What are the options for a successful new cosmetics company like Pixi, whose founders have the impetus to expand but lack the financial firepower to do so? Rebecca Hoar reports.
Pixi is more than just a pretty face. The make-up company founded in 1999 by three Swedish sisters has held its own in a crowded market, during a difficult economic climate. A Pixi makeover is several lipstick shades away from the heavily mascara'd and rouged horrors of the traditional department store assistants, and beauty editors rave about the quality of the goods. 'Hip', 'fresh', 'cult favourite', 'the Estee Lauders of the future' ... these are a few of the tributes that Petra, Sofia and Sara Strand can tuck away in their vanity cases.
Yet the fresh-faced trio now face difficult decisions. Pixi has reached a crossroads in its development. To date, the company has one shop, in London's Soho, and counters in five Pure Beauty stores. Pixi's multi-hued lipglosses and eye colours, with average prices between pounds 15 and pounds 25, are also sold in Brown's in America. As a new brand, they're funkier than the long-established Chanel or YSL, and they've slotted easily into the young, up-market niche first carved by Stila and Urban Decay. Yet without serious funding, Pixi can't move forward. 'We could do two things,' says Petra, the eldest. 'We could grow organically over the next year, take it slowly and do things on a shoestring. Or we could finalise the business plan and look for investment, probably with a business angel with retail experience, or maybe a venture capitalist.'
The company has a solid foundation. Petra and her husband Tony Oppe, who manages the branding and finances, initially raised pounds 60,000 by re-mortgaging their home. They kept pounds 15,000 as a reserve and with the remainder designed the products, hired manufacturers, opened the shop and employed 10 full-time staff.
And now the Pixi brand has a younger sibling. Pop was created when Top Shop approached Petra to design a fun make-up range for the high street store. Whereas Pixi was the fruit of years of research, the new brand was on the market only months after the Top Shop meeting. Just over a year later, Pop is doing great business. The brand is sailing off the Top Shop shelves, and has been adopted by the cool Urban Outfitters chain in the US. The Strands are now in talks to supply Pop to other UK high street chains. Pixi and Pop's combined turnover hit pounds 1 million in 2002.
The sisters are keen to develop Pixi long-term and believe that Pop has great financial potential in the shorter term. But they don't know where to find the funding to grow the brands. It's a problem that many growing businesses face. A successful company can have the impetus to expand but lack the financial firepower to do so. What are the options?
According to Chris Rowlands, executive director in charge of growth capital business at investment firm 3i, a small firm should consider business angels, venture capitalists or bank loans, or float itself on a stock market (AIM, for example) - all options for the Strands. 'Any company needs to think clearly about the different sources of investment available,' says Rowlands. 'One alternative to pounding the streets talking to different sources of capital is to talk to an adviser. Or try friends or contacts who have investment experience.'
As a rough guide, a business angel will usually invest between pounds 100,000 and pounds 250,000, says Bernard Hallewell, MD of the National Business Angels Network, although less than pounds 50,000 is not unusual.
Angels tend to work closely with the firm. 'The business angel should fit with you as a person,' he advises. 'If the chemistry isn't right, it's a marriage made in hell.' A good one can act as a mentor and source of business knowledge, too.
Venture capitalists play a similar role. They are likely to have deeper pockets, however, and will expect a correspondingly higher return on their investment.
A public listing on AIM may suit a company expecting rapid growth, although the current poor economic climate will deter some. Bank loans suit businesses that don't mind being in debt and have concrete assets to offset the loans.
Hallewell also suggests corporate venturing, in which a mature company offers a growing firm a partnership. The young business gets management expertise, access to distribution channels, great contacts and perhaps funding. The larger firm gains access to a new product and new expertise, and a new revenue stream.
What should a company like Pixi do before embarking on fund-raising? Rowlands and Hallewell agree that its financial aims are critical.
'If we put our money in, how are we going to get it back, and what sort of return can we expect?' says Rowlands. It must have clearly outlined financial goals and a realistic plan for achieving them over, say, the next five years.
