BUILD
By now you're ready to take that brilliant idea and turn it into a successful business, and that's when the fun-and the real work-begins. Dragging your feet at this point could allow one of your competitors to beat you to market, but you can't sacrifice careful planning, development, and important partnerships for the sake of flat-out speed.
This section will help you focus on the raw materials that go into a successful Net company, from that first, crucial round of funding and your basic technology to unglamorous essentials such as lawyers, office space, and outsourcing. Making the best use of the options and time available is key. The future strength of your business isn't only dependent on the quality of your idea, but also on how well you build on the opportunity.
Get Off the Ground With an Angel
Raising money from a venture capital firm may receive all the media attention, but it is not the first financing your startup will receive.
By Ian Patrick Sobieski
ian@bandangels.com
Building your Internet company is often referred to as walking up a flight of stairs, with each step representing an increase in the value of your company as you achieve certain goals. Angel financing typically acts as the first and second steps on that staircase.
Angels are wealthy individuals who will write you a personal check, ranging anywhere from $20,000 to $1 million, to help finance your company. There are many flavors of angels, from the retired dentist hoping to impress his golfing buddies by getting in on the seed round of the next eBay to the former CEO who wants to stay in the game (if not up until 2 a.m.) by helping startups grow.
At some point you likely will raise money from a large venture capital firm, but it won't be the first financing you receive. Most VC firms today won't make investments less than $3 million to $5 million. Yet virtually every Net company needs to raise a seed round of a few hundred thousand dollars to allow the founders to quit their day jobs, create the skeleton of the company, incorporate, build a prototype Website, file for necessary patents, and so on. Taking less initially lets you build the value of your company and lets you give less of it to the big VC fund when you eventually raise that $5 million round.
Six degrees
It is never too early to start looking for an angel investor. Individual angels will write checks as small as the company needs, sometimes in the thousands of dollars. Professional angel groups such as the Band and small early-stage funds can easily put together anything from $500,000 to $1.5 million.
To find angels, tell everyone you know and everyone you meet, from your mom to strangers on the street, what you are doing. That six degrees of separation saying is really true. You shouldn't worry about giving your idea away as much as you should worry about not getting your funding fast enough-especially on the Internet. A good place for the totally uninitiated to start is to talk to anyone who deals with a lot of startups, such as lawyers, PR firms, accountants, and marketing consultants.
The best angels offer more than just money, however. You want your angel backers to provide money and sweat-making business development contacts, finding candidates for positions within the company, landing a good PR firm, helping with that first firing, or negotiating the six-figure license with Yahoo!. So much of the world operates on referral that you also want an angel who is well connected in your local tech community and is willing to pick up the phone on your behalf. If you find an angel with the right background, consider persuading him or her to take a more active role in the company. You may ask that he or she serve as a formal adviser or director of the company-even if it means cutting him or her a deal on that initial financing.
Short and simple
When pitching angels (and VCs!) remember your immediate goal: The purpose of your initial pitch, and your pitch document, is to get them to pick up the phone and schedule a more extensive conversation-not to get them to invest. Keep your business plans to yourself until they are explicitly requested. What you need first is a short marketing document that highlights the problem, your solution, how much money you stand to make, and why you're the team that is going to make it happen. Highlight the most intriguing aspects of your company (Unusually strong team? A killer patent position?) and avoid clouding your message with spurious detail.
The size of the angel investment you can expect depends on who you are and where you are on the value staircase-are you still in graduate school and just have an idea, or are you the soon to be ex-director of marketing at a successful startup? Do you have a product? Do you have revenue? The answers to these question can affect the value of your company, but don't get hung up on negotiating price with angels. All serious angels know about the value staircase, and they know that eventually it will be appropriate for you to raise $5 million from a VC firm. So early financing rounds must be at a cheaper price.
The range for an early-stage investment is almost always less than $10 million, and a seed investment is often in the low single millions. It is reasonable to give an angel 20 percent of your company in the first round, but remember that these first initial investors will be diluted substantially in subsequent rounds. By the time of your IPO, their stake may be only a few percentage points.
Special investor rights are commonplace in early stage deals and this is where getting a good lawyer pays off in spades (see "Hiring an Esquire," p148). The key point, however, is to negotiate with your investors in a spirit of partnership. Just like your first employees are often quasi-founders, your first investors deserve a special place. Don't try to negotiate with an angel the way you would with a VC. Similarly, don't waste a lot of time with an angel who thinks his $50,000 is a Kleiner Perkins Caufield & Byers term sheet.
