Running a startup is like conducting an orchestra: listening and conducting simultaneously to maximize performance. Mike Shapiro, founder and CEO of The Alternative Press, is running a company with high growth potential that falls somewhere between a typical high street business and Google or AOL. Where they will land on the opportunity continuum remains to be seen, and will likely depend on their ability to raise capital from time to time going forward.
After investing $100,000 of his own money and giving up a salary for two years, it was time for a major expansion. “A founder who wears many hats only gets you so far,” says Mike. Unlike many businesses at this point in his life cycle, Mike’s business has positive income, which means that he pays all of his bills with the incoming income and has a little left over. For many (if not most), keeping the lights on is what typically drives a startup to raise investment capital.
The Alternative Press is an online local news business that sells licenses to local entrepreneurs who then run their own local news business while the infrastructure is covered by the corporate parent. Having tested the licensing model in 10 markets, the next natural step was to scale the business into over 100 more markets. This would require raising money, ideally $1 million. Even if the business qualified for a bank loan, Mike was concerned that repaying the loan would limit his investment in critical areas such as sales, marketing, and infrastructure. Instead, he decided to call on accredited investors, people who meet certain wealth and annual income requirements, to invest some of their money in his company in exchange for shares.
There are two possible options: angel investors or venture capitalists. Angel investors are a better match when raising a first round of capital, as VCs invest only 3% of their money in early-stage companies (as opposed to later-stage startups, which receive the majority of their money). venture capital funds). Individual Angel investments tend to be smaller, requiring more to complete a fundraising round, but the returns can be considerable. For example, Nick Hanauer, a Seattle businessman, invested $40,000 in Amazon.com; his investment was valued at $250 million at one point.
Mike chose to seek angel investors through a private placement known as a REG D 504 offering. He could also have created a campaign on AngelList or Gust, two popular web-based platforms where angel investors can review numerous investment opportunities. Once the Securities and Exchange Commission completes the regulations for the JOBS Act, capital crowdfunding will also be an option.
Mike worked for a three-month stint with a securities attorney, an accountant, and his new president, Jim Lonergan, a seasoned executive who ran successful media companies, including TheStreet.com. Together with these advisors, he developed a business plan, a presentation platform, and an offer document. He is now working on his network to identify accredited investors and meet with them in hopes that they will write a check.
The pitch boils down to several key points:
*A consumer trend toward finding online and “hyper-local” content to help manage daily life.
*The online local advertising market is huge and growing ($15 billion) as advertisers increasingly move their budgets to more targeted local marketing spend.
*Proven and attractive business model in 10 current markets capable of generating operating margins of over 40%
The goal is one million dollars and 20% of the share capital is offered in exchange. Investments can be as small as $25,000 and as large as $1 million. Here’s what Mike is finding: “Asking for money is never easy. I’d rather ask for business. Yet every day we see business success, a new licensee coming in, a new advertiser committing $15,000 for an annual ad spend, We continue to build confidence in the business and the model, so scaling up becomes easier.” Mike says they have learned two important lessons:
*Many people, although financially qualified, are not very involved with private investing, so it takes time to absorb the opportunity.
*There is a need to talk, meet and go over the business/finance model before investors feel comfortable committing, more than they previously thought.
So far, Mike and TheAlternativePress.com have verbal commitments for $250,000 and expect to close this fundraising round by the end of the first quarter. Mike is finding that he spends about 25% of his time fundraising and is constantly improving his presentation after each meeting as he listens carefully to questions from investors.
Assuming they raise $1 million, allowing The Alternative Press to further test the licensing business model, grow the business according to plan, generate positive EBITDA and post-investment cash flow, Mike anticipates another round of fundraising in 18 months. The second round would allow them to expand across the US faster than cash flow would allow.
In this business symphony, Mike is in the first movement. How it is built and harmonized is being written as you read this. Whether it becomes famous for its success and is studied by many is time to say, but I would say that it sounds promising.