Shareout specialises in the development of intelligent internet software that adds a visual presence to the top of a web page enabling tailored information and importantly advertisements, to be delivered to users whilst they surf the internet.
KPMG Business Incubation Services, known as K-Incubator, was the principal adviser in assisting Shareout in its plans. And, increasingly, deals like this are becoming as important to firms like KPMG as they are to expanding businesses like Shareout.
There are a number of different incubator models available on the market at the moment, some offering all things to all e-businesses. But, like the whole area of virtual business, there is still confusion out there.
K-Incubator sees itself as a ‘junction box’. ‘An entrepreneur with a business proposition has to find the right source of money,’ says Clive Hyman, head of K-Incubator. The junction box bridges the gap between those with the drive and ideas and those with the money.
But the box also plugs the start-up into the rest of the firm, be it legal services, corporate finance advice, tax and SME services. ‘We have created an eco-system to satisfy the need without taking on the overhead,’ Hyman adds.And no real risk either. K-Incubator, unlike other incubators will not take equity in the start-ups, offering instead a system of deferred fees and contingency fees dependent on fund raising.
Hyman says: ‘We do not have a pool of money, but are using our time and our fees.’
But with that exception, KPMG is offering a full business service incubator, nurturing tomorrow’s business success stories. K-Incubator was launched in February this year at the height of the dot.com frenzy.
The firm had realised there was a huge issue around the number of dot.com propositions that were out in the marketplace looking for funding, and that it needed to take a commercial decision on how to manage the impending rush of activity.
The firm was determined only to take on good propositions.
‘We did not want to waste time and money chasing rainbows,’ recalls Hyman.KPMG?s own proposition was that it had a large owner-managed business service and a good network of entrepreneurial contacts on the one hand, combined with a long standing record in private equity work and a reputation in the fundraising community.
The firm aimed to bridge the communications gap between the entrepreneur and the funder. But it is not simply a dating agency; the firm aims to groom the entrepreneur to shape a business proposition that is fundable.
It seemed that any half-conceived idea had venture capitalists swarming all over it, offering what, with hindsight, appeared to be insane levels of funding.Between February and April everyone was planning their get-rich-quick schemes, looking for the pot of gold that lay at the end of the IPO rainbow.
But K-Incubator was designed to operate in an orderly market, and was fully prepared for the return to normality. ‘We wanted to be where normal criteria were being deployed again,’ Hyman says. ‘We were seeking to position KPMG in e-space at the same time as generating our future client base.’
The nature of the e-space that K-Incubator occupies now is one of continuous evolution, described by Hyman as a ‘fashion industry’.
The businesses move far faster than before, but if the traditional business values are ignored, they will come unstuck, believes Hyman.
In particular, he thinks there will be a number of start-up companies that will face difficulties in securing second phase financing. ‘Many companies found fundraising easy, but this has now generated a false valuation of the business. The underlying value is incorrect.’
This means, according to Hyman, investors will be coming on board at the wrong rate, and as a consequence will not come on board at all.In fact K-Incubator is currently working with a number of ‘distressed’ businesses as well.
‘We are firm about who we will work with,’ states Hyman.He cites the number of employment start-ups who want to come on board but argues that the majority are not offering anything that is different.
‘If it is a sustainable business model that can add value to their customers, then it is worth having a look at.?
The business needs to have moved beyond the straight ?webification? of an existing business; it needs to create a change in the way something happens.?If you don?t have those ingredients then investors will not be forthcoming.?Existing businesses will have a brand strength upon which it can build in the new economy, but it cannot be done the other way. ?You can?t build a brand if you don?t have a business; a clear recipe for not succeeding.?
Hyman does not mention any names, but boo.com immediately springs to mind.Above all, Hyman is looking for people who have a passion for business, not those with gold fever, merely wanting to grab the IPO money and run. ?You don?t know what the exit route will be.?
The private equity market was as confused as anybody else, and was looking for structure and discipline, something that Hyman believes K-Incubator can provide.?If I ring and say I have an opportunity they know it will have been through a pretty rigorous process. We are not going to waste time, which is mutually beneficial for everybody.’
In fact, since February, KPMG has seen over 700 propositions, but Hyman expects only a handful of them to come to fruition.
This might sound a particularly low success rate, but returning to traditional business values, Hyman says this is entirely consistent with the raw start-up rates in other business sectors. ‘Nine out of ten businesses will fail,’ he says.
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