Driving around Atlanta recently I’ve see several large billboards for web hosting companies — yes, web hosting companies. Do they know something I don’t know? Since when did old fashioned billboards on the side of the road generate a better return on investment (ROI) when compared to online advertising? Here’s my theory: web hosting is so competitive, and has such low barriers to entry and obvious need, that the traditional online lead generation routes don’t have an appreciable ROI. Web hosting companies that continue to do the online advertising do so to get greater economies of scale so that these new customers eventually will be profitable. And, that’s why they are trying out billboards.
Oh, and here are the companies that are advertising:
Through a tweet I came across Brad O’Neill’s blog post on Rajeev’s Rule:
“When any sincere individual or group of people asks for your assistance in the pursuit of their business dream, strive to help them in any way that you can, be it small or large.”
Rajeev Motwani was a Stanford professor and angel investor that was one of the most respected advisors in Silicon Valley and was always looking to help others. While I haven’t achieved his level of respect, I do aspire to give back and help other entrepreneurs in pursuit of their business dream.
Please shoot me an email or tweet if I can help.
One of the challenges in a startup is deciding when to trade off short term revenues (money!) to focus on the long term plan. This might sound like a strange concept — why would I want to say no to money? Let’s look at a few examples where this can happen:
- A key beta customer really wants to pay for consulting work, but you know, based on previous experience, that this will take too much energy away from the product
- Traffic is growing nicely on your site, and the urge is to put up advertising, but you know it’ll detract from the user experience
- Users are using your service for free, and several have offered to pay, but time is better spent improving the product and not implementing a payment system
Of course, this can be a good problem to have. My recommendation is to think hard and be wary of making short term decisions that can hinder growth or don’t have economies of scale.
Today I had the opportunity to help at the monthly StartupLounge PitchCamp program facilitated by Michael Blake and I must say that it is a great program for entrepreneurs and I highly recommend it. The program is designed to give entrepreneurs a brief overview of elevator pitches, time to refine the pitch with a couple mentors, and finally a chance to practice it in front of everyone. Generally, the thinking is that as an entrepreneur we suffer from expert’s syndrome where we know so much about our business that we can’t concisely say what we do in a 30 second elevator ride, and thus having an objective third party goes a long ways in helping.
Here are some of the guidelines from PitchCamp:
- There’s no perfect elevator pitch but there are ways to make a good one
- Answering questions such as who you are, what you do, what pain you solve, and what you want is a good formula
- An analog analogy can be useful to make the business more memorable by attaching the idea to an existing concept people are familiar with
- A hook, or opening comment like “I was frustrated trying to…” can also be memorable
Some other tips include recording yourself and practicing it on anyone who will listen. A choice quote: an amateur practices until they get it right while a professional practices it until they can’t get it wrong.
I’ve read a number of executive summaries over the years and most will include a section on fundraising, including the amount of funding desired, and for a smaller percentage, the desired valuation. Naturally, the expected valuations are all over the place, and don’t usually designate whether it is the pre or post-money valuation. Unfortunately, the vast majority of desired valuations are much higher than the going rate, especially in Atlanta. There aren’t any hard and fast rules but here’s what I’ve seen over the past few years:
- Angel deals for pre-revenue companies with a beta product are typically at a $500,000 post-money valuation (e.g. $100k would be invested and the angels would own 20%)
- If the entrepreneur or team has been successful before building a multi-million dollar company, expect a $1.5 – $2 million pre-money valuation
- Revenue generating startups should take their trailing twelve months revenue and multiple it by a comparable public market multiple (the going rate for a similar publicly traded company), less a discount of 25% – 50% for being private (no liquidity or market for shares)
I recommend that startups use this as a guide when thinking about valuations and raising money.
One of the concepts I don’t hear entrepreneurs talk about enough is the fast follower approach. The general idea behind the fast follower approach is to build a product in a semi-established, fast growing market. All too often entrepreneurs feel their idea must be completely unique for it to be a good one. Some characteristics of the fast follower approach include:
- Companies doing well in the market but no clear leaders
- Market large enough to support multiple winners
- Incumbents that are tied to a legacy platform and can no longer keep up with the modern web app expectations
- Method to improve an aspect of the market resulting in an x-factor (7-10x improvement)
I’m a fan of the fast follower approach and believe entrepreneurs should look for markets and opportunities that meet the characteristics listed above.
One of the themes we’ve heard over the past few years in the Atlanta technology community is that we should focus on our existing clusters like Internet security and logistics as we have a wealth of existing expertise and investors ready to go. Well, I’d like to start creating more dialogue around our online marketing software cluster. Didn’t know we already had a cluster? Take a look at these existing Atlanta companies that do over $100 million in combined annual revenue:
The next time someone mentions clusters in Atlanta, I’d bring up the largest cluster that no one talks about: online marketing software. In fact, I’d bet it is one of our faster growing clusters as well.
We’re excited to start talking about Shotput Ventures 2010. After reviewing last year we decided to make a few tweaks for our next class of companies. Here are some of the changes:
- Investing $6,000 per co-founder (like TechStars) instead of $5,000 per team and $5,000 per co-founder (like Y Combinator) due to our great low cost of living
- Having the max number of co-founders per team be three instead of four as we found the four person teams weren’t as productive
- Smaller program with 5 – 6 companies so that we can devote more attention to each team
- Formal partnership with the ATDC (more info to come soon)
- Published company ideas and markets we’re interested in
Take a look at our program timeline, FAQ, and apply online once we open up applications.
After reflecting on Startup Riot this morning, and discussing it at lunch with a friend today, I realized there was an attribute most startups were seriously lacking: revenue. I don’t mean revenue like a few hundred or a few thousand per month, but rather, at least $100,000 in revenue. Yes, this isn’t a goal of Sanjay’s when putting on the event, since it is designed to be inclusive of all startups that meet the requirements.
After going through the list of 50 startups again, my educated guess has a total of four, possibly five, of the 50 startups yesterday having trailing twelve months revenue of at least $100k. Why $100k? $100k isn’t enough to be profitable in most cases, but it does provide a foundation and paint a picture for how to build a much larger business.
Here’s my challenge for Atlanta: let’s double the number of startups that present at next year’s Startup Riot that have $100k in revenue.
Can we do it?
Today I had the opportunity to attend the third annual Startup Riot at the Fabulous Fox Theatre in Atlanta. Shotput Ventures partner Sanjay Parekh puts on the annual event which drew over 400 attendees and provided a platform for 50 startups (yes, 50 startups!) to give a three minute pitch with four slides.
To learn more about the startups that presented, please take a look some of the blog posts:
I’d highly recommend the event and I’m looking forward to attending again next year.