One of the interesting things about fundraising is the different perspectives you get from potential investors. If they spend enough time to really understand what you are trying to do, they offer great feedback, suggestions, and advice. They also sometimes ask a tough question or two.
I officially started the fundraising process a couple of weeks ago and have had a couple of meetings and a few more set up in the coming weeks. Since many of these angel investors are really busy, getting on their calendar can take weeks!
One question I was asked had to do with the cost of customer acquisition. It’s so hard to tell what that might be given the uncertainty and newness of many business concepts out there (including mine) today. I searched and searched and oddly only found very dated ancient info (i.e., 1999 – 2001) figures for sites like Amazon.com. At a high-level, the cost of customer acquisition is how much it costs to get a customer/visitor to your site. My guess is for sites with successful viral uptake like facebook the cost is in the cents (i.e. [total marketing and some R&D costs]/number of unique visitors). On the other hand I’ve heard that customer acquisition costs for companies like Vonage are in the hundreds of dollars. Anyone who has seen their mailers and expensive TV commercials can see why that number is so high. Last I heard I think it takes them at least 2 years to break-even on each customer they get.
I even had the MBA student who helped me create the financial model search his resources and no such luck. I would be happy to get information on even what the amount that a magazine like O Magazine or Pregnancy Magazine spends getting one customer to sign up. You’d think that as much has been written about facebook, that their cost per visitor would be somewhere on the Internet, but for some strange reason that information is not readily available. Go figure!
In my quest, I happened upon the following links that might be useful for any other entrepreneurs looking for the same information.
Calculating Customer Acquisition Costs (an online calculator)
Customer Retention and Acquisition (definition and 1999 info on Amazon.com)
On Measuring The Cost of Customer Acquisition (a 1999 Entrepreneur.com article)
There may not be a satisfactory answer (or more likely I don’t have access to the money or resources to help me find it) but at least being aware that there could be an answer is probably not a bad thing. I ended up backing into some numbers using the information in our financial model which to me, the ever optimistic entrepreneur, seemed reasonable enough. 🙂
UPDATE: This post was re-published on Found|Read here. Check it out to see additional comments by their readers.
Author: Aruni |
Filed under: angels,
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Several readers who saw my Fundraising Toolkit post have asked me about my experience raising funds from angels and VCs for my first entrepreneurial endeavor. We raised about $15 million of which $3.5 million was from angels or what I would call boutique VC firms (i.e. a group of angels under one investment roof). Keep in mind that was all before the bubble burst back in 2001. Here are some of my observations based on my experience and from stories I’ve heard from other entrepreneurs.
Angels
They tend to invest their own money and reputation in earlier stage companies that can benefit not only from dollars but also their advice and contacts.
The really good ones (yes, there are fallen bad ones) have built their own businesses from the ground up. They have a great appreciation of what it takes to build a business and are creative with solutions to the inevitable unexpected issues that arise.
They tend to get their ‘hands dirty.’ Our lead angel investor for my first company was Marc Seriff, founding CTO of America Online. You may recall that in 1999/2000 talent was scarce and the Internet bubble was close to its biggest. Marc actually manned a career fair booth that we had at The University of Texas at Austin. He also participated in the interview process of finding great developers! Needless to say we found some good people. Since Marc was our lead for our first round, he even assured our vendors that he would make sure (i.e. personally guarantee) they got paid if for some reason we couldn’t close the round!
They tend to bring their friends along for the ride. Marc and another of our angel investors, Jack Baum, brought in their friends and contacts making the fundraising process a little bit easier. Jack also introduced us to the owners of our very first big paying customer who ended up doing a nationwide rollout with us. I remember framing the check! He and his partner Steve Winter brought in two of our three venture investors. The two good ones! Steve even served as our interim-CEO between the time we parted ways with the first CEO we hired to replace me until we found the next one.
They don’t necessarily have to invest money to be an angel. Richard Benkendorf was one of our advisors who introduced us to our first key customer in the Coca-Cola bottling system that helped us achieve our first $1 million in revenue! We framed that check too!
When the dollars needed get big for future financing rounds, angel investors usually voluntarily step back or can’t provide the needed growth capital.
Some of them may not have sat on a Board or been involved in building their own businesses making some board meetings interesting to say the least. In other words, an angel who made his/her money from their own business versus someone who came in later at Google, Microsoft, or Dell have different perspectives and experiences.
Venture Capitalists
They tend to invest in later stage companies with some revenue, product completed, and market traction. They seem to like to come in after an initial angel round of investment (if the deal structure is not too messed up).
