Burn vs Build: Making Your Venture Capital Work For You

Having a stockpile of capital is a great boon, but it also comes with its own fair-weather problems. When you are fortunate enough to have these problems keep these three tips in mind in regards to customer growth: Focus on the numbers, know the acceptable numbers, and adjust for market conditions. When entrepreneurs and their investors approach customer acquisition from this perspective, it becomes much easier to determine whether the company is burning or building

By Clate Mask

Raising a pile of cash is a huge blessing for entrepreneurs.  But it can also be a serious curse.

When entrepreneurs suddenly have a wealth of capital to grow their business, the decisions about how to invest that capital become difficult.  As an entrepreneur, it’s often hard to know whether you’re building value or just burning cash with your “investments.”  The line between burning and building becomes blurry because the success of those investments plays out over many months or years.  In the meantime, you’ve got to hit numbers and keep your investors happy.

A very interesting place where this burn vs. build dichotomy plays out is in the fast-growth, land-grab mode of customer acquisition.

VCs invest because the company has fast-growth potential.  In hot markets and a hot economy, the game accelerates and investors want to scoop up customers as fast as possible.  And, of course, management wants to grow, too.  But frequently, aggressive growth brings fulfillment problems and a host of management nightmares.  All too often, the result of aggressive customer acquisition is a cash bonfire.

So, how should management teams and investors work together to appropriately push aggressive customer growth and ensure they’re using that precious capital to build value instead of burn capital? Keep these three things in mind:

Focus on the numbers – Great management teams run the business by the numbers.  When it comes to decisions around customer acquisition investments, three numbers are critical: 1) Customer Acquisition Cost (CAC); 2) Churn; and 3) Lifetime Customer Value (LCV).  The entrepreneur and her management team must establish these critical metrics.  Ultimately, LCV should be measured as a multiple of the CAC.  The higher the multiple, the healthier the business and the more aggressively the company can invest in customer acquisition.

Know the acceptable numbers – It took me a while to realize how important it is that my investors and I are on the same page with respect to the appropriate LCV/CAC ratio.  The acceptable rate will vary by industry, but the board must come to an agreement on the targets and appropriateness of CAC, churn, LCV and the LCV/CAC ratio.  Doing so gives the management team the direction it needs and deserves.

Adjust for market conditions – This is where it gets fun.  The “acceptable numbers” always seem to be a moving target, depending on competition, availability of capital, company stage, etc.  I’m always amazed at how fluidly the market conditions change.  Sometimes a 2x LCV/CAC ratio is great; other times a 5x multiple is the target.  What’s important here is that the board and management agree what the acceptable numbers are and they are adjusting as necessary to help the company execute its strategy.

At a minimum, the entrepreneurs and investors can approach their customer acquisition investment with eyes wide open, which improves communication at the board level and provides a big benefit to the management team that’s out executing to the board’s direction.

For more information please reference this article

 

 

Looking for a venture capital investment for your company?


Why get venture capital? Why look for investors? Venture capital is oftentimes key to a successful starting business. But, it is important to know what you are getting into and how it will affect your business.
If you are a business owner than you aware that one of your business challenges is getting your company funding. You may be in need of a venture capital investment. This type of investment can give your company the resources it needs to grow to it’s full potential. A venture capital investment can be used for a variety of things. You may want to invest in top notch talent, new machinery, manual laborers or you may need to invest in research or new technology. Whatever the reason, a venture capital investment can help you business grow.

 

If you go this route, you’ll need to be prepared to give up partial ownership of your company. Venture capital firms will require a fair valuation of your business shares and then will acquire a set amount of shares at an agreed up price. Generally speaking, the more established and profitable your business is, the less the stake in your business the venture capital company will have. If you are a start up and have yet to generate revenue you should be prepared to give up a substantial amount of ownership and control. Equity investment companies are cut throat with their investment money and will want to ensure your company succeeds. You will be required to sign contracts that bind you to your financial and growth projection. If you fall short of your expectations you could be penalized financially and possibly driven out of your own company.

 

For more information please reference this article: http://www.zizzoo.com/guides/venturecapital/articles/article6/index.php

 

With Eye on Public Offering, Coupons.com Attracts Big Investments

BY EVELYN M. RUSLI

Coupons.com, a network for online and printable coupons, has raised $200 million from several institutional investors, the company said Thursday. The deal values the company at about $1 billion, according to two people close to Coupons.com who were not authorized to speak publicly.

“This investment will help fuel our growth as we continue to revolutionize the multibillion-dollar coupons industry that, for decades, has relied predominately on newspapers for distribution,” Steven Boal, the company’s chief executive, said in a statement.

The names of the investors were not disclosed.