Smart angels are often less concerned with valuation and more interested in how the entrepreneur conducts himself or herself. Is she headstrong and strident or reasonable and flexible? Similarly, if your angel rubs you the wrong way during the negotiation, perhaps you should get a financial backer you relate to better. Remember that the tough times may be still to come. Once the angel writes you a check, you're married to him or her for the life of your venture.
Ian Patrick Sobieski (ian@bandangels.com) is a managing member of the Band of Angels, a group that has placed more than $50 million in more than 100 Silicon Valley startups since 1995.
ANGEL INVESTORS
Alliance of Angels
www.allianceofangels.com
Seattle, Washington
Atlanta Technology Angels
www.angelatlanta.com, Atlanta
Band of Angels
Silicon Valley (no Website)
Tech Coast Angels
www.techcoastangels.org
Southern California
The Capital Network
www.texasangelinvestors.org
Austin, Texas
Silicon Alley Venture
Partners
www.savp.com, New York City
The VC meeting
What to do when you finally get through the door.
By Bob Kagle
rkagle@benchmark.com
It's 7:30 a.m. on Sand Hill Road. You've been up most of the night polishing your PowerPoint presentation. Your mouth is dry. Your antiperspirant is kicking in. The venture capitalist enters the room. How should you break the ice? Relax!
Presenting your business idea to a potential venture capital investor need not be a hair-raising experience. Remember, you've already passed the first hurdle by getting this meeting in the first place. This probably means that someone they know and trust referred you (always a good approach) or that your idea is intriguing and has captured their imagination on its own.
Your challenge now is to work your way up the list of several prospects that nearly every good venture investor enjoys these days. Your presentation should be concise. Here are a few pointers to keep in mind during the fundraising process.
Understand your business
What is the essence of the value proposition to the customer? How large is the target market? How fast is it growing? What are the business and profit models? Show that you have thought deeply about this business and have done your homework. Good investors will probe deeply. If a question stumps you, resist the temptation to fake it. Acknowledge the need to look into it further. Most investors prefer "learn-it-alls" to "know-it-alls."
Distinguish yourself
Describe how your experience and track record position you for success. Show your passion for the business. Demonstrate real commitment to the project through personal investment or the foreclosure of alternatives. If you have already quit your day job and invested your vacation money, say so. You should create the feeling that this is such a compelling opportunity that you have no option but to pursue it vigorously.
Make a connection
Identify links to the prospective investor. Note any of the firm's past investments that are relevant to your company. Demonstrate a good fit and potential value creation with their portfolio companies.
Be prudently open
Being unnecessarily circumspect about your business can cast a pall over an otherwise good meeting. Trust, but verify. Ask the investor for a commitment to confidentiality, verbal is sufficient. Save sensitive details until you have developed comfort and sensed a genuine interest level. This can be a bit of a balancing act, but you will need to reveal enough to get a second meeting.
Identify the risks
One of my favorite questions is, "Let's suppose we are having coffee together two years from now, commiserating over the fact that this just didn't work. What might be the reason?" Great entrepreneurs almost always have a thoughtful answer or two. If you know where the minefields are, you can avoid them. Also, an honest assessment of the competition will build credibility.
Foster competition
Orchestrating a successful financing is a bit of an art. Make sure that you approach at least a few potential investors in parallel. The comparisons between firms will be illuminating. Also, valuations are almost always highly subjective and a little competition is generally healthy for the process.
Seek true partnership
Remember you are buying even more than selling. Watch for signals from the investor that they will be a good partner: Do they listen well? Are they generally respectful? Do they seem to have an instinct to help? Are they generally enthusiastic and positive? Building a company is a daunting challenge and emotional support from your financial partner can be critical.
Most importantly, be sure the investor passes the intangible but very important "gut check." Good chemistry and compatibility are important ingredients in fostering and maintaining a strong and lengthy partnership.
Check references
There is no substitute for talking to entrepreneurs who have worked with this investor. Were they accessible and constructive under adversity? How did the investor's involvement directly affect the company's success or failure? Good venture partners make a difference. Equity in a startup is very dear. Make sure you will be getting your money's worth.
Bob Kagle (rkagle@benchmark.com) is a founding general partner of Benchmark Capital.
ONLINE VC RESOURCES
Venture-Capitalist.com
www.venture-capitalist.com
Venture Capital Resources
www.datamerge.com/capital/moneyventure7.html
vcapital.com
www.vcapital.com
vfinance.com
www.vfinance.com
Hiring An Esquire
You're going to need lawyers. Better to act than to react.
