Guru.com's Seven Strategies for Financing an Internet Start-Up
The formula for financing an Internet start-up is an imprecise mix of art and science, charisma and luck, timing and contacts. Some companies strike it rich right out of the gate, like
Drugstore.com, in Bellevue, Wash. Founder Jed Smith's concept for an on-line drugstore went straight to the top at Silicon Valley venture firm Kleiner Perkins because Smith knew an assistant to partner John
Doerr. Other entrepreneurs, such as Blaise Barrelet of San Diegobased WebSideStory Inc., have had to bootstrap their businesses and found outside funding only after proving their model in the market. Whether you're on the high road to capital, like
Guru.com, or on the low road, here's a tip sheet for navigating the funding stream.
1. Go after smart money, not easy money. THE HIGH ROAD: Scour your Rolodex for deep-pocketed contacts in the Internet arena -- and then check with all your friends, your boss, and your colleagues. That's what Guru.com did in spades, and it clearly worked well. Have your contacts introduce you to people who can provide funding or act as strategic advisers. Feature advisers in your investor pitch, and update the list each time a new one comes aboard. "Once the dollars start to flow," observes Salt Lake City entrepreneur Will West, "there's a herd mentality."
THE LOW ROAD: No contacts? Drop in on your chamber of commerce and find out who's involved in the local Internet economy. Track down your closest angel-investor group. Chat with the group's administrator about the sorts of businesses its angels have funded and why. Find out how best to submit your business plan for the angels' consideration. Do everything in your power to put off relying on relatives. In the Internet-finance environment, explains Harvard Business School professor William
Sahlman, "from whom you raise money is often far more important than the terms."
2. Use your first dollars to buy topflight management.
THE HIGH ROAD: A truism these days among Internet angels and venture capitalists holds that a stellar management team is worth more than a supercool business plan. "The idea is irrelevant," states venture partner Andrew Anker of August Capital, in Menlo Park, Calif. He's exaggerating -- but not by much. "So many people are focused on the Internet right now, the reality is that any great idea you may have, five other people are going to have, too."
Guru.com, for example, bet a lot on being able to hire technology director Kevin Kunzelman early on.
Kunzelman, who had been the systems architect of E! Online's Moviefinder.com and Match.com's Internet dating service, was hard to woo. Guru.com had to up the ante twice -- and in the end resorted to offering to pay for him to take a vacation anywhere in the world (he chose New Zealand) on top of a signing bonus. As Guru.com's experience demonstrated, a team that has proved itself capable of running with an idea at Internet speed can break ahead of the pack.
THE LOW ROAD: If you can't bring top talent in-house right away, forge strategic alliances with others and then link their management with your concept. Remember, too, that customers speak volumes about a business.
3. Speed is paramount: get your site up and running.
THE HIGH ROAD: It was the subject of heated dissension among investors, but Guru.com's strategy on this score paid off in the end. Work out bugs in the business while you gain traction in the space. Instruct your Web designer to put a premium on users' experience; look and feel are as important as functionality. Track usage closely and keep the figures on hand when you look for financing. Guru.com deployed user feedback to great advantage in its second round. "The very fact that they had collected it showed that they cared very much and were building a business to serve customers," comments Guru.com venture partner Aneel Bhusri of
Greylock.
THE LOW ROAD: If you can't afford the $1 million it will likely cost you to erect a bare-bones Internet business, seal a deal with a company that is positioned to help your business take off once you do go live. Chad Carpenter's
Klickback.com, an Internet-based rewards program headquartered in San Diego, recently forged a strategic alliance with paging company Metrocall Inc. "When we go live, we will be selling their paging services on our site, and they will use our rewards as their loyalty program for their 1.4 million consumer customers," Carpenter explains.
4. In approaching venture firms, home in on a specific partner and make your initial contact through one of your advisers.