The really good ones (yes there are bad VCs – in case you haven’t heard) have had repeated success with other portfolio companies, have built their own businesses, and come with a big rolodex of contacts and partners to help you cross some of the early hurdles. One of our venture investors, SAP Ventures, led by Jeff Nolan who blogs at Venture Chronicles (the only former investor I found who blogs publicly) introduced us to departments within SAP who were targeting the same customers that we were. He also gave me a copy of The Monk and The Riddle by Randy Komisar (see below for book link) that was a great read at a time when I think he sensed I was no longer enjoying the journey.
They tend to be more bankers/financiers than operating (i.e., built their own business) people. They tend to look at a business with a black/white eye on numbers and how fast they can get their money plus a nice return on their money out.
The good ones will often bring along investment partners in what is called a syndicate. A few VC firms who have worked together before will join forces to fund a deal which makes life easier for the founders because they can go back to building the business versus fundraising sooner.
They seem to use and apply a formula that they have achieved financial success with before which often means replacing the founding CEO or other key founders with people they have worked with many times before. If more often than not something has worked for them with a portfolio company in the past, they’ll apply the same logic to future deals companies.
They are investing other people’s money (i.e. their limited partner’s money – insurance companies, wealthy individuals, other corporations) and if they perform well those people will give them more money to invest. In other words they are risking more than just their finances and reputations, they are risking other people’s finances and reputations as well.
Who To Choose?
Personally, I think it all comes down to the investor fit and the stage of the start-up game you are in. It’s definitely better to have people who have built businesses on your side. It’s also good to have people who have backed high-growth businesses if you plan to IPO or sell to an established business in the near future.
Most technology start-ups don’t make it big. It’s a unique combination of talent, dedication, luck, timing, and great people that make the difference between the companies who become household names and those who shut down on the wayside or find another comfortable existence. We often forget that it is more than OK to start a good profitable business that provides value to your local community. If you want to play with venture capitalists, then you need to aim for the ‘household name’ category like Google or Yahoo! even if chances are high you won’t make it to an IPO.
My biggest learning was how important it was to be able to communicate with your investors openly and honestly. Trust your gut and if they respect and trust you as a person and you respect and trust them, it will be much easier to weather the inevitable storms. It’s easy to take money for money’s sake but in the end it can end up being more costly than what it was worth.
As Ben Yoskovitz says in his Startup CEO School of Hard Knocks post, you must have fun! When you are no longer enjoying the journey, take a break and look around to make sure you are doing what you should be doing. Make sure you are in the right place at the right time for yourself and don’t be afraid to make changes.
Author: Aruni |
Filed under: angels,
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marc seriff |
Tags: angel investors,
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jeff nolan,
marc seriff,
randy komisar,
richard benkendorf,
steve wintor,
the monk and the riddle,
venture capitalists,
Yahoo! |
15 Comments »
Following on my Other People’s Money – The Hunt Begins post, I thought it might be interesting to share what I will be putting in my Fundraising Toolkit. Check out The Entrepreneurial 7 Year Itch to get some additional background.
I plan to raise seed financing from angel investors for Babble Soft, and here’s what I will have in my toolkit.
An Executive Summary. Thankfully people have moved away from the 35 to 40 page business plans that used to be required when I raised money for my first company. Now it’s easier to get your foot in the door with a 5 to 7 page summary. If they are interested, they will ask for additional information. In a typical Executive Summary you will see sections on:
- The Company
- The Problem
- The Solution (i.e., Your Products)
- The Market (including Competitors)
- The People
- The Numbers (i.e., the Financial Projections).
Financial Projections. In my opinion, creating Financial Projections for an Internet startup is often an exercise in futility that shows you have an idea of how you will make money. Most experienced technology investors know that predicting the future is a crazy process at best especially when you are starting from ground zero and success primarily depends on many viral factors. Financial projections for IBM are much different than financial projections for an Internet start-up. The assumptions you make are the most important part of the model as they give the investor an idea of the homework you have done on the market.
Some venture capitalists like high profile Fred Wilson (a.k.a. A VC in NYC) of Union Square Ventures go as far to say that sometimes you can wait to scale before figuring out and executing your business model when describing his stance on Twitter’s lack of a current business model.
Since Babble Soft is not Twitter, I’m not already a gazillionaire, and I have a million things to do, I have a sharp MBA student, Anand Balasubramanian, helping me create an Advertising and Subscription based model. I love energetic, rock star, cheap, student help! He has done a great job so far building a simple, easy to understand financial model for me.