Both stress the importance of knowing what you want. This should be clear from your business plan. A lack of focus implies uncertainty. It's an area the Strands need to work on. They are undecided about whether to include both Pixi and Pop in the business plan. Nor are they sure how quickly they want to grow Pixi - should it open just one more store in 2003, or 10?
Management is important. William Kendall, co-founder of private equity investment firm Nemadi, has experience of both sides of the investing fence. At Nemadi, he hunts for good investment opportunities, but until 1998 he was chief executive at the New Covent Garden Soup Company (NCGSC), searching for investment and making sure the investors got their promised returns.
'What you're really looking at is the people,' he says. 'Are they actually going to take it to the next stage? Are they going to be a nightmare?
Entrepreneurs who've got their business off the ground often think they have a divine right to do what they want. It can be very difficult to manage someone who feels that way.'
Kendall believes this was why NCGSC had run into problems before he joined.
'The owner was desperate not to lose control,' says Kendall. 'He was obsessed with 51% ownership.' The problem here is that keeping control equals less money. The larger the stake you relinquish, the more cash you get in return.
Investors favour companies that know their own weaknesses. Says Hallewell: 'Founders should be aware of the management competencies required and know where they're good and where they're not so good.' It's a sign that the founders are mentally prepared to ease their grip on the company.
Oppe and the Strand sisters know they need to give up some managerial control, as their ambitions outstrip their means. They'd like to open a mixing lab this year; ultimately, they'd like to see Pixi shops in the rest of Europe and in the US, and for Pixi to be a leading player at the luxury end of the beauty market.
But they know where they lack expertise. 'We need to bring into the party someone who's very savvy in the retail arena,' says Oppe. Yet Pixi's strength is as a niche brand - it shouldn't be transformed immediately into a mass market money-maker. 'We'd rather not go into chains,' says Oppe. 'We're keener to keep it the way it is in our store, which is very exclusive, very niche.'
With such a strong philosophy attaching to the brand, will this be a problem for an investor? Not according to Kendall. 'You want to invest in a business where the entrepreneur has a very strong view about the philosophy of the business. That's a plus,' he says. 'But only if they're not using it as a screen to prevent you bringing more management on board.'
What else do investors need to know before they sign the cheque? 'A business angel will want to know you're being grown-up about what you want to spend the money on,' says Hallewell.
Adds Kendall: 'If you have some very hot private equity money looking for 30% returns, you need to spend it sensibly. It would be casino-type investing to chuck pounds 2 million on an ad campaign, for example. You should be planning to spend the money on bricks-and-mortar, on the expansion of the business and on senior management. Ultimately we're all risk-averse bankers.'
So where would Pixi spend it? Where potential investors would like: a mixing lab, more stores, managers with retail and distribution expertise. 'We're not here to take the money out,' says Petra.
So far, so good. But investment is a two-way partnership. Entrepreneurs should be as discerning as the investors. 'If you're going for a business angel, make sure they can afford the money you want,' says Hallewell. And check out their trade and bank references. 'Make sure that they're going to be on your side.'
Pixi is poised to move from the small scale to something much bigger, and that will involve change and compromise. If the Strand sisters manage to find the investment they need and are prepared to accept the changes this will bring, they'll be all made up.
SHOW ME THE MONEY
- Take time over your business plan. It must be clear and focused, and should give potential investors a sense of how much money you need, what you'll spend it on and how and when you expect to make a return on it.
- Consider all the options. Investment comes in many guises - choose the one that's right for your company.
- Don't just go for the highest bidder. The right chemistry is as important as the cash.
- Identify your own weaknesses. Investors prefer companies that are self-aware.
- Don't be a diva. You can't expect to call all the shots when someone else is putting in the money.
- Get advice. Scour your contacts for anyone with investment experience.
- Find investors via networks such as the National Business Angels Network, the British Venture Capital Association and your local Business Link.