Raising Capital: Dos and Don’ts for Small E-Businesses

Looking to raise money for a small online business? Experts say that in today’s difficult economic environment, some basic tenets for securing financial backing remain — but other rules have changed, and it is as important as ever to be abreast of those changes.

For example, as far as presentation, a live or semi-live demonstration of the product that lets the client “do some of the driving” works best, said Jesse Reyes, vice president of global product management for Venture Economics, a NewYork-based capital research firm and a division of Thomson Financial.

“Be prepared to show something more than PowerPoint,” Reyes told the E-Commerece Times.

One also should pay close attention to the words chosen in the presentation, according to Reyes. Certain catchphrases lose their appeal very quickly.

“Don’t be cute,” Reyes said. “Avoid buzzwords. Everyone uses them, and no one believes them, and what’s worse, it speaks of hype.”

Know Your Backer

Reyes added that once a potential backer is located, the best thing is to persuade a third party to set up the meeting. An introduction “will increase your odds 10 times of getting your foot in the door,” Reyes said, while cold calls are almost universally shunned.

“The best VCs only want qualified leads,” Reyes said.

Once the meeting is booked, it is important to appear professional and knowledgeable.

“Don’t assume that ‘business casual’ is the order of the day anymore,” said Reyes, noting that because there are different definitions of business casual, formal business attire is generally the safest approach.

“It’s only a fairly arrogant entrepreneur who could walk in to a VC and not show some deference,” he said. “It’s a not-so-subtle message if you aren’t dressed appropriately.”

Focus, Focus

Gartner Group analyst Robert Anderson told the E-Commerce Times that having a product that appeals to a niche market will increase a company’s chance of getting funding.

“[E-businesses] need to target the market,” Anderson said. “They need to be industry-specific.”

Anderson recommended that companies aim their products at industry verticals and sub-verticals, such as nursing-home management, construction management or medical billing, rather than using a shotgun approach and pitching the product at a broader market, such as health-care providers.

“Small businesses really want to do business with companies that align and understand the way they do business,” Anderson said, adding that a targeted approach will attract new customers in the beginning, making it easier to branch out later.

‘Huge Washout’

“I think there’s a great wariness now, a great reluctance on the part of venture capitalists to make unfocused investments in companies,” Anderson said. “We saw a huge washout in businesses, dot-coms, that were attempting to provide Web-based services to small businesses in the last 18 months.”

Anderson said Gartner found that more than 60 percent of Web-based service providers to small businesses have failed in the past year and a half. While some of those businesses are casualties of the dot-com implosion, “a lot of it is simply because they didn’t narrow and target businesses specifically enough,” Anderson said.

Companies looking to raise capital should do their homework and know which potential backers to approach, Reyes said.

“It doesn’t make a lot of sense to go asking [for] money from someone who has done a thousand Internet deals and you can see in the news that their companies are losing money,” he said. “Most likely they are going to be very difficult to persuade.”

Know All

Some rules about raising capital have not changed, but have been re-emphasized with outside financing at a premium. No. 1, it is as important as ever to rise to the challenge of knowing your market — and your potential backers.

“Assume everyone you’re going to be asking for money from is going to be very skeptical of online businesses,” Reyes said. “It’s harder to raise capital (in the current economic climate) because there’s a lot more competition.”

According to Venture Economics, venture capital investment of US$7.7 billion in the third quarter of 2001 fell 31 percent from the previous quarter and 73 percent from the third quarter of 2000, when investment was at an all-time high.

Venture capitalists, Reyes said, “have taken the rose-colored glasses off, and they’ve stopped believing everything anyone tells them.”

Slow, But Flowing

Small business owners should remain vigilant, however. With 81 percent of the third quarter’s total investment representing follow-on funds to existing portfolio companies, Venture Economics said in an October report that “despite tough economic conditions, venture capitalists continue to show committed resolve on behalf of entrepreneurs.”

Moreover, the report found, venture capitalists continued to fund new ventures, including some Internet infrastructure companies. So, there is money to be found for companies with good business plans.

“Don’t give up,” Reyes said. “This is a game of numbers. A VC looks at about 3,000 pitches a year. He’ll probably meet with a couple hundred of those, kick the tires on 50 of them. And he’ll probably finance five.”

The short advice for small businesses looking to raise money is to channel their efforts carefully. Target the product, and then target the financiers.

1 Comment

  • It’s unfortunate that VC folks have become so leery of anything. Period.

    Harvey Seeger, CEO of GXS, recently stated that investors no longer look

    at ROI in terms of years. They expect payback periods to be less than

    six months – preferably three. That’s an ROI of a cool 200+% – arguably

    not needing a VC for those kinds of returns. So, here’s the question: if I

    have a hot new technology, one that even includes a patent, a defined

    market and a clear value proposition, how AM I supposed to find VCs

    who’ve taken refuge inside a fortress, defending their previous investments

    at the expense of taking on anything new and reasonable in terms of ROI?

Leave a Comment

Please sign in to post or reply to a comment. New users create a free account.

E-Commerce Times Channels