Investment

5 Rules of Raising Capital

by Travis Ketchum · 2 comments

Getting money for your start-up is, quite simply, a huge pain in the ass. Some people are lucky enough to have a windfall of cash, or have stumbled upon a project that took off enough to fund their bigger ideas. However, many of us have to pound the pavement looking for capital when trying to do something big.

Let me start this off by saying that raising capital can be incredibly complicated and that there are more sharks in the water than friends who will do anything to buy off an equity stake, kick you out and run with the majority of the profits. Be careful.

Rule #1: Ship Something

Before you even think about asking other people for money, you need to get your teams heads together and develop some kind of product that you can demo and show a little traction in the marketplace with. Investors know now that the cost barrier to shipping a product is dramatically lower than it used to be. Hosting is much less expensive and you can outsource many of the small tasks (quick design work etc) to get SOMETHING working.

Rule #2: Know your competition value

It doesn’t matter what you think your project is worth, it matters what investors think it is worth. This number is generally relative to commonly accepted metrics and how they compare to your competition. And yes, you have competition even if you think you don’t. Using sites like Crunchbase and the trusty Google search can reveal a lot about your competition, their value and traffic levels. Did your closest competition just close an investment round with a $1 million valuation but you are beating them in traffic by 20%? Go for a $1.2 million valuation or more and work from there.

Rule #3: Don’t take the first offer

If you are really building something of interest, you are going to start getting the attention of investors early on. These bids are likely going to be for a much lower valuation (since it is before significant traction) and will results in you giving up more equity early on that is logical. This offer is usually a lot less capital than if you simply held out for a few more months to establish some additional traction that drives up your valuation.

Rule #4: Don’t bite off too much  at the start

Investors know that it takes about $100k to create a killer website (including paying for your time), so when you are assessing how much investment to take only take what you need plus 15%. The 15% is because it usually takes longer and costs more money to get to your goals than you originally think. Developers are notorious for taking too long and going over budget, so as a project manager/ceo you need to account for this. By taking only what you require to get to the next level you stand a higher chance of becoming cash flow positive, taking more money at a higher valuation or at the very least not losing as much of your investors money if it doesn’t work out.

Rule #5: Have an exit strategy

I don’t care how good or bad your idea is, you need an exit strategy before taking a single dollar in venture/angel money. You better be able to detail what kind of return the investor can expect and when. Additionally you need to be transparent about the risk involved with your investment. Being open and honest is appreciated by most investors and should help foster a relationship of trust when moving forward. From a statistical standpoint you need to realize that you are probably going to fail at your company, but if you work your ass off and the right people come together in the right market at the right time you might have a tiny chance of making it work. This is just reality, but stay strong; as Ghandi said “What you do is insignificant, but it is significant that you do it.”

Just Haven’t Met You Yet

by Travis Ketchum · 0 comments

As entrepreneurs, we can often relate our business passions to that of our lives with a significant other. We put so much effort into things we like to try and see them succeed and grow into something truly amazing. Today I was listening to my iTunes when @MichaelBuble’s song came on ” Just Haven’t Met You Yet” and I couldn’t help but draw the similarities between an entrepreneurs quest to build something amazing and the human desire to find someone you love to spend your life with.

“I promise you kid, I give so much more than I get”

Starting a business isn’t easy at all – in fact I can say without a doubt that starting not one, but two businesses so far it has been the most challenging thing in my life. Every time you decide to put yourself on the line financially, emotionally, and mentally you run a huge risk of being hurt, battered and depending on the level of risk you might even feel broken by the end. But what entrepreneurs see is amazing OPPORTUNITY that makes the risk all worth it. If you aren’t this person out of your circle of friends, chances are that you know at least one or two who seem not only willing, but EAGER to do this kind of thing.

But what is incredibly important about entrepreneurs like us is that we are willing to take that risk. No risk, no reward.. this saying has always been true and always will be. I know that I wake up every morning and ask myself “Why am I doing this? Why am I putting all my chips on the table to try and do this?”. But every day I keep working at it because I know deep down I am far from satisfied with the status quo – I want to build something truly amazing.