By Casey McGlynn
cmcglynn@wsgr.com
Most people think that the time to call a lawyer is when you get in trouble or need to sue someone. But for those who plan to launch an Internet business, waiting that long would be a serious mistake. Securing top-flight legal assistance should be an integral strategic component of any startup plan from day one. In fact, it is not uncommon for entrepreneurs to bring their ideas to a technology-savvy lawyer when the business plan consists of no more than a page or two of notes.
An experienced lawyer who has helped other Internet companies secure financing can help fill the holes in the business plan and make it more attractive to investors. Issues such as valuation (see "The Valuation Equation," p150) and vesting must be determined early and correctly. Entrepreneurs should always engage an experienced securities lawyer to help them incorporate their new venture and set up the equity structure of their new firm.
An experienced corporate attorney will help entrepreneurs create an ownership structure for their company that is familiar and recognizable to venture capital investors. Arcane corporate structures are a red flag for venture investors, while a normal corporate structure gives investors more confidence that they are dealing with smart executives and that they will be able to maximize their investment.
Once the structure is set, a lawyer should be able to help introduce you to key venture capitalists and angel investors. Make sure your lawyer is "in the know," networking and familiar with the many players in the industry. The lawyer isn't going to get your business funded, but should be able to open doors to the right investors. Your lawyer should also take part in any negotiations you have with potential funders and should advise you whether the terms of an investment are in your best interest.
In today's environment, it's also important for a startup to form partnerships with established companies. Your lawyer should be able to leverage contacts throughout the technology industry for your benefit. Corporate partnerships backed by formal letters of intent are powerful signals to the investment community that you have a hot startup.
Entrepreneurs should engage legal assistance for many other functions as well. It's vital that young companies have intellectual property counsel from the beginning, to assist with such issues as patents and trademarks and help you stake out a defensible position in the marketplace. New companies should also have legal help when establishing employee benefits and compensation structures, such as stock option and retirement plans, as well as when creating personnel policies. In today's competitive labor market, it's best to have these issues settled before you start looking for employees.
None of these services come cheap, of course, and the demand for experienced legal talent is very high. Don't be surprised if you have to sweeten the pot by offering stock in your new company, either in addition to, or in partial payment of, legal fees. Don't scrimp on the legal help-it's absolutely key to your success.
Casey McGlynn (cmcglynn@wsgr.com) is a partner at Wilson Sonsini Goodrich & Rosati.
ONLINE LAW RESOURCES
FreeAdvice.com
www.freeadvice.com
Law-Talk-Online
www.law-talk-online.com
Nolo.com Self-Help Law Center
www.nolo.com
USLaw.com
www.uslaw.com
The Valuation Equation
How do you figure out what your company's worth?
By Rich Shapero
rich@cpvp.com
One of the most important issues facing today's Internet entrepreneurs is how to figure out their company's valuation. Establishing a valuation and raising capital based on that figure largely determines the amount of equity the founders will retain.
Thus, it's no surprise that I'm constantly asked how to get the highest valuation. From my perspective as a managing partner at Crosspoint Venture Partners, here is some advice about how to approach a valuation and how to ensure that your company gets as high a figure as it deserves.
My first suggestion may be somewhat of a shock: Don't present a valuation to investors. Sure, run through the numbers in your head and get a rough idea of what you think your company might be worth. But one of the worst things you can do as an entrepreneur is to present a potential investor with a preset valuation. If you set it too low, you're giving away too much of the company. If you set it too high, you'll likely scare away future investors for whom the cost to get in is too great, and the potential returns are too slim. VCs laugh at entrepreneurs who walk in the door holding a term sheet.
Second, the best way to get an idea of your company's valuation is to shop it around to multiple investors. You'll get different figures from the different groups, and that is a far better indicator of your company's worth than any rough number you come up with in your head. An average first-round, premoney valuation (before any investors have signed on) is between $1 million and $15 million, with most falling between $5 million and $12 million.
Finally, be very selective about whom you choose to get your capital from. Unskilled investors (some angel funds and private groups) can assign your company a bad valuation, dooming your later rounds. Don't poison the well before you give investors a chance to drink.
Rich Shapero (rich@cpvp.com) is a managing partner at Crosspoint Venture Partners.
The First Round
These days, a seed round or an angel investment will likely be the first funding your company receives. But eventually, you'll probably need an investment from a venture capital firm to get you to launch. How much can you expect to receive in your first round of VC funding? Consider these figures.
Type of company Median sum of funding
Business-to-business $8 million
Content $5.5 million
Ecommerce $13 million
Net infrastructure $15 million
Source: VentureOne
DID YOU KNOW?
