Situation: A company sells personalized content as well as a tool kit. The long-term plan is to monetize storage of personalized content. When they speak to venture capitalists, the VCs advise them to focus on just building their user base and not to worry about revenue. What would you do? Where should you focus – eyeballs or dollars?
Advice from the CEOs:
Take advice from venture capitalists with a grain of salt. Remember that their game is to fund companies that they like incrementally, taking a greater share of ownership of the company with each increment in funding. The more you lack revenue, the more you’re dependent upon them.
Gain traction by offering free content with up-sell opportunities for premium access.
The give-away strategy is a great model to build your initial user audience. Consider micropayment options for special features, content storage, and so forth.
Going slow and steady may not be the right model for this space. Company growth for a web-based platform is different from the typical bootstrap model.
It’s hard to get good advice for viral marketing opportunities from CEOs who have bootstrapped their companies. Look for other input. Seek the advice of CEOs who have been successful in the viral online marketing space and learn as much as you can about their business models.
Gaming is another opportunity – premium or virtual world sales.
Situation: A CEO has identified a new business opportunity that looks promising but will require raising additional cash short term. What are good sources of short term cash, and what will simplify access to these resources? How do you raise cash short term?
Advice from the CEOs:
You must be the biggest critic of this opportunity. If it doesn’t fly to your critical eye, it will be hard to sell to others. As a reality check, ask yourself whether the opportunity is something on which you’d bet your house.
Build the new capability around a web distribution system that compliments your other capabilities. This broadens the appeal of the offer.
Generate an investment proforma and revenue stream. Most investors or debt financers will want to see this. You can position it as an immature business plan backed by your best estimate of the numbers.
You’ll need a business plan unless you’re lucky enough to find someone who believes that you can turn any opportunity into gold.
Presell subscriptions to target clients to prove the value of the offer – both to you and for investors.
Assure that any payments due from you go into an escrow account, to be released on a quarterly or other phased basis pending performance from the other parties within this deal.
This is not a venture capital story. Angel investors will seek a lower return for lower risk than VCs. Set some milestones for the Angels that will help them to see that you are monitoring their risk.
Situation: A company’s major customers are expanding their manufacturing in China. They want the company to be able to service their Chinese locations. If you don’t already have a presence in China, what are the best ways to create a presence in China? In addition, how do you get the cash produced by these operations out of China?
Advice from the CEOs:
Increasingly, multinational businesses with operations in China seek vendors who can seamlessly handle all of their domestic and international needs. In China, the objective is to be able to translate service output into English so that US managers can monitor the output and assure that Chinese operations are meeting the same or similar basic standards as their domestic and other foreign operations. If your company can’t do this large contracts are at risk.
Look for local partners, including partners located in Hong Kong or Japan who can deliver service in China to your standards. You want partners who you can risk-manage.
It is interesting to look at the Japanese approach to China. Japanese concerns known to CEOs around the table only transfer highly developed, late stage manufacturing projects to China.
As you look at partners who have capabilities in China there are a number of qualities that you want to investigate:
Competence and honesty.
Loyalty – a partner who will stick with your company and not just take the new knowledge and start to compete with you.
Absence of graft and record of compliance with the Foreign Corrupt Practices regulations.
If you work with Chinese partners, work with two of them. Do not give them exclusive agreements, and do not tell them about one-another. This is critical to protecting any IP that you will be using in China.
We’ve learned over the past year that taking cash from your Chinese operations out of China is difficult. The Chinese government imposes heavy fees and levies on companies exporting earned capital because they want this capital to remain in China. Given this, you must ask yourself whether this is important to you.
A late stage private high-tech company wants to know what questions are most critical for managing the next stages of growth. This includes factors that can help differentiate good opportunities from poor ones. What questions would you ask about managing a late stage private high-tech company?
Advice from the CEOs:
Never compromise on your team. Is this a team of individuals who will be effective together, and can you make changes where necessary to build and manage the team that you need?
There is no room for someone who is not a cultural fit – do the team members work well together and does everyone see and support a win?
Who are the key stakeholders, and what drives them? Are these drivers compatible or in conflict? Can you bridge potential conflicts, or will they defocus your efforts?
Market & Strategy
Are your market projections realistic or fluffed?
Will your value proposition appeal to a large enough market to justify the investment of time and resources?
Is there a strong, realistic plan?
If you do a full SWOT (strengths, weaknesses, opportunities, threats) analysis, is the net positive?
Finances & Capital markets
Are the revenue and financial projections done correctly and achievable?
Raise money when you can, not when you need it – will the timing of your deal or opportunity, given existing financial markets, allow you to raise the funds necessary to bring the opportunity to fruition?
Is there openness to all potential capital or financing options? Financing is a personal relationship – how strong is the relationship?
Boards & Governance
Investors are investors; don’t overestimate their industry savvy. Are they aligned or in conflict? Are they fresh or tired? Will they support your efforts, and do they have the ability to generate extra funds as required?
It is impossible for a CEO or deal to be successful without the full support of the board – will you have full board support for your opportunity?
Is there clear differentiation between governance and management?
Looking over these questions, is the balance positive or negative? That balance will help you to accurately assess whether a given strategy or opportunity makes sense for the company.
Interview with Sandy Lawrence, Past CEO, Therative, Inc.
Situation: The technology sector is growing following a couple of lean years. Whether you want to fund a new company, or a new effort within a smaller company, what are the best avenues to capital? How has the game changed?
Funding and credit markets are opening but still tight. The bar has been raised because too many people are chasing too few available dollars.
The venture capital sector has consolidated. Over 80% of current focus is on technology, software and medical. Under 20% goes to the consumer sector.
It is important to target VCs who specialize in your technology, market and business model.
Research current VC portfolios.
Angels now act more like VCs – particularly structured angel groups.
Initial investments are typically under $1 million.
If you have a technology, investigate the grant world – e.g., NIH or DARPA. These organizations fund research, but not marketing, etc.
Look for specific programs or RFPs that align with your technology.
Target your grant request toward prototype development and studies.
Search LinkedIn for military people who can introduce you to contacts within programs like DARPA.
Investigate SBA Grants, and foundations with an interest in your technology or application.
Foundations sometimes will grant funds ($100k) to support the work of individual scientists and researchers.
Call on friends and family who believe in you and your work.
Whoever you approach, these rules apply:
Do your homework. Choose sources that align with your project and profile.
Presentations must be crisp and easily understood. Investing in professional assistance is wise.
Be able to make your case in 15 minutes or less. The first minutes are most crucial, so have your ‘elevator’ pitch perfected.
Your model and financials must support a high multiple exit, 5-10x their investment in a reasonable period of time (~5 years).
Team, Team, Team – credentials, experience, presentation – be a team with whom the investor can work.