Andrew Foyle set up Argo Interactive in 1996 as an internet service provider. The company needed money to expand but Foyle knew from previous experience of running a technology company that they would have problems.
Software companies are unlikely to get bank loans, venture capitalists would see the company as too small and Foyle was reluctant to sign away a large chunk of equity to business angels at such an early stage in its development. Argo was launched with a very unusual initial public offering.
Foyle had already been bitten by the entrepeneurial bug when he set up Argo Interactive in 1996. He had already built a software company writing programmes for Acorn Computers. Argo evolved as an internet service provider for those customers. Foyle also saw an opportunity for writing server software for the network computers being developed by Acorn. However, he needed finance to buy the necessary equipment.
“We knew from bitter experience that trying to approach a bank for finance for an intangible asset company – an intellectual property company – that it would be very, very difficult,” he said.
The problem, said Foyle, lies in the structure of the banking system. “The person you have to speak to is the small business manager who also finances the local hairdresser, the local shoeshop and the local farmer,” he said. This is particularly true of the small business manager at Foyle's local branch in Chichester, he added.
Banking procedures are applied equally to all types of company and a new business will be evaluated on its assets. With no physical assets and all its profit to be derived from intellectual property, banks are reluctant to lend to these sort of high-growth companies, said Foyle.
Foyle also considered venture capital funding. However, as the company was a startup with a need for only thousands, rather than millions, of pounds, Foyle did not think they were big enough to tempt the venture caital industry.
Another option for Argo was business angel funding. However, Foyle was reluctant to sign away a large chunk of equity for the capital they needed. Participation is a big motivation for an entrepeneur to drive a company forward. Giving away 50% of the company for a £400,000 stake at an early stae, when Foyle knew that they would need further rounds of financing which would see his share even further diluted, was difficult.
As Foyle rejected other financing options, he started to think about what the company did have in its favour – a loyal and enthusiastic customer base.
Argo drafted an email to be sent to all of its subscribers in May 1996 asking if they would be interested in buying shares. Within half an hour Argo had received replies indicating that customers would put up £20,000 of funding. Within 24 hours, that interest totalled £70,000 and had passed £200,000 in one week, said Foyle.
Having confirmed the interest from subscribers, Foyle went to the lawyers and accountants to prepare for an initial public offering. Argo had to prepare a full prospectus in a printed format as companies still can not complete an internet-only IPO. It was not a cheap process, noted Foyle. He estimates that the whole process cost nearly £100,000 and was nearly as much as a listing on a stock exchange such as the Alternative Investment Market. “It was a big risk because we knew we had to raise a minimum level of £300,000,” he said, noting that although some of the costs were percentage-based, some were fixed irrespective of how much the offering raised.
With an initial offering and two subsequent rounds, Argo raised a total of £600,000 and had sold less than 20% of the company. “It offered a much better ratio than a venture capitalist or a business angel. It gave us a sensible startup valuation and we didn't have to sell our souls to raise the money,” he said.
Ironically, much of the work would have ensured that Argo was ready for an early listing on AIM or OFEX. Much of the initial outlay and costs would have been offset against a later listing, Argo would already have a proper structure, the articles were written correctly. However, Foyle said the firm has now turned its back on the stock market and instead raised two rounds of equity finance from venture capitalists.
However, Foyle looks back on the internet offering as a defining moment for Argo. “It's what got the ball rolling,” he said, adding that Argo probably would not exist without it. “This is what sorts the wheat from the chaff when you are up against a problem,” said Foyle. “You try this route, chuck a few balls at it and see what hits the target.”
Argo's route to finance was unconventional and not for the fainthearted. Foyle himself notes that it could press against the boundaries of investment rules. As soon as you approach more than 50 people, it becomes a public offer, he noted. Even with a 15% response rate the amount of money from each investor needs to be significant to payoff.
Would he do it again? Foyle notes that he already is looking forward to a similar offering for a company that was spun off some time ago. Argo still holds a stake in that company and Foyle is watching with interest as it looks to raise money. “If you have got a great idea and a few hundred customers don't ignore them as potential investors,” he said.