BUSINESS VALUATION RESOURCES
American Business Appraisers
www.businessval.com
Big5consultants
Online Valuation Advice
www.big5consultants.com/article_valuation.htm
nvst.com
Business Valuation Forum
http://forums.nvst.com
The Institute of Business Appraisers
www.instbusapp.org
VentureLine
Business Valuation Techniques
www.ventureline.com/techniques.htm
10 Tips For Naming
A naming expert tells how to avoid the moniker massacre.
By Clay Timon
clay_timon@landor.com
You're counting down to liftoff. Your strategy is sound, your offer is unique, your board oozes talent, and you're awash with venture capital. With your Web designers raring to go, it's time to get serious. So what are you going to call yourself?
Houston, we have a problem.
Any startup that regards its brand name as a final detail is heading for disaster.
These days, branding consultants work at Internet speed, a hyper-accelerated brand development process forged by the necessities of this dynamic market. While the new rules are still being written, here are a few maxims for naming a new site that even the most free-wheeling startup ignores at its peril.
1. Get started now.
Don't leave your brand name and visual identity until the last minute. Bring in expert advice as early as possible. Like lawyers and accountants, branding consultants are paid to keep secrets. The more time they have to work with even limited information about your gestating brand, the better.
2. Keep it as simple as possible.
The key criteria for any URL are that it be short, easy to spell, and understandable. Yes, we know that's easy to say in a world where most such names are registered by mega-corporations or unemployed cybersquatters. However, there are still plenty of untried letter combinations out there.
3. Avoid cliches.
Stay away from prefixes and suffixes that fail to differentiate you. The Net is saturated with names that use cyber-, net-, -tech, digi-, sys-, and their ilk; using these terms can also shorten the life of a name. People can look at a name and date it the way they do a vintage wine: "Ah, yes, that looks and sounds like a mid-'90s."
4. Avoid the .com.
These days, a Website is cost of entry. Why highlight the fact that you're a Web company when within three years most business will be conducted over the Web anyway? Investing in .com as part of your company name is shortsighted and could work against you in the longer term.
5. Avoid the descriptive.
Sure, a descriptive name lets you own a space on the Internet. It's a great short-term strategy for building brand recognition fast, and it capitalizes on search engine-driven random inquiries for your product or service. Wine.com is clever for online wine, but what happens when they want to get into beers and spirits? Descriptive is limiting, and limiting is bad.
6. Create a unique personality.
Ask.com could have left it at that. A Website devoted to answering questions is a masterstroke in itself. Yet the builders of this brand went further, and imbued it with the avuncular, dignified, and human character of Jeeves. Although Jeeves is little more than a digital hook on which to hang a brand personality, it works. It resonates, it's distinctive, and it sticks in the mind.
7. Go for unexpected combinations.
Coined associative, coined descriptive, and possibly real arbitrary names represent the best bet for future domain-name availability. Unexpected combinations of real words evoke an image immediately, providing a stronger foundation for brand building. Fogdog means nothing to most people, so online, it means everything its owners want it to mean.
8. Reinvent a real word.
Using a real word in its traditional sense is limiting. But using it to mean something completely different? Now we're talking. It's not exactly a new tactic: What does apple have to do with technology or shell to do with petroleum? Bear in mind, however, that you'll have to work especially hard at building consumer expectations if your name has nothing to do with your product.
9. Make new words.
Sometimes there just isn't the Internet room available; all the best words in the category are taken, with only uninspiring or limiting words left. In such cases, creating a new word may be the answer. Expedia isn't in the dictionary, but with a bit of brand-building support, it can easily become recognized as a site to aid the business traveler. When naming Hewlett-Packard's new test and measurement spinoff, we eventually settled on Agilent, to represent a company that needs to remain agile and responsive to its market to survive. It's an invented word, but with the right marketing support, people get it.
10. Ensure that your brand promise equates with your ability to deliver.That's the best overall advice we can give. Any site with a memorable and differentiated name will pull in browsers. But if the content or architecture disappoints or your follow-up service fails to deliver, then no amount of memorability will help you.
Clay Timon (clay_timon@landor.com) is CEO of Landor Associates, a branding and design consultancy.
NAMING COMPANIES
Catchword www.catch-word.com
Location: Oakland, Calif.