Visuals. Since I’ll be raising funds for products that do not exist yet, I have engaged a great local design, user experience, and information architecture firm, Projekt202, to create a few mock-up pages illustrating both the web and mobile components of our new applications. They seem as excited about the vision as I am and are taking on some of the financial risk with me. It makes me so happy when I find people who get what I’m trying to do! I’ll also have a demo account of Baby Insights and Baby Say Cheese ready to log in to demonstrate our existing applications.
An Investor Leads List. However you choose to keep track of your calls, meetings, and referrals it’s important to do so. I have met entrepreneurs who want to raise funds who aren’t organized about the process and end up looking a bit flighty. Unfortunately the investors are allowed to be flighty but they usually don’t tolerate too much flightiness in entrepreneurs. Remember: “She who has the gold makes the rules.” After a while it’s easy to forget what you promised to get to whom and who referred you to whom. It’s important to remember at what stage of the investing dance you are in with each potential investor. On this spreadsheet I plan to keep track of:
- Name
- Contact Information
- Professional Background
- Who Referred Them to Me
- Investment History
- Typical Investment Size
- What Items They Need From Me, and
- Personal Assessment on the likelihood they will invest.
Passion Tempered With Wits. I think that often the big thing that can swing an investor, especially an angel investor who has been in your shoes before when building his/her company is your passion. Why are you doing this when there are much easier ways to make a buck? What will keep you going? What excites you about the business? I am passionate about helping new parents and caregivers connect and find answers. I am passionate about building a business. I am passionate about finding great people to work with. If that passion is tempered with some logical thinking, that’s a big huge ‘ole plus! All of us entrepreneurs are a bit crazy at times so I just hope I don’t lose my wits in the middle of an investor pitch!
Since I am still working on everything above except for my passion which has recently been reignited, I’ve got a lot to do before the meetings I already have set up with potential investors in the next couple of months. If you have suggestions on other things I should have in my fundraising toolkit, let me know by leaving a comment below. It’s been a while since I have raised money and I’m always open to learning new things.
Join me for the journey. Subscribe to the blog and hold on to your stomachs, it’s bound to be a scary roller coaster ride at times!
UPDATE Jan 12, 2007: Found|Read republished this very post on their blog and called it My Funding Toolkit. Check out that post for some great comments! They have many more readers than my blog currently does so I’m delighted that they chose to share it with their readers!
Author: Aruni |
Filed under: angels,
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venture capital |
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raising funds |
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If you are a regular reader of my blog you have no doubt caught on to the fact that I have begun the fundraising effort for Babble Soft. If you are new you might want to check out The Entrepreneurial 7 Year Itch to get some background.
I’m currently working on creating a business plan comprehensive executive summary (who has time to write read a 30-50 page business plan?!?), the financial assumptions and projections (with assistance from an MBA student), creating screen mock-ups of our new applications (with Projekt202, a fabulous local design company), and setting up meetings with potential angel investors. This process is an ongoing, reiterative process that can sometimes make you want to pull your hair out. As soon as you type the last character on your plan, it is outdated because something has changed somewhere that you may or may not know about. Strange but true.
While doing all that, I also need to finish software testing of our new Baby Insights mobile application, learn more social media, make SEO changes, make sales, establish partnerships, and make progress toward meeting my 2008 New Year’s Goals! Hmmm something might have to give here…
Stay tuned for more about my journey to persuade people to part with their money in exchange for hopefully a lot more money at some time in the future…
Author: Aruni |
Filed under: angels,
babble soft,
entrepreneurship,
fundraising |
Tags: angel investors,
babble soft,
entrepreneurship,
equity financing,
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high tech startup,
start up financing |
4 Comments »
I’ve seen companies doing soft launches of software products which makes me wonder what a hard launch is. So far the main difference I’ve noticed is that the official press release about the new application or new feature doesn’t go out until after the ‘hard’ launch. My guess is that a lot of bug fixing is going on between soft and hard launch.
So, I’m happy/thrilled/ecstatic to report that we just soft launched our new sleep and immunization recording features of Baby Insights Web! We are still working on some development issues on Baby Insights Mobile and plan to hard launch that app in January 2008. The mobile app is not web-based (yet) so we don’t have the luxury of a soft launch.
Babble Soft is offering FREE 3 month gift subscriptions valued at $19.95 until March 15, 2007 to anyone who discovers a software bug in our NEW Baby Sleep and Immunization features of Baby Insights Web. Gifts are transferrable! Sign up for your FREE account today. Happy hunting!