Coupons.com’s financing round comes as several Internet companies head to the public markets at multibillion-dollar valuations. Both Groupon, another coupon company, and Zynga, a developer of game applications, are said to be preparing to file for initial public offerings in the next few weeks.

Shares of LinkedIn, a professional social network, more than doubled on their first day of trading in May. While investor enthusiasm has so far been concentrated on a handful of elite social Internet start-ups, some lesser-known companies are beginning to benefit from the rising tide.

Coupons.com, founded in 1998, is a sprawling digital network that includes printable coupons, online coupons, loyalty card promotions and mobile coupons. According to the company, the platform is used by hundreds of retailers that together represent 44,000 store locations in the United States.

Like the social shopping site Groupon, Coupons.com helps users find location-based deals in their area. Although the business model is not focused on daily deals, like Groupon or LivingSocial, Mr. Boal says Groupon’s meteoric rise has been a big plus for Coupons.com.

“Groupon has definitely cast a broader light on the savings industry,” he said in an interview. “It hasn’t hurt at all.”

Mr. Boal said that an initial offering was possible, but that there were no immediate plans for one.

According to Mr. Boal, $100 million of the new financing round will be used to expand the business internationally, to make acquisitions and to hire new employees. The remaining $100 million will be used to provide liquidity to shareholders.

The recent rise of investment rounds — Groupon, Zynga and Facebook have collectively raised more than $3 billion in the last year — has lined the pockets of many early investors. According to Groupon’s recent I.P.O. filing, in the company’s last major round of $950 million in January, about $810 million was paid out to shareholders.

Coupons.com hired Allen & Company as its financial adviser for the transaction.

Read more http://dealbook.nytimes.com/2011/06/09/coupons-com-raises-200-million/

 

Thiel: Tech Bubble? What Tech Bubble?

By CLAIRE CAIN MILLER
There has been lots of chatter about a technology bubble in Silicon Valley.LinkedIn’s initial public offering, Groupon’s upcoming I.P.O. and bloated start-up investments and valuations are bringing back painful memories of the dot-com bubble’s burst roughly a decade ago.

But this time there is no bubble, says Peter Thiel, the PayPal co-founder, early Facebook investor and hedge fund manager.

“We don’t have a tech bubble for a variety of reasons,” Mr. Thiel said in an interview. “If anything, we need to be encouraging people to be doing more in tech.”

Mr. Thiel isn’t shy about calling out bubbles. He was outspoken about the dot-com bubble, the housing bubble and what he now thinks is a bubble in higher education.

But he says the technology industry today is missing a key component for a bubble: the ability for the general public to invest and potentially lose money. Despite a couple much-hyped I.P.O.s, almost all the new tech companies are still private, so venture capitalists are the only ones risking their money.

“The first component of a bubble — something a lot of people believe and can act on — doesn’t even exist,” Mr. Thiel said. “Most of these companies are privately held. There is no way for the public to become involved.”

The doomsayers are simply hungover from the last bubble’s burst, he said. “People are still burned out from the ’90s.”

Much of the bubble talk surrounds five companies: Groupon, LinkedIn, Zynga, Facebook and Twitter. Mr. Thiel estimates that those five companies account for three-quarters of the value of new Web companies and, he said, five companies do not make a bubble. If they did, we have bigger problems, he said.

“We need technology for our society to get better in the decades ahead,” Mr. Thiel said. “So if you say there are not even five good companies, that even those five companies are fake, that is saying that our society is completely stagnant and that nothing is happening at all.”

Read more http://bits.blogs.nytimes.com/2011/06/07/thiel-tech-bubble-what-tech-bubble/

 

Fleeing to Foreign Shores

By GRAHAM BOWLEY

Reva Medical, a maker of medical devices in San Diego, wanted to go public last year to raise money to satisfy impatient venture capitalists and finance research for its heart stents.

But it found little investor interest in the United States for an early-stage medical device company that had not yet made a profit.

Reva Medical did what a small but increasing number of young American companies are doing — it looked abroad for money, in Reva’s case the Australian stock exchange.

After an eight-month road show, meeting investors and pitching the prospects of a biodegradable stent, the 12-year-old company sold 25 percent of its stock for $85 million in an initial public offering in December.

“There are so many companies that require capital like our company, and they don’t have access to the capital markets in the United States,” said Robert Stockman, Reva’s chief executive. “People are looking at any option to stay alive, which is what we did.”

Reva’s example shows that nearly three years since the financial crisis began, markets in the United States are barely open to many companies, leading them to turn to investors abroad. Denied a chance to list their stock and go public here, they are finding ready buyers of their shares on foreign markets.

