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Marketing to Venture
Capitalists - Part II
"Target the
type of VC you want, and demonstrate traction with target customers."
from the desk of Peter Fillmore
January 2001
How do you equip your tech startup with strong messages to venture
capitalists? I talked with Andrew Waitman, President & CEO of Celtic
House International. Celtic House has established a reputation as one
of Canada's most successful venture capital firms. Based in Kanata, they
have funded successes including Abatis Systems (acquired by Redback
Networks), Pixstream (acquired by Cisco) and Extreme Packet
Devices (acquired by PMC-Sierra).
We started by discussing the tendency of VCs, at venture forums, to
gravitate towards certain opportunities, ignoring many others. "Humans are
like geese, they tend to move in flocks, so they all like a hot technology
space, or a fad," he commented, "The presence of a fad moderates the risk,
because it increases the chance that an entrepreneur's market will exist."
Here are some more tips for getting investor attention:
Assess your Risk/Reward scenario - VC interest levels are based on
their views of the "Risk/Reward" matrix. The biggest paybacks usually come
from high risk, high reward start-ups, but a VC will prefer low risk, high
reward investments. Certainly they are not interested in anything with low
reward, or even modest rewards. For example, a venture that plans to
create profits of $5 million/yr within five years may not cut it. If a $5
million investment were required, the opportunity would be fine if all
targets are achieved. But, as Waitman commented, "The risk is often that
revenues and profits don't grow as planned, the size of investment to
achieve target profit levels may turn out to be considerably higher, and
the sustainability of the margins due to competitive pressure will always
be in question."
Consider how investors view your "Risk" - "VCs need to assess three
primary risks - execution risk, technology risk, and market risk," Waitman
commented. Entrepreneurs must understand these, and be able to express
them in a clear and simple way. He added, "We look for people with tough
ideas, hard for competitors to imitate." This reduces market risk. Early
customers and partners are also key - try to find a big company who can
use your product as well as sell it to their customer base, thus reducing
market risk and also the cost of customer acquisition.
Consider alternate scenarios to increase "Reward" - Many VCs prefer
infrastructure technologies - many applications will benefit from them, so
infrastructure markets are usually bigger than niche markets. If possible,
re-consider your key strengths, and rethink how you define your space.
Seek investors who know your market space - "Generally, if you're
pushing a concept that is not in a hot space, find a VC who understands
that industry space," said Waitman, "If you are talking to somebody
outside your space, they see a high risk." Investors are always asking,
"Will your market space actually emerge as a growth market?" It often
takes a good deal of technical and application expertise to assess the
potential rewards of a new market, so talk to people who live there,
including early customers. If you can't attract a VC you should consider
the path taken by JDS Fitel (now JDS Uniphase). They had difficulty
finding VC money in the early years, but got an equity investment from
Furakawa, a major customer in Japan.
Include an investor message component in your PR campaign -
Industry analysts and VCs watch the media, so figure out who the relevant
thought leaders are in your space, and approach them with your "what's
new" story, and carefully stated investment messages. "At a VC forum,
target the type of VC you want," commented Waitman, "and demonstrate
traction with target customers." The "target customer" issue is critical
with a space that is not hot. Close some key orders - this has more impact
than all the market research and growth charts.
Consider key milestones and timing - Timing of your ramp-up plan is
going to be evaluated; first, what evidence do you have that the market is
ready? Next, how quickly do you get your business model to a sustainable
level? And finally, when do you get to breakeven profitability? "The issue
of getting the business model to a sustainable level is critical," said
Waitman, "investors will be looking for your plans and abilities to attain
critical market share, perceived leadership, and momentum." Your marketing
plans should cover 4 key audiences mentioned by Waitman, "Talent - can you
convince people to join the company? For investors, can you prove the high
value of your unique strengths? With analysts, can you get positive
coverage? And with customers, can you get the key accounts and
testimonials you need in the early stages?" Having good answers ready will
increase your credibility, and your success at landing the right
investors.
Marketing to Venture Capitalists - Part I
Your comments, questions, and suggestions for future articles are welcome
fillmore@westpark.com
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