Strategies for winning funding in 2012

Critical factors for winning investment above the competition

Recently, I chaired the Venture Capital panel at the Consumer Electronics Show (CES), hosting a stellar cast of investors, who offered savvy advice on winning investment capital in the current funding environment. They offered key strategies and tactics for rising above the noise of so many early stage companies competing for the few positions available in each Fund.

Number of new deals planned for 2012: 4-5 per early-stage investment firm

Consistent with last year’s panel (2011), each early-stage Fund planned to invest in a Series A for four or five new early stage companies during this year.  No more than that.  In the case of Jerusalem Venture Partners, Yoav Tzruya reported that this number represents no more than 1% of the 600 companies JVP reviews each year for its early stage fund.  Kevin Spain of Emergence Capital, which has a focus on B2B applications, and Chris Petrovic of GameStop Digital, which is a strategic investor/acquirer of game companies, as well as Habib Kairouz of Rho Capital, agreed with the plan for 4-5 new deals this year.

Current market competition is significantly increased

We are in a boom period again, this time for the number of early-stage companies in play in the market.  The continuing trend that allows for new technologies and applications to be built with many off-the-shelf tools, using world-wide technical expertise, for much less capital, has created many new companies competing for the funding resources available.  The new trend of incubating companies in accelerators has added some seed capital to these concept-companies to get them through their initial product development.  But then these companies need to get some traction in the market, hopefully to significant revenue, before they can hope to move from seed capital to Series A.

Alternative strategies if you cannot get from Seed to Series A, or from Series A to Series B funding: ways to create a stronger offering

Looking at these market conditions, some on the panel offered an interesting perspective for rising above the noise: consider early stage strategic alliances/mergers to strengthen your position to attract funding.

Early stage companies not attracting that critical Series A or Series B funding should consider connecting strategically or through acquisition or merger with other similar-stage companies to create a stronger offering for funding.  Aligning with other early companies that would enhance your market position or extend your product offerings or brand, you might attract that essential next stage of funding.

I found this “investment banking” approach fascinating for early stage companies, but of course in the hour we had, we didn’t delve into and examples or the terms of such deals.

Kevin Spain added a new point, that he sees a strong emerging trend in B2B and enterprise applications using the new technologies that are mostly focused on the consumer market now.  He advised companies to look for those B2B market opportunities for their current B2C products and applications.  A doubling of your target markets, which rise and fall under different economic conditions, may present a strong offering to investors.

Strategic approaches to sourcing capital

We did move on to speak about strategic corporate capital, as both Scott English from Hearst and Chris Petrovic of GameStop approach their investments as strategic additions to their portfolios, rather than as pure venture investments –even though each has a different priority for these investments.

The first point made was to conduct your due diligence about how strategic investors value their target companies.  Hearst, for example, is a later stage investor focused on financial ROI to Hearst first, and strategic value to the portfolio second.  GameStop, focused on early stage game companies, values its acquisition targets first as an operational addition to its portfolio plan (does the company add to GameStop’s infrastructure, product mix, learning about new markets, or strategy) before financial and ROI considerations.

The lesson here, as offered often in these pages, is to ~

1. Do your homework about your company’s “fit” with what an investment group might be seeking,
2. Talk with other companies in the investor’s portfolio, and
3. Narrow down your list and your efforts to those investors that prefer your company’s stage, market sector, and your possible enhancement of their portfolio’s current companies.
4. Some strategic and corporate investors function very much like venture capitalists, and others have different priorities.  So, after your due diligence, and as you enter discussions, read the deal’s restrictions and the detailed legal conditions before negotiating or accepting any investment.

Critical factors for winning investment above the competition

The panel was particularly savvy about the profile of companies who would receive their funding:

Norm Fogelsong of Institutional Venture Partners, a later-stage venture fund, insisted that your company’s vision must be big, very big, to attract the rounds of capital needed to become a major player.

The panelists agreed that they are very focused on execution, in particular execution on market penetration.   After you have been funded on your product’s unique value, it is time to turn your attention to your market, especially your customer acquisition and retention strategies, tactics and results.

Yoav related that he looked for CEOs with deep market savvy, a founder who knows his or her product and its market realities, and has a strong go-to-market strategy.

Sharon Wienbar of Scale Venture Partners, a later stage investor, said that she looks for the CEO to “de-risk” Scale’s investment with the following factors:

• Proof of market responsiveness:  does your customer commit to your vision of your product’s value, price and use?
• A business model that prioritizes customer acquisition and retention:  do you have a plan that acquires each new customer quickly and for less and less cost of acquisition?
• Compelling metrics:  are your projections for market penetration, growth and profitability backed up by proven metrics?

So, amid the growing competition for capital we are seeing this year, particularly in the consumer market, investors’ focus seems to move quickly from unique technologies and applications to strong execution.  Early stage companies need strategies to present compelling offerings to investors, and an increasing focus on market execution that leads to growing a big company and taking significant market share.

(Image source: blog.flagstein.com)