Named: Chemdex, Petopia.com, On-Link Technologies
Lexicon Branding
www.lexicon-branding.com
Location: Sausalito and Menlo Park, Calif. Named: Apple PowerBook, BlackBerry, Liberate
Metaphor Name Consultants
www.metaphorname.com
Location: San Francisco Named: Apple eMate, ClearStation, Excite, Exodus Communications
NameLab
www.namelab.com
Location: San Francisco Named: Compaq Computer, NetJet, Webvan.com
NameTrade
www.nametrade.com
Location: San Jose, Calif., Portland, Ore., Los Angeles, Philadelphia
Named: Centric Software, Entango, EurOK
The Science Of Securing Office Space
Six things to consider before signing a lease.
By Dan Gonzalez
dan_gonzalez@staubach.com
It may not get much press, but real estate is the second-highest cost for most companies. Decisions based only on short-term needs ("Let's get this space now-it's pretty cheap!") can cripple long-term growth. To avoid this ready-fire-aim thinking, follow these steps to make sure any potential office space supports your startup's long-term vision.
Develop benchmarks
Benchmarks will help you set cost controls. How are competitors using their space now, and how will they in the future? How much space do they allocate per employee? This can range from 125 square feet per person for a call center operation to an average of 200 to 250 square feet per person for an open plan layout with work stations. What are they paying per person per square foot? Most of the renowned technology markets have a shortage of space, so rent costs may not be easily negotiable (see "The Going Rate," p158).
Nonetheless, rent costs may not be the most important factor in relocation for startups. Consider two buildings, one in a suburban area with a lower cost per square foot, and one in an urban location with a higher cost: If the lower-cost site is not as accessible to customers and staff, does not convey the impression of a dynamic company, and does not offer room for expansion, then the lower cost becomes insignificant.
Make your real estate support your business goals
If going public or getting acquired is your exit strategy, your balance sheet should have as few liabilities as possible. This means you shouldn't try to purchase your own building. A surprising number of startups think it is better to "build equity" in the business, but this instead may tell investors and suitors that you have debt that needs to be serviced.
Look for buildings with local landlords
Many buildings are owned by pension funds, real estate investment trusts, and other conglomerates. The primary goal of these landlords is to increase the value of the asset, so they generally have less motivation to help a local startup with fluid needs such as expandable space. Local landlords offer a greater chance for personal and regular interaction, and they may be more willing to negotiate for concessions such as a renovation.
Still, even a local landlord must be comfortable with your startup status and ability to make payments. You may need to offer a letter of credit, a personal guarantee, or an annual escalation in rent in exchange for a lower security deposit. Have these tools ready and begin the process long before you need the space.
Know your technology needs
Fiber-optic networks and telecommunications providers are critical for many startups, so be wary of "riser management." (Risers are the conduits that carry wires from floor to floor and to each tenant's suite.) Companies such as Hotwire, Allied Riser, and OnSite Access pay building owners for access to these risers, then sell their services to the tenants. Landlords, therefore, can limit access to a few providers, so know the policy on this and whether you have roof rights for antennas and satellite dishes.
If mission-critical systems will go into the new space, know how dependable the power source is. Check with the local utility to see how often the power goes out, and determine whether a backup generator is available. Also, find out if the suite has enough power. Today's tenants need about six to eight watts per square foot.
Since startups often operate during non-traditional business hours, they'll have to pay extra for heating, ventilation, and air conditioning (HVAC). Some hours may be complimentary, but there should be caps on the additional costs specified in the lease. Additional HVAC could, based on the location, be anywhere from $25 per hour to several hundred dollars. So if you occupy 10,000 square feet and use an average of two hours additional HVAC five days a week, then you are paying an additional $2.40 per square foot per year, or $2,000 a month.
Negotiate for a lease that gives maximum flexibility
For a startup that expects to double in size in one or two years, signing a five- or 10-year lease is a surefire way to put a kink into the growth plan. If you can't get an ideal lease term, be sure to include clauses for subleasing, termination and renewal.
Subleasing part of your space now is a great way to ensure you get the extra space you will need later, and it boosts cash flow. The best sublease clauses have no conditions, such as having the landlord approve the subtenant. Termination clauses let you out of the lease if the landlord can't provide expansion space, for example. An option to renew a lease is also critical, especially in low-vacancy markets where a landlord could otherwise force you to leave and lease the space at a higher rate. Have parameters specified in the clause so rates can't be doubled or tripled.
Another critical area in all leases is the default section. Landlords can use this to cite tenants for infractions and make them move. Penalty language should be limited to quantifiable damages such as nonpayment of rent or failure to carry insurance, not subjective offenses such as leaving lights on or parking in a reserved spot. And there should be a reasonable time allowance to remedy the defaults.
