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.

Screen shot 2009-10-23 at 6.41.57 PMDan 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.


Screen shot 2009-10-23 at 6.40.05 PMDev 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.


Screen shot 2009-10-23 at 6.48.49 PMDavid 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.


Screen shot 2009-10-23 at 6.53.21 PMRyan 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&A:

Q: Is there focus on value at exit?

Screen shot 2009-10-23 at 6.53.21 PMRyan 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.

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Screen shot 2009-10-23 at 6.48.49 PMDavid 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.

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Q: What makes for a critical revenue mass?

Screen shot 2009-10-23 at 6.40.05 PMDev Gandhi (Nexage)- More revenue is tough. The focus is to keep the break-even point the same, be efficient. Less revenue means you have to burn less cash. But what else is measurable? Gaining a large customer base, having big advertising impressions are key, especially when the ad market rebounds.
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Screen shot 2009-10-23 at 6.53.21 PMRyan Moore (GrandBanks Capital)- $110 million makes sense. But then look at Nokia and Pocket, Pocket had Sprint. Look at AOL and 3rd Screen Media, AOL wanted the footprint. If you make the business argument, the footprint can drive a crazy multiplier. Carrier deals are brutal!
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Screen shot 2009-10-23 at 6.41.57 PMDan Smith (Go2 Media)- Solve a need, don’t make one up! Go2 is a disruptor. We provide a local entertainment guide. We’re not just a mobile pure play. We’re building mobile and then expanding to the web, instead of being web and trying to go mobile.
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Q: Is a carrier deal required?

Screen shot 2009-10-23 at 6.41.57 PMDan Smith (Go2 Media)- The distribution model is changing. Three years ago everyone had to work with the carrier and you had 50 people in front of you. Search is now a viable way to discover and there are the app stores. We all have carriers we deal with, but get to the next one through acquisitions. Carriers are not as key. Quality content, value proposition, and appreciation for application platforms are really important.
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Screen shot 2009-10-23 at 6.40.05 PMDev Gandhi (Nexage)- Carriers bring huge distribution, but off-deck is growing. Is now a good time to build a mobile only company? This is the best timing to build a platform to adapt rapidly, with radical innovation to other platforms. And you also need to focus beyond North America from day 1!
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Q: What are the biggest limiting factors as well as opportunities?

Screen shot 2009-10-23 at 6.41.57 PMDan Smith (Go2 Media)- Carrier’s data plans! Usage-based is an obstacle. The level of engagement is 10x with data users, but we need to figure out new business plans.  If you build a business without a carrier your bottom line is better!
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Screen shot 2009-10-23 at 6.53.21 PMRyan Moore (GrandBanks Capital)- Average volumes are huge but revenues are not! So you must be capital efficient to get across the desert today, and you share it at least three ways— with carriers, with ad networks, with the OEM or publisher. And oh, the VC too! Your footprint will get you value. That’s a build to revenue plan.
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Q: For mobile advertising, are there any recommended platforms? Is Google it?

Screen shot 2009-10-23 at 6.40.05 PMDev Gandhi (Nexage)-There are lots of mobile ad network platforms— Quattro here in Boston, AdMob, Millennium Media. There are like 28 world-wide. At Nexage we connect to them all.
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Screen shot 2009-10-23 at 6.41.57 PMDan Smith (Go2 Media)- Google will give you revenue per CPM. People will pay a premium around targeted advertising, but the smaller the audience, the lower the CPM. But if you can amass a large local audience you may get $10-$15 per CPM.
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Q: How about Android? Things in the cloud? Did we learn anything from Danger?

Screen shot 2009-10-23 at 6.41.57 PMDan Smith (Go2 Media)- iPhone changed everything! It set the bar for other devices. Apple showed you don’t have to go through a carrier. The ramifications of that have trickled off to Rim, etc. An iPhone app now may be a step backwards. On PCs, everything had to run on the machines. You went to the browser, you used Ajax, you use SaaS. But it took 25 to 30 years to get there. Mobile will evolve similar but it won’t take 30 years. But we have 50+ environments and need to get down to five or six.
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Screen shot 2009-10-23 at 6.53.21 PMRyan Moore (GrandBanks Capital)- Well, Android flies next to the BlackBerry! Advertising is based on repeat buys so the sponsorship model works to some degree.
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-Randy Giusto

randygiusto@newdigitalcafe.com