Silicon Valley Frontlines

The Updated "Marketing Spend. Worth It, or Not?" List ...

Back on April 11th I wrote a post "Marketing Spend. Worth It, Or Not?" Today I saw a great post by Scott Olson on VentureBeat - "Five Marketing Time Wasters" that can usefully be added to the list. They are:

• Bloated marketing requirement documents (MRD's). Get out there and listen to the customer. Check!
• Direct mail lead generation. Yes, totally agree on the snail mail front - expensive to develop, out of date mailing lists and materials that end up in the round file right away. Even email marketing - go figure who's really serious when they respond. Check!
• $30 - $40k a year on analyst subscriptions! Yikes - how did I miss this the first time around?? Not only that they are frequently undisguised bribes to get their hacks to sing your praises. Total waste and unethical to boot. Check! Try building real relationships with the top bloggers in the space (though believe it or not many of them want the bribes now too!)
• Branding, advertising and tradeshow sponsorships. An expansion on my earlier thoughts - and good ones. Branding to my mind is something you earn, not something you pay for. Check!
• Detailed sales powerpoint presentations. Key point here is that these are too often one way preaching. As a start-up you need to listen, dialogue and validate. Not preach. Check!

To this I'd add this observation of my own:

• Make sure your initiatives are part of a cohesive plan. If you pursue driving potential buyers to your site but don't optimize the site, your landing pages and then capture basic data when they get there (like email addresses so you can keep reaching out to then in the future) then you have been wasting your money.

So here's my updated list of a bunch of marketing activities and how they stack up for a typical start-up.

Worth it:

• Viral PR. Cultivating key influencers such as bloggers and via new media such as Twitter. 
• Speaking engagements on panels and at events.
• Highly focused and optimized key-word search.
• Compelling, engaging and search-engine optimized websites with calls to action, well thought out landing pages, etc
• Engaging smart, hip, independent PR folks to devise the strategy and make it happen.
• Online case studies, customer references and success stories.
• Lead management solutions such as Marketo or Eloqua.
• Hip, fun, cheap videos such as Flaii's, using employees and associates. 

Not Worth It:

• $12,000 a month (or more) retainer-based PR with traditional agencies. I hate that stuff. You  might as well set fire to $100 bills and enjoy the show.
• Branding
• Large, fancy tradeshow booths, sponsorships and splurges at big events. No chocolate fountains! Still better to have a speaking slot than a booth though!
• Advertising in traditional print media. Its dead or dying, hugely expensive and no-one cares anyway. 
• Lots of traditional print collateral and materials.
• Trash and trinkets - T shirts, lanyards, tschotkes ... urgh!!!
• $30 - $40k a year on analyst subscriptions!
• Direct mail lead generation.
• Detailed sales PowerPoint presentations, bloated marketing requirement documents and other "big company" timewasters.

Pitching to Prospective Investors ... Part 3

In previous posts I've listed some of the things that start-ups should focus on - and things they should avoid - to give themselves the best chance of success when pitching to a prospective investor.

Some are critical - doing a well-rehearsed demo for example. A start-up I saw pitch recently - UserZoom out of Spain - had a very well done video clip demo included in their presentation. This meant the pitch man Alfonso de la Nuez, their VP Marketing, was able to focus on explaining what was going on and how it works rather than fumbling around trying to connect and make it work and he was able to move quickly enough to get the desired effect. Kudos to him - it worked brilliantly!

After observing more funding pitches I notice a substantial issue for many is the one of communication, specifically when English not the primary language of the person pitching.

I saw this with at least 3 different start-ups just last week. Two of the three had great stories. One was an Italian software company looking to start up it's U.S. operations and potentially establish it's headquarters here. The other was a start-up with a Vietnamese cofounder that has developed a explosive detection system. The U.S. Navy has funded 3 prototypes to date. (The third, an Austrian company, had such a badly-flawed strategy for a new password-replacement system that the language issue - and it was there at a low level - rapidly became a non-problem anyway!).

To be perfectly clear, this is not a bias issue. Not even for a Brit used to hearing the Queen's English butchered on a daily basis. It's about getting the message across clearly and concisely in the limited amount of time you have in front of the prospective investor.

Now, most investors are patient and will try hard to make sure they get it. But if you struggle with the English language then find a way to communicate that relies less on you talking and more on the demo, on the slides and so on. Bring a team member who is fluent and can fill in the gaps (NOT a translator, a bona fide member of the management team). The demo approach taken by UserZoom is a great example of a way to solve the problem (in that case the English was perfect, but had it not been then this approach would have helped address that superbly).

It's hard enough to raise money these days. You need to insure that the pitch literally "speaks for itself"!

Yet More on the State of VC Funding ...