Don't try this by yourself
You're probably not an expert at the accounting, legal, and real estate needs of the business. Tenants should use a team of advisers who know the dynamics of startup technology companies and the real estate market. These should include executives in real estate, architecture, construction, and data/telecommunication. Your real estate advisers ideally should not have business relationships with landlords; some do, and there can be a clear conflict of interest if they are negotiating with a landlord on behalf of a startup.
Dan Gonzalez (dan_gonzalez@staubach.com) is vice president of the Technology Practice with The Staubach Company, a commercial real-estate strategy and services firm in Vienna, Va.
DID YOU KNOW?
From "High Tech Start Up" by John L. Nesheim. (c)1997, 2000 by John L. Nesheim. Reprinted by permission of The Free Press, an imprint of Simon & Schuster.
Dancing With a Partner
The many advantages of establishing a keiretsu.
By Wendy Lea
wlea@ontarget.com
To succeed in today's ultra-competitive, global, digital marketplace, you need to design and implement a multichannel strategy supported by a variety of types of partners. The partnerships you strike may be for market awareness, sales assistance, implementation, support, financial, or logistics services. And you'll undoubtedly weave in new partners and weed out old ones throughout your growth continuum. But it's important to begin looking for partnerships early in your company's development.
The rationale for establishing partnerships at the early stages of your company's development is ultimately your bottom line: You could take two months, three months, or six months to do all your own market research, Website building, marketing, branding, and so on before you launch and begin generating some revenue. But if your business plan calls for revenue of $100,000 a month, delaying launch while you develop all the operations yourself will cost you dearly. Why would you lose this potential revenue when you can partner with experts to accelerate your time to market?
Where do you start? Partnerships for dot-com startups fall into two general categories: those that help you gain rapid market awareness ("standing on the shoulders of giants"), and those that assist in actual operations-i.e., customer service, implementation, logistics, shipping/ transportation, reselling, etc. The first step in determining the most appropriate partnerships is defining what your business needs now. Do you primarily need exposure and market cachet, or do you need specialized capabilities that augment-and further differentiate-your core offering?
The best way to make this decision is to be very clear on what you want to provide to your customers. For example, if you're an online real estate services provider, is your competitive differentiator to be the most comprehensive source of photo-based nationwide listings, or do you also want to expand your Web offerings to include contact information for local real estate agents, mortgage lending services, and moving companies?
Next, you need to understand how your customers want to buy your product or service. If you're a discount cosmetics supplier, you may be able to conduct all your business online, assuming you can generate credible market awareness through a partnership with Women.com, iVillage.com, or another female-focused portal. But if you're a provider of aftermarket auto equipment that sells to both consumers and auto supply stores, you'll need to employ a variety of routes to market. You may be able to sell to consumers through your Website. But a telephone-sales campaign may be the best way to target local auto supply stores, while securing a contract with a national chain likely calls for a direct sales force.
For the latter example, you may need to partner with a telemarketing organization to work the local stores, team with a Web integrator to design and manage your Website, and even align with an independent rep firm for direct sales until you have your own direct sales force in place.
How to recruit
Once you've defined the areas in which you need help, you can begin to recruit partners. Start by asking for recommendations from your VC partner, as well as monitoring with whom your competition is partnering. Your partner choices will primarily come from those companies that can round out your offering. The clearer you are with your own core value/competency, the easier it will be to find relevant partners. Going back to the online real estate example, if you serve the commercial market you may want to feature an in-office landscape artist, an executive limousine company and a "personal buyer service" on your site.
Once you've set your sights on a partner prospect, you have to develop and deliver a mutually advantageous value proposition. This will define the business value you bring to your partner, your partner brings to you, and that you, together, will bring to the marketplace. The value proposition will include specifics on the objectives of the partnership, as well as its uniqueness or differentiator.
Formalizing the contract
Once you've sold your value proposition to a partner, formalize the agreement. Handshake arrangements can be dangerous for a startup. Whenever possible, contract initially for a level of exclusivity. This can be highly attractive for your partner as it ties you solely to them in the given space, and can be highly advantageous for you as it gives you more natural "skin in the game."
To avoid diluting your brand or getting caught in an unsuccessful partnership, make sure you spell out the expectations of both organizations (revenue, responsibilities, etc.), and set the contract for a specific period of time. Entering into a committed, short-term "memorandum of understanding" will give you the opportunity to gauge the effectiveness of the partnership, evaluate its worth to you, and determine whether your company has grown past the point of needing this particular partner.
Things to worry about
While partnerships are a critical element of any startup's success, there are several risk factors you need to keep in mind. To avoid brand dilution, focus on a small number of partners for a pre-set length of time, and engage in your own focused incremental sales efforts. Moreover, you should review your company's status on a regular basis, say every two months. As your business will be constantly evolving, your partnering needs-versus your ability to go it alone-will be also be evolving, and so should your strategy. You will eventually outgrow certain partners, and so you must be ready to shift your strategy when necessary.
