Remember lonelygirl15? lonelygirl15 appeared on YouTube in June 2006 and was an instant sensation.  

A teenager, resting her chin on her knee, stares into the camera and, calling herself Bree, announces that she’s 16.  After a few giggles, she says her town is “really, really boring.”  She confesses to being “a dork.” Then she sticks her tongue out and begins making faces.

The video ran for a minute and a half and has now been viewed more than 4.5 million times. In retrospect, it announced the dawning of the age of online video, illustrating both its democratizing and viral power.

It was also a fake.

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Rather than a spontaneous expression of teen spirit, the video was cast, scripted, and produced by Miles Beckett and Greg Goodfried, who soon after co-founded EQAL, a digital-content-creation studio that in 2009 began shifting to a celebrity-driven social-video platform. It was acquired last September for a rumored $15 million$25 million by Everyday Health, an online health-information provider with more than two dozen websites.

According to another EQAL founding executive, former chief strategy officer and board member Paras Maniar (a childhood friend of Beckett’s), Beckett’s original idea for lonelygirl15 was to impress Hollywood so that he would be asked to make a real movie. But before that happened, Beckett and Goodfried hooked up with Neutrogena, and the cosmetics company signed a two-month contract with Beckett and Goodfried to associate itself with lonelygirl15.

What had begun as a demo had become a business.

It was a business, however, with assets that consisted of a video on YouTube and a short-term contract with Neutrogena. Getting money to grow would not be easy.

“A bank loan?” asks Maniar, laughing. “We financed the video with credit cards. We had no money in the bank. We had no profit. If we had gone to a bank, they would have laughed at us.”

The Finance Challenge
As a start-up, EQAL didn’t have a history of deposits with a bank. It didn’t have the hard assets that banks like to lend against, nor the recurring receivables factors like to see. On top of that, it was operating in a new, ill-defined, and thinly understood space.

Today, online advertising is huge. According to research released last week by comScore, a measurement and analytics firm, 5.3 trillion display ad impressions were delivered on the web in the United States last year. Online videos attract an average of 75 million viewers every day. “Video ad monetization clearly accelerated in the past year,” the study says.

But even now, it’s difficult for digital companies, with their largely intangible assets, to get the cash to produce the kind of high-quality online video large brands want. And, of course, large brands pay late.  A video commercial can cost as much as $2 million to produce, but the production company may have to front that money while it waits 60 or 90 days to get paid.

How can such a company, a company like EQAL, manage its working capital in that environment?

Funding the Unfundable
In 2008, EQAL raised $5 million in venture capital. But “2009 was a reality check,” says Maniar. EQAL was shifting from being a content provider to a media platform, eventually partnering with Walgreen’s, Google, and Kraft. “We had good customers, but we were waiting for the cash to come in,” Maniar says. “We had opportunities; we needed to make growth decisions, but we had no cash flow.”

And in 2009 and 2010, cash was hard to find.

EQAL’s original venture-capital partner was not thrilled with EQAL’s shift from studio to platform, and in 2009, according to Maniar, “graciously” allowed its stake to be purchased by a combination of EQAL’s management and a group of angel investors. Maniar was never that enthusiastic about venture capital, anyway. “You dilute ownership,” he says. “There are lots of strings attached.”

But, in the meantime, “there was never enough money,” says Maniar. So EQAL began looking at alternative debt. Factoring companies, however, tend to look for receivables that come in recurring cycles, preferably through a subscription model. “And they don’t understand the advertising business. They ask what they’re factoring against. Branded social media with a celebrity behind it? I don’t think so,” Maniar says. And then, he recalls, Beckett told him, “I met this guy. . . .”

Factoring the Unfactorable
“We’re 100% focused on digital media,” says Jed Simon, the guy Beckett met. Simon, the founder and chief executive officer of FastPay, a finance platform that provides lines of credit against receivables, casts himself as a factor who understands the business. 

“Online advertising is characterized by large brands advertising through small channels. So the attitude of the large brands is Take our money or leave it.’ They’re just not going to pay their bills. It’s the name of the game: working capital. If you can, you use your supplier’s balance sheet to finance your business,” Simon says.

Simon founded FastPay after 10 years at DreamWorks, where he ran direct-response media campaigns as vice president of international distribution and marketing. In that role, he saw businesses with large upfront capital needs losing opportunities.

“I knew there was a market for technology and media businesses that needed to finance receivables and needed growth capital,” Simon continues. To create that business, Simon raised initial capital from angel investors. Last summer he got $25 million in financing from Wells Fargo Capital Finance and SF Capital Group, bringing FastPay’s total capitalization to about $30 million.

At first, Maniar was cautious about FastPay. “It sounded like a fantasy,” he says. So last year Maniar did a test with one $200,000 invoice. “The cash came right in within 24 hours. When they got payment, they took their piece, and put the rest in our account,” he recalls.

Simon says the average invoice FastPay factors is out for 60 days. FastPay charges from 1% to 2% on the money it lends against the receivable. “A little higher than a bank loan,” says Simon, “and a little less than investor capital. But then the investor is your partner; we’re not.”

So, if company A has a $1 million invoice due in 60 days, FastPay will advance it between 70% and 80% of the invoice’s value once it’s approved. (The full amount is returned once the invoice is paid.) Say FastPay advances 80% of the invoice. Company A will then be paying $16,000 for the two months, plus the $1,000 to $2,000 FastPay charges to offset third-party costs for regulatory compliance.

“Let’s say it costs them 2%3% on average to finance an invoice,” Simon says. “If their gross margin is 25%, then it’s only costing them a couple of points.”

In the digital advertising world, margins can run as high as 50%. But it’s up to CFOs to determine whether quick access to working capital justifies slicing points off margin.

For EQAL, being able to use its receivables as a revolving line of credit strengthened its position during its negotiations with Everyday Health.

“We were never under pressure to do another equity round,” Maniar recalls. “We used FastPay to keep cash flow and growth smooth. That put us in a good position. We had accounts receivable with FastPay through 2013, and it was all transparent to Everyday Health.”

Maniar believes that EQAL’s acquisition by Everyday Health was a success  for EQAL in part because it felt it could walk away if the deal wasn’t right. “If you can’t walk away, you get squeezed,” he says.

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