Start-up of the Month: Carefree.tv - serious fund raising

Carefree.tv has picked a hell of a time to start up, and a hell of potential user base. Can it succeed? Heather McLean recently spent some time with its founders, battle-hardened by years at ITV Digital...

Drumming up cash for a start-up in these troubled times is no mean feat. Yet the three founders of home shopping company Carefree.tv have refused to allow a paltry issue like a global economic downturn defeat them.

They came up with the concept of a platform designed to get lower income households shopping over interactive TV channels while working at their previous employer, ITV Digital.

Seated around a massive conference table in a start-up unit a few minutes trek from Waterloo station, the company's director of operations and finance, Karen Kraws, twitches with nervous energy.

Her colleagues are Iain Rayner, Carefree.tv's managing director, and Tim MacIvor, director of customer relationship management and technology.

Together, the three ex-staff of the digital broadcaster, which went bust in March this year, are a veritable bundle of enthusiasm.

Rayner came up with the concept behind Carefree.tv while figuring out a way for ITV Digital to target the 10.6 million lower income households in the UK's CD and E financial brackets, of which just 38 per cent have PCs compared to 83 per cent of A and B households.

He explains: "Around 50 per cent of people applying to ITV Digital were from the low end of the market but the company didn't cater for their needs. It was very frustrating. We were banging our heads against doors at ITV Digital about how to cater for this group for four years.

"We worked out a weekly payment deal for low end customers of ITV Digital and it wasn't implemented. So that's why we came up with Carefree.tv."

Ultimately funding depends on investors, although Kraws did raise cash after leaving ITV Digital by auctioning several of the broadcaster's cloth Monkeys over eBay - enough to fund cups of coffee for a couple of months.

So far the trio have spent £20,000 of their ITV Digital redundancy cash on getting the initial stages of the business together, touting for a minimum of £300,000 of seed funding from investment website Angel Bourse. They expect to have spent a further £30,000 by the time they get the required funds, which they hope will be by the end of September.

However, Rayner warns: "This is a difficult time to raise money. It's July and August. Our initial funding period is 60 days but I can see us getting to September and still not having signed everything up."

The initial funding will go towards creating the technological infrastructure for the business, starting its advertising campaign and paying for a few people to answer the phones.

The team has pinned its hopes on the idea that the bottom financial end of UK households being receptive to buying electronic products marketed to them by friends, explained by a corporate video and presented via a paper-based catalogue, with lower price tags than physical retail stores could offer.

"A large proportion of our target market will be tenants and people living in council houses who will never aspire to owning their own home," Rayner says. "However, they do want widescreen TVs and have kids hassling them for the latest high-tech equipment. Children are IT literate. There will be an aspirational demand for products like the Xbox and Playstation 2."

The VHS video and paper brochure scenario will eventually evolve as that market segment moves to DVDs, but it will still be supported by catalogues. Within 12 months Kraws said Carefree.tv will see a shift of users into interactive TV and web-based environments that will not require a magazine accompaniment.

Each video will cost around £4 to create but Rayner is not fazed by the expense: "Our marketing methods aren't going to be cheap but a video is cheaper than building retail stores, so it's not as expensive as you might think. We're not going to give videos out willy-nilly."

Kraws added: "If people aren't buying our products, we will encourage them to leave."

The company will run on a basic skeleton staff because, as IT director MacIvor reasoned, the company will not know if it can raise more cash in a second round of funding in a year's time due to the economic climate.

Advertising and marketing of Carefree.tv's service will be kept low by being run almost exclusively within local communities. This will involve regional newspapers, competitions to encourage people to join and member-get-member incentives based on a similar model to Avon.

Carefree.tv will use specialised companies to collect cash from its customer base. One particularly important idea that the team had was weekly payments, to make products seem more affordable to consumers.

Rayner notes: "We're not going to be discounters. We're going to sell things for more than we buy them for. This is a fixed cost business that we believe we haven't pitched too high."

The company forecasts it will be cash flow positive by March 2003. "We aren't going to take huge wages or drink too much Champagne," Rayner says.

One year from its launch Carefree.tv wants its customer base to have reached 60,000 users, generating average revenues per customer of £63, a total of £1.9m.

By the end of year two the average revenue per customer is expected to have risen to £100, or £8.7m in total, and by the tail end of year five on a customer base of 275,000, average revenues will have hit £121 per customer or £33.2m for the year, the team states.

On the customer growth figures, MacIvor comments: "It's quite difficult to raise money at the moment so we had to be quite conservative on those figures. I actually think we can do better than that."

Working at ITV Digital appears to have helped the three to have the guts to take the leap off the edge of the gangplank, into investor territory.

MacIvor says: "You learn a lot from a company that goes through its life cycle very quickly."

The passion behind the team at Carefree.tv is essential to getting the concept off the ground, and the trio certainly seems to have passion by the bucket load. Will that be enough? They are certainly putting everything in to the venture.

Ops director Kraws has the last word: "It's great to think we are setting something up. Everything we have learnt over our careers is being used."