Next, there's the question of cultural compatibility. This is highly important. If your MO is dramatically different than that of your partner, you risk sending the wrong messages to your target customers.
Third, you must ink partnership agreements that contain highly detailed expectations. It's your business, and ultimately you are responsible for its success or failure. Thus, you must be particular in the wording and management of all your partnerships. You should build exit clauses into your partnering agreements, which can be unwinding agreements for lack of performance, or immediate termination clauses for blatant lack of compliance. Regardless of how harsh or softly they're stated, you need to have them for your safety.
Wendy Lea (wlea@ontarget.com) is vice president of consulting services for OnTarget, a global consultancy.
When To Outsource
Trying to hire Web designers and ecommerce gurus? Don't bother just yet. Outsource the development of your site to save time and headaches.
By Rick Barker and Michael Sippey
rbarker@viant.com, msippey@viant.com
More and more, Internet startups are turning to consulting firms to help bring their concept to market quickly. Even some of the oldest names in consulting-from McKinsey & Company to Andersen Consulting-now are announcing plans to offer services to Internet startups. And there's certainly no shortage of Web-only consulting firms. Our company, Viant, represents this new breed of consulting firms that combine strategy, creative, and technology expertise to build digital businesses.
Consultants can help entrepreneurs in many ways. One of the most obvious is in the fields of Web design and technology outsourcing. The amount of valuable time it takes these days to interview and hire Web designers, developers, and implementers can be crippling for a new company. Making the decision to outsource frees up your team to focus on other mission critical operations, and can often get you the expertise and sheer number of bodies working on your project that you couldn't afford on your own.
Consultants aren't for everyone, however. They build complex systems at Web speed, and once you sign on with them, you'll need to follow their development process. Some entrepreneurs have allergic reactions to detailed work plans. Others cringe at "consultant speak." There can also be control issues, as some startups strive for complete control over developing their strategy, brand, and systems.
If you decide to go the outsource route, make sure the firm you choose understands the idiosyncrasies of Internet startups. Implementing an enterprise resource-planning system for a Fortune 500 company and building a new dot-com site require very different sets of skills. Look for years of Web experience and a track record of quality work. Did the firm build a flat HTML site for a lemonade stand or a complex retail ecommerce site? Talk to some of the firm's clients. What was their experience like?
Your site, your business
Remember, you're not just building a site, you're building a business. The right outsourcing firm can help you define competitive strategy, business processes, operating models, and revenue models. And be sure to check their value web: If they have the right connections, they can help you form key relationships with funding sources, technology vendors, potential business partners, and even customers.
While you're out scrutinizing potential partners, expect to be scrutinized right back. Because of the flood of money chasing new ventures, it's currently a seller's market. The top Web consultants can choose their clients instead of vice versa. Having your first round of funding in the bag is a big plus, since it demonstrates interest from investors in both your business model and management team. At Viant, we also screen for culture fit and realistic expectations regarding cost, scope, and development timeframes. Everyone wants to be the next Amazon, but it's important to remember that Amazon wasn't built in a year, let alone a day.
Finally, keep in mind that working with your consultants as a partner-instead of as a vendor-will help keep your day-to-day interactions healthy and productive. Here are five guidelines to help you find the right outsourcing firm and create a successful partnership:
Be prepared to spend money or provide equity. If you choose a top-tier consultant, expect to spend $3 million to $7 million to build your business and launch your site. You may want to have your consultant take equity to reduce your cash burden and better align incentives.
Formalize the deliverables. Work together to craft a detailed work plan for your project. Both sides need to commit to specific deliverables within specific time frames, and then have the discipline to stick to the plan. Agree on acceptance criteria up front to avoid problems later on.
Expect to collaborate. Expect to work side-by-side when building your business. At Viant, we often incubate startup clients since there's no better way to collaborate than to live with one another.
Plan for independence. Once you're working with your partner, it's easy to forget that you have to build your own team. Start hiring early and put a knowledge-transfer plan in place so that the information you need to maintain and extend your business after launch isn't left in the heads of your consultants.
Exit gracefully. When it's time to cut the umbilical cord, do it with style. Work with your partner on a joint marketing plan. Announce and celebrate the successful launch of your business. Lastly, work to maintain a long-term relationship; your consultants undoubtedly know your business, brand, and code base better than anyone else.