I hate to keep harping on VC funding, yet its still the lubricant the Valley relies on to help turn ideas into substantial businesses. The market is crying out for alternatives but for now its still the main game in town.

Because my focus is on Silicon Valley itself - more broadly, technology in the greater San Francisco Bay Area (so, yes, including San Francisco's South of Market start-ups, Emeryville and so on) - I'm always interested to see how the money flows to the Valley compared to other geographies. Here's Q2 2009 VC funding of start-ups by region, courtesy of Silicon Alley Insider (as are the other charts in this post)

The Valley continues to be the main recipient of VC funding, with one third of the total. Frankly, I'd expected it to be more. You can certainly see how the rest of the market is very fragmented, geographically.

In Q2 the industry segments that did best were biotech and medical devices, whereas clean tech has collapsed from a funding perspective (the Industrial/Energy vertical below). No real surprise as energy prices are way below those of a year ago and its still a tough space to figure out winners and one that requires substantial capital resources for success.



In a recent post I talked about VC's main concerns around lack of exits, or ability to eventually find a liquidity event that actually realizes their investment. Here's a very graphic representation of the (lack of) IPO opportunities for liquidity. The chart doesn't include Q2 2009 in which I think there were 3 tech IPO's including OpenTable, but its still a collapse compared to the couple of prior years. It won't continue this way for ever and in my next post I'll suggest some reasons why ...

Three Keys to Startup Success ... Monetization Strategy, Effective Marketing and Management

Three things keep showing up as critical to getting a startup on the road to success - Monetization Strategy, Effective Marketing, and Management. Ok, yes, cash helps too. But you won't get cash without being clear how you'll use it to execute well in these areas. A good, working product or service? Of course - but history is littered with great ideas and good products that never went anywhere because people didn't know how to turn then into successful businesses.

Success in the near term may be getting enough funding to enable the next stage of a company's development. This may be completion of the initial product, build out of the team or gaining initial marketplace traction. In the long term it's building a sustainable, profitable, growing business with a large market opportunity (unless you're building a lifestyle business - which looks a more and more attractive option these days!). So what do I mean with these three things that are so critical to getting on that road to success?

Monetization Strategy

As I've noted before, with certain exceptions (Twitter, at least for now; YouTube - though not for much longer), having a clear, well thought out and tested monetization strategy is critical. "Tested" ideally means people paying real money for your product or service and who will be reference accounts (ones that a VC can call and talk to) - or, if you're still very early, credible people who will say "yes, if you produce that I'd buy it and here's what I'd pay". Its highly unlikely you're going to be a trailblazer in your monetization strategy. Leave that to Google, Salesforce and others. But you ought to know what others are doing and how you play off key trends and examples in the marketplace - term software licenses instead of perpetual, scalable subscription-based services rather than fixed fee, micropayments (many  payments of small amounts) and so on. See my post from May 8th for more!

Effective Marketing

For many of the startups I've seen pitch this year the biggest near-term challenge is getting known and then getting customer traction in the market. "Who are you and why should I care?" is a major barrier - but when you solve it you are in great shape! In a pitch I saw last week from a very exciting startup, UserZoom, being able to say you have eBay, Monster, Shell, Novartis and others as paying, happy customers in less than a year from starting their service is the most compelling thing you can have when raising money. Fortunately these days the options for creative and cost-effective marketing targeted at getting that initial adoption are better than ever. See my post from April 11th for more on marketing spend - what's worth it and what's not. 

Management

Although it's an old axiom in the VC business - that VC's invest in management teams - it rings even more true today when money is scarce. Why? Because VC's know that great management teams are far more likely to execute effectively, with fewer mistakes, and find ways to turn good ideas into successful businesses with the least amount of cash investment and lowest risk. The VC money is the lubricant - but its people who have to make it happen. Regrettably, many inexperienced founders have a hard time understanding that the best thing they can do is hire people who have been there, done that - but that's what it takes and what a VC will look for. Find and hire the best people you can to help turn your idea into reality - these days those people are even more readily available than ever before.

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VC fundraising - it just keeps getting worse ...

Q1 (January through March this year) was bad for VC's raising money for new venture funds, coming as it did right after the implosion of the financial markets and the screeching halt to IPOs. New numbers from Thomsons and the National Venture Capital Associaton show that Q2 (the three months through June) was even worse. Check it out:

Note the average size of fund raised. In Q2 this was barely $70m per fund. That's pretty small compared to an average of almost $150m in Q4 2007. Is that a problem? It can be - smaller funds typically invest in early stages (good for startups) but aren't able to participate in larger rounds of funding for later stage growth. Where will that money come from?

Let's also be be clear what this money represents. Money they raise for their funds in Q2 is not the money VC's are putting to work today  - that money comes primarily from funds raised in prior quarters and years. This is the money they raise today that they will have available for future investments over the next few years. Not a good omen as startups look to raise money for their future operations.

