Spread betting

17 March 2006

From the original great idea to the dark days when the cash nearly ran out, ClusterSeven has emerged with a strong order book and its first funding round. CEO Steve Semenzato recounts what he learned

Steve Semenzato is co-founder and CEO of ClusterSeven, an enterprise spreadsheet management company based in London and New York. With 20 years technology management expertise, Semenzato faced one of his toughest challenges launching ClusterSeven in the banking and derivatives trading space in the summer of 2003, particularly as the founders were determined not to take any pre-revenue investment.

Having secured £2.4m first round funding at the end of last year, the company is now focusing on further product development and expansion in the US, where Semenzato believes expansion is critical for a successful exit.

It seems obvious now with all the regulatory pressure, but where did the original idea for an enterprise spreadsheet management company come from?

I had been working in a management consultancy company [Sapient] and met up with another consultant, who like me was in the energy trading space. Imagine, he said, if you could right click on any cell in a spreadsheet and get the full history of what has happened in that cell. At first, I thought that must be something you could do already. But he showed me otherwise and the company was born.

Isn't this something that Microsoft - whose technologies your system is based on - could develop itself?

We have an open, productive relationship with Microsoft and that's part of our product strategy going forward. Microsoft is very enthused about what we provide. It has had a number of clients looking for solutions to this problem. It was a gap in the market and something Microsoft itself said it was not offering.

At the same time, Microsoft has been there as a door opener to us. What we provide is enterprise class software - not client software, we are looking at major organisations - and Microsoft has been able to introduce us.

You started the company in June/July 2003 with a redundancy pay-off and nine months or so of friends, family and founders' funding. But it took you 18 months to deliver a product - and you took no pre-revenue investment: how did you get through those early months?

We had a high degree of optimism - maybe too much optimism as we initially thought we would get up and running in three to six months. That optimism carried us forward in the early days; it allowed us to think we could get through so many challenges. But it's pragmatism and realism that entrepreneurs need to understand too.

You can imagine what a dark winter it was in 2004, especially when the money started running out after nine months. We were desperate for cash. This seems a trivial amount now, but we were spending £50,000 per quarter at the beginning of the company and we were living hand to mouth. We were not prepared as principal founders of the company to take a salary, but we still had to pay for engineers to build the technology. It did get very difficult.

It got to the point where we sat there and said either we sell some software or we might as well pack up and go. We couldn't take back the previous one and a half years of our lives, so we had to focus on the commercial side and start selling. That was when we started getting the breaks.

We had our first significant deal, with RWE Trading, followed by energy giant EDF Energy. Then we focused on the banks - and we found lots of opportunity and prospects there. We did three major investment banking deals finishing last year with £3.5m of booked revenue.

And at what point did you decide that you needed outside funding?

By February 2005, we had taken our final round of friends and family funding - in all it totalled £750,000 - so through the summer, we started to talk to the VC community. A large VC decided not to invest because their business profile was to give more money and take more equity than we wanted - it was all mutually amicable - but later in the year they introduced us to Quester and we subsequently secured £2.4m funding for a minority share.

Given your cash problems, wouldn't it have made sense to seek investment earlier?

Early on if we had given away a bigger stake, there would have been no incentive for us to stick around and back then there was nobody else who would have wanted to run the business - because there was no proven market or product revenues. Now we can see the value in the company increasing. No pain no gain, as they say.

When you let external players into your business, you dilute your stake, so that's always a balancing act. But looking back I think we did it the right way - I'm proud that we've still got majority ownership by the friends, family and founders.

You've managed growing companies before, but never from start-up. What for you was the biggest challenge?

The lessons we've learnt are more on the practical side. From a corporate perspective we were OK but the biggest issues were more personal. Under the covers there is a lot of stuff that you have to block and tackle your way through. If you work really hard then you get your reward.

You decided from the beginning that the product had to be enterprise-class software. How did you persuade large corporates that you were a serious player?

We really honed our offering to customers. That is the trick. There are 400 million users of Excel, and 200 million more who are not even registered. We initially looked at front office areas, anywhere where there are specialised derivatives being traded, because there is money, pain points and pressure from regulators.

Ultimately, our technology could be used in all sorts of areas. But because we are a little company, we have to go after the top 20 users of major spreadsheets in the major banks. When we started the company we perhaps had delusions of grandeur about where we could take it. But without wanting to blow my own trumpet, that's the difference between having a technology guy in charge and a commercial guy.

We've got to be very focused for perhaps the next 18 months to two years and become the benchmark in what is a very conservative industry. The goal for us is not necessarily for our customers to say 'we use ClusterSeven', but to say 'we are compliant with audit and the regulators - and we are using spreadsheets in the front office'.

If I can get global names on board and the right messaging and marketing, then I'll have succeeded. What tends to happen is people go on a journey with us; initially they are interested in the internal audit capability, then as they replay the data - like a movie version - they realise the value their data now has, and they can have much more confidence in it.

So having got through the difficult start-up years, what's next?

I'm looking forward to the next 18 months as it's a growth stage I've been through with other companies. We're a very conservative bunch. So I would say we're likely to double the £3.5m we made last year, but our goal is to overachieve that - particularly because in the US market our revenues could increase exponentially.

In my background I've been on two or three rocket ships. And I know that just for the next three years, revenue growth will make this company attractive, not EBITDA ratios. What I want is a growth strategy and funding strategy that allows us to do that. With the VC investment we now have a strong board and we can increase the strength of the executive staff, all of which will have a tremendously positive impact on our future success.

And you're now expanding in the US, where many UK companies have tried and failed. What makes you think you can succeed there?

The strategic decisions software companies here in Europe make have to be more geared to global positioning. You need to have a high profile in the US. For any software developer, the US will be by far the biggest percentage of your revenues, whether you are an Israeli company or a London one. You need to make sure that is the case.

To be a success in the US, there's an unwritten rule which means you have to look and feel like an American company. They don't care that you are an English company but what they don't like is if you just come over every few months in a pinstripe suit. You must have US management based in the US - gone are the days that a big German company like SAP can dominate the enterprise software market from Germany. Now management profile is everything.

Steve Semenzato was speaking to David Longworth, research director of Webster Buchanan Research