Focus: Fortune favours the Internet brave

To allow one Internet jackpot to slip from one's grasp is certainly a misfortune; to miss out on another would be worse than carelessness. So this time Greg Hadfield is ensuring he keeps control of Schoolsnet, his new education web site. He has learnt the hard way from Soccernet, his previous big hit in cyberspace, that it is all too easy to sign away potential online riches.

The dilemma facing Internet entrepreneurs like Mr Hadfield is familiar to all business start-ups. Lacking capital, they need help in putting together deals and raising funds, but they must also be wary about handing over too much of the business too early. That is especially true in Internet time, where the perceived value of a company can rocket from one month to the next.

Mr Hadfield's own cautionary Internet tale began in August 1995 when he launched Soccernet with his son, Tom, a teenage computer whizz. It swiftly became one of the world's most visited football websites, offering realtime match reports and football scores. Realising he needed backing, Mr Hadfield - then a Fleet Street journalist - successfully approached his bosses at the Daily Mail for sponsorship.

A year later, discussions over who controlled Soccernet resulted in Mr Hadfield receiving pounds 40,000 and a revenue share deal, in return for withdrawing claims of ownership. He was also employed to run the site full-time, and remembers one senior executive laughing at his notion that Soccernet would one day be worth pounds 1m. Fast forward then to August this year, when the Daily Mail sold 60 per cent of Soccernet to Walt Disney's interactive division for pounds 15m. Mr Hadfield's final payment? "I'm getting a six-figure sum, rather than a seven- figure sum," he says.

Even the smartest entrepreneurs failed to anticipate the swift revaluing of Internet-related businesses over the past couple of years. Cliff Stanford, who set up Demon Internet, pocketed pounds 33m in cash in May 1998 when Demon was sold to Scottish Power's subsidiary, Scottish Telecom, for pounds 66m.

At the time, it looked a very generous price. Last month, Scottish Telecom (renamed Thus) was floated and raised around pounds 750m for its parent company, thanks in part to the Demon business. "Of course pounds 66m was a bargain for them," says 45-year-old Mr Stanford. "On the other hand, they bought it at a price I was willing to accept."

Peter Wilkinson set up Planet Online in 1995 and in August 1998 reaped pounds 25m in cash for his share when the company was sold to Energis, the telecoms provider. It seemed a great deal - but Mr Wilkinson would have tripled his money if he had instead taken Energis shares, which have soared during the subsequent and telecoms market boom.

So how should Internet entrepreneurs protect their interests? Mr Stanford now sits on the other side of the negotiating table, having launched Redbus Investments, a seed fund vehicle which invests in other business start- ups including high-tech ventures.

He has put pounds 9m into 15 companies and advises entrepreneurs: "Have a clear plan of what you want from your investor. Don't go out for too little. If you need pounds 300,000 for your business plan, ask for twice that, even if you have to give up shares. You are going to be in a difficult position with your investor if after a year you go back and ask for more money."

Valuations often seem subjective. "I'm looking at a company which I'm valuing at pounds 1m," says Mr Stanford. "The guy has been offered pounds 3m for the whole business. I'm offering pounds 500,000 for half of it. We're saying he and us combined could turn his company into a pounds 120m company. The man thinks we are undervaluing his company."

Everyone agrees there is still a funding gap. Individual rich investors - business "angels" - tend to be offering tens of thousands of pounds. Established venture capital firms "don't want to know until you get to pounds 3m", says Mr Stanford. "Raising half a million to pounds 2.5m is the difficult area."

That was the predicament which Mr Hadfield, 43, faced with Schoolsnet. Unlike Soccernet, which started in his son's bedroom, Schoolsnet needed substantial backing to realise their ambition to create a one-stop education site for parents, students and teachers, providing everything from detailed information on all UK schools, including examination league tables, to online lessons and multimedia teaching aids. Further ahead, he saw Schoolsnet hosting an online procurement service through which schools could buy all the items they required.

In 1998 he started looking for funding, and together with Joe Saumarez Smith, a former journalist colleague, concluded Schoolsnet needed to raise pounds 500,000. Mr Hadfield's selling point was his record of a successful prior start-up. Earlier this year, he held meetings with an investment bank which had previously contacted him about Soccernet. "That enabled us to develop our business plan," he says. But they soon realised pounds 500,000 was not enough.

"In the middle of all this, my son and I were approached by an individual who was developing a European sports Internet site," says Mr Hadfield. "We met in a winebar, and I said, `I'm actually trying to raise money for Schoolsnet'. He said, `How much do you need?' And on the back of a napkin I wrote down how much we wanted and when we needed it. He knew people, and within two or three weeks, 14 private individuals, all of them wealthy and many with City backgrounds came up with pounds 800,000 funding." This time, Mr Hadfield made sure that he, his son and Mr Saumarez Smith (by now the 28-year-old chief executive) still owned 60 per cent of the company. "We're going to get it right this time," says Mr Hadfield.

Schoolsnet is currently negotiating a second round of funding that will raise a further pounds 5m and value the company at pounds 30m. That will reduce the trio's stake to 51.43 per cent.

Richard Kemp, the lawyer behind Kemp & Co, a specialist e-commerce and digital media practice, says: "It is very difficult with private individual funders to lay down hard and fast rules. Are they Internet- savvy? Have they anything to contribute? That is often worth a lot more than just money looking for a home." At Schoolsnet, two of the original 14 backers, with investment bank experience, sit on the board.

Mr Kemp says entrepreneurs must keep a close eye on the surrounding e- finance landscape. "You need to know what deals are being done today, or you'll never know if you are getting a good deal."

A couple of years ago pounds 2m would have bought a 40 per cent stake in a viable Internet start-up, he says. Today pounds 2m might secure only 25 per cent. He also says full-time employees should know the potential pitfalls of developing their start-up ideas at the office or through work. "Does the employer have legitimate rights to say they own that idea?" asks Mr Kemp. "The employer has quite a lot of cards in his hand."

Mr Hadfield is playing his new cards carefully. "Soccernet was just a dry run," he says. "Schoolsnet will be far more successful."

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