On October 16th I attended The Capital Network’s (TCN) and Massachusetts Innovation & Technology Exchange’s (MITX) panel on “Raising Capital For Your Mobile Digital Media Company” at Microsoft Labs’ headquarters in Cambridge, Massachusetts. Moderated by Brian Shin, Founder and CEO of Visible Measures, panelists included:
- David Beisel, VP, Venrock– David’s focuses on digital and mobile and ad networks at Venrock, is involved in Gazelle.com and the Portable Web Innovators Group.
- Dan Smith, CEO, Go2 Media– Go2Media is is a local recommendation site with over 4 million hits per month, and has a number of carrier partnerships.
- Dev Gandhi, CEO, Nexage- Nexage is focused on building the next generation mobile advertising platform.
- Ryan Moore, General Partner, GrandBanks Capital– Ryan is a Nexage investor and with respect to mobile, focuses on the advertising ecosystem in the Boston area.
Here are some of the discussion threads with panelists comments in bold (paraphrased) and my thoughts following each in italics.
Dan Smith (Go2 Media)- The current climate is much better now to raise money than it was say. last October. Deals will take longer to get done both inside and outside. Entrepreneurs should spend their time on the numbers and on capital efficiency. VCs want to see your cash flow beyond your projected first and second rounds. They want to see what if scenarios- what if your expectations are wrong? How will you get through your cash? Today’s environment requires more interactions on your part just to get to a funder. You may be close to getting a term sheet but if the DOW is up or down all of a sudden, don’t be surprised if you get delayed. Market conditions are impacting the time we have to look at pitches.
RG- I know that among the entrepreneurs I have been talking to the past six months, a larger percentage are realizing they have to bootstrap the initial stages of their business before they seek funding, even from angel investors. Business plans, cash positions, pitch decks, what if scenarios, and ideas on how to scale all have to be thought out ahead of time.
Dev Gandhi (Nexage)– In today’s environment you need to be a broader play. For us, April and May was bad timing, but we did it! We signed over 25 customers in the past six months and have had good traction. But you can’t focus on a single area any more. Many startups are still weak in management. You have to show your potential investors some efficiency, some traction, in addition to your vision. Ad networks are a five year old business model, so for us, signing up customers was critical. For any startup, signing up customers should be the biggest focus of your plan, not the idea itself. You will have to fight a little to get your series A round, but if you survive and are growing, you will be taken care of in your series B.
RG- The feedback from many investors these days after they are pitched is “show me a client base” followed quickly by “show me a distribution model.” Today’s startups need a well thought-out multi-year and multi-stage game plan of how they will grow with capital, what their requirements will be at multiple stages, how they will grow their customer base, and inevitably deal with churn, which everyone deals with in mobile.
David Beisel (Venrock)- There is still a lot of carnage in mobile. You have to deal with carriers, disparate devices, figure out your revenue model, and further out, deal with your burn rate. The web has an ecosystem but it is not as disparate. The bar is much higher in mobile and you have to address the gray areas. You have to determine how big is the market opportunity and what is your role in it? There are a lot of developers in the Boston area but it’s not appropriate for VCs to invest in them. As a mobile entrepreneur you need to realize that there is more to it than just the money. What do you bring to the table? Seek VCs for their connections, they will be part of your management team. As far as valuations, both inside and outside they are lower than expected. Terms are much more stringent these days.
RG- Yes, in mobile there are now five major ecosystem platforms— Symbian, iPhone, Android, Windows Mobile, BlackBerry, each with their own app store, and to a lesser degree there is still Palm. Couple that with four major carriers— Verizon Wireless, AT&T, Sprint, and T-Mobile, and a host of lesser carriers, and you have a degree of complexity that is not there on the web. Startups needs to find expertise within their investors. VCs who invest and step back are not the kind of resources you need these days. You need VCs who will roll up their sleeves, take an active role in your company, and you need to give up some ownership for this.
Ryan Moore (GrandBanks Capital)- In 2002, as a VC, you invested in a space to learn about it. Not anymore! There are at least five or six capital players in every different mobile space today. Revenue is spread out. When we look at a space, we look at who will break out of the pack. Who has something to differentiate? We will fund them more aggressively. You also need third party validation, not necessarily just revenue. A startup needs carriers, publishers, and a network to validate it. It is also easier to raise multiple millions of dollars than it is to raise your first $500,000. And an angel round of $500,000 doesn’t get you very far because you have to go back for so much. Professional capital is very expensive, is diluted, and there needs to be an agreement with the entrepreneur on what to do with it. As an entrepreneur, you need to be aware of what you are getting into, that it’s other people’s money! And everything is compressed these days. If you think you need $5 million, you will get $2.5 million. Everything will take five to seven years. Terms will come up in later rounds.
RG- Over the last five years, I have seen many startup pitches, as an executive industry analyst at IDC. Many firms in front of me were both funded and pre-funded. Over time, you started seeing the same solutions or same approaches, trying to solve some of the same fundamental problems, with very little differentiation, other than many be a tweak in a business model here or there (via revenue sharing). Or even worse, startups that were basing their businesses on solving problems that they said that “customers didn’t know they had yet.” In this economy, it is clear that you need to solve a fundamental problem, you need to provide value, show some initial customers, have a well thought out revenue sharing plan (splitting revenue with others such carriers, device vendors, and developers), and also think through how you will scale a distribution model over the next three to five years. The days where your idea is your elevator pitch along with a two year exit strategy are long gone!
Q: Is there focus on value at exit?
Ryan Moore (GrandBanks Capital)- Seventy-five percent of M&A activity occurs at $125 million and below. That’s the ceiling. There is series A optionality. Take the money, exit in two years, or accelerate and raise a bigger round.
David Beisel (Venrock)- There is compression on exits. There are multiples of public companies as competitors or acquirers. Ultimately it’s a reflection of what happens in public markets.