Joey Tamer refines the vision, strategy and success of companies --
Fortune 1000, capitalized start-ups and investment fund.
www.joeytamer.com (310) 245 5310 joey @ joeytamer.com
by Joey Tamer
First published in a modified version in Digital Coast Reporter #8 October 1999
Investors have a rather straightforward
wish list. The catch is, they want all of it filled at the beginning. And
why not? Even the small firms read thousands of plans each year, and fund
a few. Larger firms see tens of thousands of plans each year, and fund only
a few more. Yes, there is plenty of capital available. But that doesn’t
mean it is easy to score the capital.
A Unique Idea in an Empty Space
The time for building the generic
tools, infrastructure and horizontal portals of the Internet is past. The
players in these areas are in place, and dominant. It is important to understand
the current moment on the technology emergence curve (see Handling the Curves:
Silicon Alley Reporter #18, Digital Coast Reporter #3 and The Sea Change:
Silicon Alley Reporter #26, Digital Coast Reporter #7, posted at www.joeytamer.com)
to determine the viability of your new idea.
Investors want a unique idea in
an empty or near-empty space. Earthweb is a good example: beginning in 1995,
it rode the early wave of providing tools to Java developers, and has now
evolved into a leading vertical portal to that unique IT market and community.
It is O.K. to be second, if your competitor in first place has proven the
market but not dominated it. Remember, in the Internet, there is only first
and second place, nothing further. With all the new territory to explore,
no investor needs to put his money on an also-ran in the making.
Scalability
Once your unique idea has proven
its empty space, it must be scaleable. Except for tiny niche businesses grown
in back bedrooms and sold for modest amounts, the rule of thumbs holds that
the business must scale to at least $100 million in valuation in a few years’
time. Ebay and Xoom.com (acquired by NBCi) are good examples of companies
that could scale fast. We have already forgotten the names of those that couldn’t.
It will be interesting to see how many well-funded businesses actually achieve
this $100 million goal in the next few years.
Defensibility
Sometimes overlooked by CEO’s,
but not investors, your business idea must be clearly defensible. “First
to market” is often the defense put up against non-defensibility. It
is an excuse. Yes, first to market gives a distinct advantage in an arena
where there is only first and second place for players. But first to market
does not make your idea defensible: you can be bumped off by copycats doing
it better with more capital and brand. You become the pioneer with the arrows
in your back.
Recently one L.A. venture group
passed on a start-up company with an in-depth site, good traffic, deeply experienced
entrepreneurial management, and an impressive projected R.O.I. on a small
initial investment — because the player in No. 1 position could create
the depth of the content already created by the start-up, even though the
No. 1’s focus was elsewhere. Given the global exposure of the Internet,
and the low barriers to entry for new competitors, defensibility must be based
on some proprietary technology, unique assets or licenses, or access to exclusive
information, services or branding.
Management Team
Here is the catch-22: investors
tend not to fund companies which do not have a proven management team which
can execute growth at the speed required to exit a company by IPO in the next
few years. But without the capital, a company cannot attract the management
team. It is critical to have the commitment of at least one executive with
a proven track record in building an Internet business. Experience coupled
with an entrepreneurial background is a big success with investors. Given
the race to exit, there is no time for an executive’s learning curve.
Investors will support a management
team which has had Internet experience within a corporate structure, but no
entrepreneurial background. If this is you, it is helpful to align your start-up
with an Internet-experienced consultant specializing in start-ups to strengthen
the team.
Many executives with proven experience
of building Internet companies have not fully vested their stock holdings
in their current companies. This reduces the number available.
Enough Money to Get the Job
Done
Investors like to see business
plans which ask for enough money to create critical mass, take first position
and accelerate the company’s growth unhindered by a second search for
capital. So, make certain that you are asking for enough money in the first
round to not struggle during launch. It is best to declare your search for
both first and second rounds, to demonstrate that you understand the magnitude
of money, particularly marketing money, required to take a significant position
in this space.
Profitability
Soon, there will be one thing only
in the minds of Internet investors: profitability. Public companies’
acquisitions had better turn into profit, despite the current valuation available
to leverage such acquisitions. New businesses funded now, still private, will
need to prove that profitability is within reach.
The Adventure
There is no road map to capitalization
in these unchartered territories. But sometimes the hand-drawn map will do.