Advertising Fragmentation

by Travis Ketchum · 2 comments

dictionary-homepageJust as when you are identifying your clientele, you must break down your advertising efforts into fragments to boost the success within each segment. Those who plan on advertising anywhere and everywhere are most assuredly doomed to losses, because while advertising can drive sales and is necessary to garner attention for your product or service; a poorly implemented advertising strategy is going to cost you more than you could make back. That is the unfortunate truth for most early marketers.

So how do you decide which advertising strategies will work best for your brand? The decision is highly dependent on the type of product that you sell, or if you provide a service. One of the basic rules that you will learn in any promotional management class is that you do not stretch your promotional budget to meet your objective, you make your objective fit your budget. So with an emphasis on startups, here is the generalized breakdown for promotional strategies.

Affiliate

The biggest draw for startups towards an affiliate model is that it requires little to no upfront cost to start moving products, or gathering clients. The most involved part of this model is setting up the program and adding to the catalog.

Affiliate systems work by have a vendor or service provider sharing either a set dollar amount, or percentage of their sale (also pay per lead is considered affiliate). This usually works out for the vendor because it hedges the amount of money they need to spend in order to gain additional sales and grow their customer base. Affiliate marketers also like these kinds of programs because they are typically very in tune with what type of traffic they can channel and at what cost. For the marketer, these programs are essentially arbitrage.

{A great way to start your own affiliate program for free is through Has Offers [link] }

Pay Per Click {PPC}

PPC advertising is a great way to get traffic as quickly as possible, especially if you are using a major search engine to deliver the ad inventory. The idea behind PPC is that you create ad copy, select keywords to bid on, and pay each time somebody clicks on the link to go to your website etc. Click fraud is a known problem that many ad networks are combating daily, however if you know how to leverage the metrics that decide your cost per click, PPC can be a great way to drive sales.

{Google AdWords is certainly the market leader right now, and has the highest search volume thanks to Google}

Cost Per Thousand Impressions {CPM}

Impression based advertising is more for the major brands, or for particularly large promotions where a firm wants to raise awareness of their product or service (typically a particular line within a series). This type of advertising usually yields lower returns on investment for direct sales; however this type of advertisement can be attention grabbing if you have a great designer. The goal here is to really reach the magical 3 real impressions per user so the message sticks with them.

{Yahoo! has a very dynamic impression based network, at least until Bing replaces Yahoo! search[link] }

Cost Per Day: Take Over

Arguably one of the most effective forms of advertisements, cost per day also carries the highest ticket price. From a consumer perspective, these ads typically “take over” an entire website, or an entire category (often home page) in order to saturate the advertising impression with the customer. I feel that this is better for the consumer because while you can’t escape the message at hand, the ads are often thought out to much more detail, more creative and reduce overall clutter on the affected website.

The advertisers like these take overs because they know that each and every person visiting that page will see their promotional message and often times has the value added ability to make large portions of the site clickable for the consumer to find out more information. A great example of this is illustrated above from dictionary.com using its backsplash as a type of digital billboard.

MG Siegler from TechCrunch finds this approach appalling stating that is “God-awful” and “greedy”. What he is missing is that these condensed take overs result in a cleaner advertising experience for the consumer and a higher quality experience for both parties. {article}

The bigger the firm, the more diversified your promotional strategy can be, but while you are still small you should be focusing on narrow casted promotion with affiliate and ppc promotion. It isn’t until your firm requires large scale brand recognition (read outside of your local area) that cpm and take over’s are a logical step within your promotion.

What do you think about large scale take over advertisements from both perspectives? Is MG Siegler from TechCrunch.com correct in describing these digital billboards cancer to the internet?

Definition {Arbitrage}: Profiting off of the imbalance within two markets.

Example {Arbitrage}: It costs me an average of $15 to produce a buying customer to site X using my e-mail lists. Site X value’s each paying customer at more than $20, and therefore pays out an affiliate commission of $20 per new lead. The arbitrage in this case would a market imbalance of $5.