THE HIGH ROAD: As Guru.com did so well, do extensive research on the venture firms you might want to have involved with your company. Look in their portfolios for companies with revenue models similar to yours and for businesses you could partner with. Ask your angels or advisers to give you entrée. Active angels can drum up VC interest in your business even before you have your foot in the door.
THE LOW ROAD: If you have no VC ties, tap into the goodwill of other Internet entrepreneurs. Contact executives at companies that are funded by the venture firms of your dreams. Would they be willing to introduce you to their venture partners?
5. Don't marry your first date.
THE HIGH ROAD: There's a lot more money out there these days than there are good deals, so explore all your options. Guru.com's founders resisted the urge to snatch up the first term sheet that VCs threw down on the table. It's smart to be choosy about whom you take money from. With every firm that grants you a meeting, take time to get to know the partner who will be your company's primary contact (and possibly a board member). Ask the entrepreneurs at portfolio companies what their venture firms have done for them and others at your stage. Play your cards close to the vest, but be clear with VCs that you're shopping around. VCs start to salivate if they have reason to think that your deal is in demand.
THE LOW ROAD: It's not the end of the world if no venture firms come courting.
6. Take the best deal, not the biggest deal.
THE HIGH ROAD: Whether your capital is coming from angels or VCs, go with the deal that will not only carry you to your next planned round of financing but also add genuine strategic value. Consider the questions that Guru.com asked of its prospective investors: What's the relevant experience of the partner who will join our team? What future partnership opportunities exist among the firm's portfolio companies?
THE LOW ROAD: Measly pickings? Take what you can get and run with it. Financing options for Salt Lake City high-speed Internet service provider STSN Inc. had become so thorny in early 1999 that founder Will West resorted to bridge financing. But as soon as West had inked a long-term deal with the Marriott International hotel chain, investors stepped right up: STSN vendor Intel and another major chip manufacturer suddenly wanted an equity position, as did two VCs.
7. Keep up your momentum.
THE HIGH ROAD: In today's supercharged Internet economy, even the leaders are constantly reinventing themselves. You should be, too. Momentum equals execution. When the founders of Guru.com discovered they had formidable competitors, they could easily have become distracted -- and derailed their financing. After an initial panic, they instead came to view the competition as proof of just how hot the market for their services was, and got back on track.
THE LOW ROAD: Even if money isn't pouring in, stay focused on the business and look for other ways to fuel growth.
And If You Can't Get Venture Capital...
Blaise Barrelet admits he "didn't even know that there were venture-capital firms" when he and his wife, Agnes, started
WebSideStory, back in 1996. The starting gun had just gone off in the race to cyberspace, and as he watched the throngs jockeying for position, Barrelet wondered, "How do all these people measure returns on their investment?" To answer that question, he built
HitBOX, which measures Web-site traffic, taxing his credit-card limits in the process. At first, Internet start-ups refused to pay for the tool, forcing Barrelet to give it away free in exchange for ads on customers' sites. Against all odds, the ads drove traffic to Barrelet's own Web pages, where San Diego-based WebSideStory ranked sites by their traffic. "Instead of being paid with dollars, we were paid by traffic, and we found out a way, very fast, to make money," says
Barrelet, a 36-year-old Parisian. In short order the Barrelets' fledgling business achieved positive cash flow as Internet companies lined up to advertise on the site -- at the HitBOX opening page, as well as on pages with category-specific site rankings.
Three years later WebSideStory is a booming business, with 350,000 HitBOX subscribers to date and more usage-tracking products in the pipeline. WebSideStory's Web sites now get close to 500,000 visitors a day. And unlike the vast majority of Internet businesses, WebSideStory actually makes money. "They have been able to finance the business through internal cash flow," observes Kurt
Jaggers, a managing director at the Menlo Park office of TA Associates, a private-equity firm. That, says
Jaggers, was a key factor in his firm's decision last June to join forces with Summit Partners in plunking down $30 million for a minority position in
WebSideStory.