Nearly one in 10 American companies that went public last year did so outside the United States. Besides Australia, they turned to stock markets in Britain, Taiwan, South Korea and Canada, according to data from the consulting firm Grant Thornton and Dealogic.

The 10 companies that went public abroad in 2010 — and 75 from 2000 to 2009 — compares with only two United States companies choosing foreign exchanges from 1991 to 1999.

The trend reflects a decidedly global outlook toward stocks, just as the number of public companies in the United States is shrinking.

From a peak of more than 8,800 American companies at the end of 1997, that number fell to about 5,100 by the end of 2009, a 40 percent decline, according to the World Federation of Exchanges.

The drop comes as some companies have merged, or gone out of business, or been taken private by private equity firms. Other young businesses have chosen to sell themselves to bigger companies rather than go public.

To be sure, as the economy improves and investors shaken badly by the financial crisis begin to regain their confidence, American stock markets may once again open up for companies trying to go public and listings may rise in the United States.

LinkedIn, the social networking site for business professionals, had a successful initial public offering last month on the New York Stock Exchange, and Groupon, the social buying site, has registered its plans to go public in the United States.

But these are big companies, enjoying the popularity of being Internet darlings. Executives and analysts fear that a long-term structural shift in American equity markets means these markets are now closed to legions of smaller, more ordinary businesses. They could more easily have gone public in the United States in the past. But they now remain private or, for the time being, have to market themselves overseas and rely on foreign investors.

For example, initial public offerings by American companies totaled only 119 in the United States last year, according to Dealogic — higher than the depressed rates of the previous two years but a far cry from the 756 companies that went public at the peak in 1996.

As young, fast-growing companies are forced to look overseas for public status and investors, executives and analysts fear that they may increasingly shift their geographic focus — and as a result any jobs they create will be abroad.

“Issuers have to put themselves through a grinder to go overseas, so any significant percentage of overseas listings is a sign that our markets have become hostile to innovation and job formation,” said David Weild, a former vice chairman of the Nasdaq stock exchange and a senior adviser to Grant Thornton.

A variety of factors explain each company’s decision to list on a foreign exchange, like the increased regulatory costs of going public in the United States. Underwriting, legal and other costs are typically lower in foreign markets, companies say.

Read the full article http://www.nytimes.com/2011/06/08/business/global/08exchange.html?_r=1&partner=rssnyt&emc=rss

 

Start-Ups Vie for Attention at the Venture Capital Table

BY MAC WILLIAM BISHOP

 

The recent initial public offerings by Internet companies including LinkedIn and Yandex are grabbing the attention of investors and making headlines, but small technology start-ups are expecting more than just scraps from the venture capital table.

Instantly recognizable companies like Facebook, LinkedIn and Groupon have no problem getting financing, but these smaller companies are hoping to prove they have what it takes to become essential services. At TechCrunch’s Disrupt conference in Manhattan, DealBook spoke to executives from three start-ups about their plans for raising capital.

Guillaume Balas, chief marketing officer of 3Scale, described his company’s “unique architecture” for managing application programming interfaces, or A.P.I.’s, which allow different software programs and applications to talk to each other. He said that with the growth of mobile Internet use and connected applications, A.P.I.’s were moving into the mainstream and making his company’s services essential for businesses with an online presence.

Andy Leff is the founder of Meporter, a company that has developed a mobile application that he described as taking “local citizen newsgathering to the extreme.” It allows users to post photos, video and articles to a local map — posts that can then be added to by other users.

Finally, Jaafer Haidar is a co-founder of Socialseek, an aggregation site that allows people to create sites following unique topics. He said the site has the potential to allow brands to “connect with users directly.”

Read more http://dealbook.nytimes.com/2011/05/24/start-ups-vie-for-attention-at-the-venture-capital-table/?partner=rssnyt&emc=rss

A Conversation With Bing Gordon

BY EVELYN M. RUSLI AND MAC WILLIAM BISHOP

 

Bing Gordon has years of experience bridging the world of technology start-ups and venture capital. In addition to having been an executive at Electronic Arts, he is a board member of Amazon and Zynga, among other firms. Now, he is a partner with the venture capital firm Kleiner Perkins Caufield & Byers.

At Techcrunch’s Disrupt conference this week, Mr. Gordon spoke with DealBook’s Evelyn M. Rusli about whether investor interest in Internet giants like Facebook and LinkedIn left room for smaller companies. Mr. Gordon said that sheer volume of growth in the social media space guaranteed that new ventures would have a chance to become giants in their own right.

To see more visit http://dealbook.nytimes.com/2011/05/26/a-conversation-with-bing-gordon/?partner=rssnyt&emc=rss