VC's will normally invest money in new portfolio opportunities for the first few years of a fund's life. They typically keep some portion of the fund available for follow-on investments with the companies they have already financed from that same fund - in part to maintain their ownership but also to insure their portfolio companies make it to an exit. Given that the latter is taking longer these days, they need to keep more of that powder dry than before. What this means is that once the monies raised from, say, 2006 through 2008 have been put to work or earmarked to support existing investments, there will be a drought for new startups. Of course, startups are feeling a drought now as, with the lack of exits (see my last post), investors don't even want to put that prior money to work.

Is it all doom and gloom? Not exactly. While August Capital and other premier names in the business continue to close new funds, and top notch individuals like Marc Andreessen and Ben Horowitz with their new $300m fund can still do whatever they want, this will weed out some of the weaker VC firms that, frankly, probably shouldn't have been in the business anyway.

And to get your startup funded you have to focus on the things that were always important but tend to be forgotten in times of plenty - great ideas, solid execution, hard work, superior management teams, monetization, creative thrift with spending ... qualities which are still in abundance in the Valley!

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Is Your Financial Model Ready to Meet Your (Prospective) Investors?

As I work with some of the startups here in the Valley looking for early-stage funding, one of the weak spots in their approach to investors is the financial model they've developed. Or - in some cases - not developed.

No matter how exciting the idea, how great the buzz or how wonderful the management team, your pitch to investors has to show how you will build a business that will be big (if it won't be big then it won't be attractive as an investment now), and will generate profits. This is not slapping together a few numbers and hoping for the best. The financial model you develop needs to show that you know how you'll monetize the idea (generate revenues) and what resources it takes to develop a robust product or service, generate customer awareness, close deals, get the customer up and running, keep them happy and scale up the business. Most importantly, it will tell an investor just how far the cash they are putting in will go - and it had better be far enough to give the company a strong shot at getting to the next fundable stage.

To explain how all this works, how to put together a compelling model and what to look out for in the process I've been presenting a workshop to CEO's of early stage companies. Here's the how I define the process for developing the model:

The last part - validating the model - is often overlooked by early stage companies. If you really think you'll be bigger and more profitable than, say, Salesforce.com or Google was after 4 years then by all means say so. But for mere mortals in business you probably want to set goals that are a little more realistic and then explain to your prospective investors how this compares to where the other companies were at similar stages in the past.

Hint: if those "comps" are now public companies you can go to their SEC filings and type in "S-1" (without the quotes) in "Filing Type" and you'll find 3 - 5 years of financial history prior to their IPO. Often this takes you back far enough to see a few years that will overlap with your model. Here's the S-1 filing for Salesforce from late 2003, with data going back to their inception in 1999 (page 23)

Here are some of my tips for success with your model:

To get a copy of my full presentation please download a .pdf of the materials. By the way, the orientation of this pitch is towards the companies I primarily work with - internet, ecommerce, software and related companies. A fabless semi company or a telecom equipment company will have, by necessity, a more complex model but the principles still apply ...

Download Startup Financial Models - Philip Smith

If you have any questions or comments, want me to come explain this to you - or just need some help - please let me know!

What VC's Are Most Worried About ...

Not only did VC investment in startups fall again in Q2 this year (the 3 months ending June 30) compared to Q2 2008 (by 57% from $6.5 Bn to $2.8 Bn) but in a survey by Polachi Inc just published on Silicon Alley Insider the reason why is not what you might think.

It's not because they can't find good investment opportunities - fundable ideas, if you will. From my own experience and that of others I talk to in the investment community the "deal flow" of good opportunities is stronger now than ever.

It's not because they can't invest in decent management teams. If anything the recession has thrown a lot of talent into the street that is a goldmine for startups looking to recruit  the skills and build teams.

It's not because of a bunch of other things either. Its because the VC's don't see an "exit". A successful exit - for a VC - is simply an IPO (take the company public and sell your shares for a 10x or greater return on your investment 6 months to a year after the liquidity event) or a sale of the company to a corporate or other acquirer (Google buying YouTube, EBay buying PayPal etc). As we know - with few exceptions such as the recent OpenTable IPO - the IPO market has been dead. And the corporate M&A market, despite the attractiveness of some of the acquisition opportunities (lower valuations, lack of other exits etc), hasn't been much better.

So the biggest issue stopping a VC investing today is "how will I actually realize the return on my investment in this great idea?" If we don't solve that problem then we are in for a rough time getting Valley startups funded - which will be to the detriment of the whole ecosystem and technology in general.

(And no, I don't know why it adds to more than 100% - I guess some people are "most" worried about more than one thing ...!)