and domain name registration.
With the consumer ISP market already overcrowded, MD Daniel Harris says it was a conscious decision to target companies rather than individuals. "We like to be able to build a long-term relationship with clients according to their requirements. Home users just tend to go for the cheapest connection."
Founders Daniel Harris, Justin Kerry and Frank Botchway had one crucial advantage when they started the company. All had worked in the industry and they could bring a handful of customers on board from day one. According to Harris, this cut the starting costs down to nearly zero, although the firm wasn't making much money to begin with. He's proud of the fact that he and his co-directors managed to remain independent, while building up revenue streams and taking on more staff.
"We're not in this business to make a lot of money and then sell out," he says. "If someone offered to invest #1 million pounds in the company tomorrow, it wouldn't be ours. We want to be in control." By concentrating on corporate clients such as Toyota and the film industry's SoHo Net, Harris hopes the company can continue to grow its revenues while pushing the technological envelope.
At the moment, the company is in partnership with the City of London University in developing systems for delivering video-on-demand over the Net. Harris also sees greater demand for high-end software development on corporate Web sites. By staying ahead of the technical game, Harris hopes Cerbernet will continue to offer state-of-the-art solutions for other companies seeking to do business online.
Global Enter-Prize also works closely with corporate clients. Founded by former Bank of Tokyo executive Gary Caesar, the company has assembled an array of corporate sponsors for its online win-a-holiday competitions. It's essentially a marketing venture. Visitors to the company's site (www.enter_prize.co.uk) can opt to play a number of simple games to win holidays to places like Jamaica, Boston and Thailand. If they get a few easy questions right, their names are put forward for inclusion in a draw for the major prizes. While playing the games, they find out about the products of the sponsors. According to the company, it's all about making corporate sites fun, interesting and interactive.
The marketing industry is already well represented on the Web to the point of overcrowding, but Global Enter-Prize believes it has found a novel approach. Marketing manager Neil Hendey says the founders made a conscious decision to do something new with the corporate advertising format.
"No one has ever done this before," he says. "No one has brought such a wide group of travel companies together on the Web for a promotion like this."
A hint of media glitz can never be a bad thing for any company seeking to attract sponsors. To this end, Christian Moore (son of "my name is Bond" Roger) brings a touch of Tinseltown glamour to his role as managing director of Global Enter-Prize, and his presence has already contributed a good deal to the venture's profile.
The money to get the business off the ground was put up by Caesar, Moore and a third founder Edward Vere Nicoll. Additional cash was raised through a friends and family investment scheme. Caesar estimates that the startup costs will ultimately total between #50,000 and #100,000, with most of that going on marketing and sales. For a company chasing blue chip sponsors, the initial marketing costs can be heavy.
As Caesar points out, to get a client such as the Sheraton Hotels Group on its side requires not only the ability to communicate at the highest corporate level, but also a budget which will allow for a lot of wining and dining.
With the first promotional package on the starting blocks, Caesar expects Global Enter-Prize to see positive cash flow within six months of the August launch. In his view, too many business plans tend to underestimate the amount of time and money it takes to get even a small venture off the ground. As such, he sees the initial investment in his company as money well spent. "We could have done it for about #25,000, I suppose. But we wanted a Rolls Royce product, not a Minimoke."
It's still possible to establish a viable business on the Web with very little in the way of capital. Edit.Co.UK was founded six months ago by John Fisher and Andy Pye. Fisher's background was in technical public relations while Pye worked as a journalist. They both saw a demand for a Web site which would bring together press releases and other documents, primarily for editors and journalists working for the technical press.
While the journos get free access to the site, the companies posting documents pay a small fee. The logic is simple - it's not difficult for a company to post a press release on its own Web site, but there is no guarantee that it will be read.
Edit.Co.UK, on the other hand, provides a kind of centralised clearing house used by specialists in technical journalism. As such it provides a cheap way of disseminating information to the right people.
By using their knowledge of two complementary industries, Pye and Fisher were able to build Edit.Co.UK from scratch with no outside capital backing. It currently employs two full-time staff. However, like many entrepreneurs, they have to keep a number of balls in the air.
According to Fisher it was possible to get the company going for a few thousand pounds - maybe five thousand at most - with both partners working on it while generating income from their other activities. The costs break down between staffing and site rentals.
On the basis of its current slow and steady level of growth, he sees Edit.Co.UK being profitable or at least breaking even after one year. However, if the opportunities for faster growth present themselves, Pye and Fisher have a whole new set of choices and potential problems.
At the moment, the company is reviewing the rate of progress and whether to put more money into accelerate the rate of growth.
If anything binds the above companies together, it's probably the realisation that commercial survival depends on finding a viable niche in the market where the ground rules are being established.
While the Time Warners and Microsofts can throw millions of dollars at their online ventures, the biggest assets that small firms have are imagination and business acumen.
These companies also demonstrate that the investment is there, for those who want and need it. As Lyndon Skeggs puts it: "There will always be investors who see where the business opportunities lie."
Happily for cash-strapped entrepreneurs, the Web is awash with help, advice and pointers to sources of finance. A good place to start is the Business Links Network site (www.businesslinks. co.uk). It offers a one-stop shop with advice on a range of matters from finance to intellectual property.
Alternatively, you could have a look at the home pages maintained by the big four high street banks. National Westminster Bank, for example, (www.nat-west.co.uk) has a comprehensive small business section, including details of the business angels scheme through which the bank introduces entrepreneurs to investors.
The health of the US information technology sector has always been greatly dependent on the willingness of venture capital companies to take risks. The British Venture Capital Association maintains a site at (www.bvca.co.uk). It provides facts about the industry and a contact number.
Books are one of the most successful areas on e-commerce and the Internet Bookshop (IBS) has pioneered this approach to bookselling in the UK. The company sold 54,000 books in the first six months of this year and now has 50,000 active customers.
IBS floated earlier this year and the money was used partly to improve its systems to cope with increased traffic. Its old Netscape server was replaced with Microsoft Back Office software. The customer-facing parts of the site were developed in-house. The site is hosted on the firm's own Compaq server and the company's target is 98 per cent availability.
IBS is starting to use electronic data interchange (EDI) to link direct to publishers and so avoid the need to order via wholesalers. The firm claims 120,000 of the one million books it lists can be delivered within 48 hours, but today lacks live links to the wholesalers' computers that would give it a better picture of books in stock.
IBS is often compared with its bigger US rival Amazon.com, but Dave Mutton, IBS marketing manager believes the company operates in a tougher market. "We lose customers because they can buy the US edition of a book from Amazon.com cheaper than we can sell the UK edition," he says.
Books tend to be cheaper in the US, but UK-based booksellers such as IBS cannot sell US editions because of copyright restrictions.
Trevor Clawson ([email protected]) is a contributor to Internet World.
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