Rick Barker (rbarker@viant.com) and Michael Sippey (msippey@viant.com) are client partners at Viant.
Free Online Business Tools and Services
There's no shortage of Web designers and consultants who will gladly charge you for assistance in each phase of the business-building process. But dig around a little and you can find many business services, tools, and advice for free on the Web. Here are some good places to start:
Advice and services
www.bcentral.com
Free ecommerce sites
www.econgo.com, www.bigstep.com
Free Webmaster tools
www.freestart.net/webmaster.htm
Website design advice
www.wilsonweb.com/articles/12design.htm
Free JavaScript chat
www.humanclick.com
Entrepreneurial advice
edge.lowe.org
BizProWeb
www.bizproweb.com
EntreWorld
www.entreworld.org
Garage.com Forums
www.garage.com/forums
InfoWorth
www.infoworth.com
CONSULTING/WEB DESIGN FIRMS
Event Zero
www.eventzero.com
Location: Boston, San Francisco
Clients: edu.com, MyHelpdesk.com, myteam.com
Fort Point Partners
www.fortpoint.com
Location: San Francisco, New York
Clients: E*Trade, Intel, J.Crew
Razorfish
www.razorfish.com
Location: Boston, Los Angeles, New York, San Francisco
Clients: America Online, NASA, PricewaterhouseCoopers
Scient
www.scient.com
Location: Austin, Texas; Boston; Chicago; Dallas; New York; San Francisco
Clients: homebid.com, PlanetRx, Realtor.com
Viant
www.viant.com
Location: Boston, Chicago, Dallas,
Los Angeles, New York, San Francisco
Clients: Charles Schwab, Della.com, General Motors
Going For Round Two
Need more money? Here's what you need to know.
By Todd Dagres
todd@battery.com
The first rule of raising your second round of financing is to do it before you really need to. The last thing you want is to be desperate and in a hurry because you can't make payroll or can't spend the money that you need to get to market. While entrepreneurs rarely plan to close the next round just in time, they often underestimate the amount of time it will take to get the job done.
The second rule is to raise more than you need. Rainy days tend to come when you least want them and you don't want to get the tin cup out too soon after the last round. Of course, more financing means extra dilution, but it may be the best dilution you ever suffer.
Another rule of thumb I recommend is to go for value, not just valuation. Each time you raise money is a branding event. Try to achieve a balance between value and valuation with each round.
If you want to make it easier to raise money in the next round, tie the fundraising to an event or milestone. It's important to give investors a sense that there has been accomplishment and momentum is building. If there is no clear event at the time you will need money, create one. Entering beta, a strategic partnership, a new customer, or hiring a senior executive are all events that will facilitate the fundraising process.
Finally, do your homework before you start looking for new money. Know which potential investors are best suited for you. Know what other deals like yours are going through in terms of valuation, amount of capital raised, etc.
Where to go
There are many sources of money for your next round of funding, and the obvious option is more venture capital. If your company is in need of an active, "value-add" investor, the VC route is most common. For companies that require money and little else, the mezzanine funds and equity funds that like to buy pre-IPO stock are plentiful these days. The amount of due diligence they perform is low and the valuation is often high, but don't expect much heavy lifting from them.
Another option that is becoming more popular is the corporate investor. Companies such as Cisco Systems, Intel, and others are committing great sums of money to investments in startups. One caveat on the corporate investor, however: Unlike VCs and equity funds, they have another agenda besides making money. They are also hedging internal bets and trying to stake out claims in new markets. An investment from a corporation may mark your company and make it more difficult to work with companies that compete with your corporate partner.
Fundraising can be an unpleasant task for a startup, but it is one of the most important factors for success. Companies with a hefty war chest can survive the tough times and use their capital base as a competitive weapon.
Todd Dagres (todd@battery.com) is a general partner at Battery Ventures in Wellesley, Mass.
Factors for second-round success
Knowing what investors value is the first step in convincing them you have what they want. Here are nine key factors for success in fundraising. — TD
Team: How strong and complete is your team?
Market segment opportunity: How hot is the market in terms of size, growth, and business conditions?
Market position: Can you be one of the leaders if not the leader?
Prior investors: How strong is your investor group? Follow-on investors bet on the jockey as well as the horse.
Customers: What is the quality level of your customers?
Technology: How much risk is there in the technology and do you have an advantage over the other companies?
Partnerships: Do you have any partnerships that endorse your company and provide a competitive advantage?
Buzz: Does your company have buzz? Have you built a perception that you are hot?
Market conditions: Is the market in a period of expansion, flux, or contraction?
© 2000 Imagine Media Inc.