So far the soft launch has been uneventful (i.e., no major bugs), which is nice. Thanks go out to our development team Cressanda and especially our project manager. I recommend them highly. The smoothness of the soft launch is also because we don’t have thousands upon thousands hundreds upon hundreds of users yet. I’m banking on our foray into SEO to help get us there. I mean if the “right people” (a.k.a. target market) don’t know we exist; it’s not surprising that we don’t have thousands of users yet. Even viral marketing takes a bunch of upfront work because you have to get to the right early adopters who have major Internet influence. I need to figure out how to do a video and get it in YouTube.
Given the fact that over 4 million babies are born in the US each year then include Australia, Canada, Europe, Japan and other Internet savvy countries, I’m anticipating that once those new parents and nannies find out about us, the floodgates will open. Babies and floodgates…not sure if the analogy works but I think you get the point. 🙂
I’ve been spending my time the last couple of days doing website updates to reflect the new features. And I’m working on pulling the pieces together of a business plan for some potential angel investor meetings that I have scheduled for early next year. If you know an angel investor (or you happen to be one) who likes the baby/new parent/web application/social networking space, please send them my way! The applications we have now are only the tip of the colossal iceberg.
Now for a short SEO break:
Whether you need breastfeeding support, are excitedly following your pregnancy week by week, are experiencing baby sleep issues, or are already under way creating your baby’s first year album, Babble Soft offers unique, easy-to-use Web and Mobile software solutions that improve communication between caregivers about baby’s and mom’s schedules.
Baby Insights helps caregivers keep track of baby’s breast & bottle feeding, sleep periods, diaper changes, medicine doses, and immunization records, as well as mom’s breastfeeding, pumping and medicine intake. Having important information stored in one location makes communication between parents, their nanny, babysitters, grandparents, or doctors seamless and reliable and gives new parents insight into their baby’s patterns to help with crucial baby care decisions. Baby Say Cheese lets you create a wonderful online baby’s first year photo album with milestones and family tree that you can share with friends and family.
If you are interested in reading about how I cope with manage software launches, fundraising, and SEO consider subscribing to this blog’s feed. If you are an entrepreneur, it will be worth your while…even if I crash and burn….which I won’t…because I said so, that’s why. Now go play with your Power Rangers. Sigh.
Author: Aruni |
Filed under: baby insights,
baby say cheese,
baby sleep,
entrepreneur,
entrepreneurship,
fundraising,
sleep,
technology |
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seo,
soft launch,
software |
3 Comments »
First off, if you haven’t heard Al Gore is now a partner at Silicon Valley venture firm, Kleiner, Perkins. Kleiner is the most prestigious venture firm in Silicon Valley. He joined to help guide their investments in companies that are combating global warming. I have to really hand it to Al Gore for totally reinventing himself from VP of the United States to candidate for President of the US to champion for the planet! His parents must be mighty proud!
After writing my post on Fred Wilson on Venture Capital Fund Performance, I have happened upon a few more interesting posts on the subject of fundraising.
Wendy Piersall made me aware of 7 Things No One Tells You About Raising Venture Capital Financing by Ben Yoskovitz.
From Ben’s blog I found 7 Steps to Land and Leverage an Angel Investor by Carleen Hawn.
Here’s a chart listing their lucky number 7 items:
| 7 Things No One Tells You About Raising Venture Capital Financing |
7 Steps to Land and Leverage an Angel Investor |
|
|
| Signing a term sheet is only step one. |
Step 1: Identify yourself. |
| It might not be worth negotiating the finer points of the deal at the term sheet stage. |
Step 2: Identify the right angel |
| Due diligence is an “interesting” process. |
Step 3: Your company’s fundamentals. |
| The paperwork is extremely detailed and extensive. |
Step 4: Valuation. |
| Most of the deal focuses on negative details. |
Step 5: Structuring the deal. |
| You pay all the legal bills. |
Step 6: Negotiation. (Psst!: You don’t need to do it!) |
| Don’t just focus on how much you’re raising and what chunk of the company you’re giving up. |
Step 7. Leveraging the relationship. |
Ben and Carleen make great points and from my experience back in the late 90’s I agree with all of them. I’d like to add, ‘trust your gut!’ Your gut feelings are based on years of experience that you may not be able to articulate quickly in words but you know…you know you do.
Author: Aruni |
Filed under: angels,
entrepreneur,
entrepreneurship,
fundraising,
venture capital |
Tags: al gore,
angel investors,
entrepreneurship,
fundraising,
kleiner perkins,
venture capital |
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