1M/1M Strategy Roundtable: Try To Get At Least $2M Pre-Money In Seed Round Valuation
At today’s roundtable, we had some interesting companies and a lot of fund-raising discussions, and I will review them shortly. Before I do, however, I want to talk about a thumb rule that I’d like to propose to entrepreneurs about raising money.Bottom line, early stage equity is very, very expensive. So at any point, if you are trying to raise money, and you are hearing from investors that you are too early and have too little validation, it may be a good thing.
As a thumb rule, try to get enough validation so that you can get to at least a $2M pre-money valuation before raising equity capital. Sub-$2M pre-money, it is better to bootstrap. If you have to raise money, try to do so as convertible notes. That is debt financing that converts into equity at the Series A valuation once the price for that is set. [I believe Jeff Clavier and many other seed investors are in agreement with me on this issue.]
Also, extremely important is that you need to raise enough money to be able to reach the next major milestone.
So with that preamble, let us look at today’s roundtable companies.
First up was Siobhan O’Brien with OnTrack Imaging, a medical diagnostic imaging venture catering to the horse owners and trainers market. As Siobhan rightly points out, horse owners spend enormous amounts of money dealing with various injuries. Her diagnostic imaging camera and related software, priced at $45,000 per unit, she says, would bring unprecedented capabilities to the vets and trainers for practicing preventive medicine. The equine diagnostic equipment market adds up to over a billion dollars, and Siobhan wants a piece of it.
Our discussion today was largely around her financing strategy, and one of the key milestones that I probed her on was: what does it take to get a validated customer?
Well, it turns out that with about $900k and 12 months, Siobhan can get to paying customers.
She has been toying with raising $350k, $2M, so on and so forth. But the right funding strategy for her is $900k-$1M, potentially from angel investors or small funds. We will work on that with her.
Then Liana Thompson pitched Trendy Loot, a very early stage deal site for low-end jewelry. Liana has just launched three weeks back with a list of about 5,000 customers from another e-commerce business she owns. However, her list has not been converting very well, and she came to ask if she should add further traffic generation programs such as Linkshare and ShareASale. She seems to have good relationships in the blog and media world for the lifestyle products category, and I thought that she should first harness those before spending money on the performance marketing services like Linkshare.
However, there is a much more significant question here: why is her list of 5,000 not converting? I asked her to call up 50-100 from that list and ask for feedback from those customers. There is no point in spending money to drive traffic to the site until she figures out why the site isn’t converting.
Next Igor Protsenko presented Profitero, an enterprise software product for helping retailers with price comparison and optimization. Igor’s focus is large retailers, and he has had conversations with a couple of them in the UK. I have to say, I am not convinced about this business opportunity because I did not see a sufficiently thorough competitive analysis. Doesn’t Retek have anything in that product category? Igor did not have an answer.
Rajan Chandi then discussed HirePlug.com, a Facebook application to help large employers manage referral hiring. Rajan has interest from a variety of large enterprise customers, and I have a CIO whom I will introduce him to, who is looking for this solution. I like the idea a lot, and believe there is a big company to be built around it.
Rajan, however, needs to negotiate his early customers better. He seems to be worried about server costs and such and is trying to do high dollar value deals without reference customers. I advised him to close six brand name accounts as 6-month or 12-month deals so that he can rapidly show value and ROI, even if that is at a discount. As long as the deals cover his infrastructure costs, he should not be worried.
A lot of money can be made with this product, and Rajan needs to build it without any outside capital – that is, with customer money – that is, with revenue – for a long while yet.
Value of Insight Consulting, Inc.
Last up, Todd Clark with Value Of Insight Consulting, Inc., a consulting and publishing company for the pharmaceutical industry that already has a $500,000 a year business. Todd knows the business of publishing highly specialized data and research in the pharma domain very well. He routinely sells $20,000 deals to corporate clients. Now, he has a new business idea in providing clinical trial data and research in Oncology, and is wondering if he should raise money. He wants to provide online subscriptions, and additional tools on top of his data services.
As we dissected the business, it became clear that this is at best a $5-$10 million business opportunity. Not something that VCs or angels invest in. It is, however, a great opportunity to keep building a larger, and highly profitable lifestyle business. I encouraged Todd to keep building.
Lifestyle businesses: Built to Enjoy
Folks, I want to go on record to say that I love lifestyle businesses, and I love to support entrepreneurs in building highly profitable lifestyle businesses. I know Silicon Valley and the MBA types look down upon lifestyle businesses. Well, I don’t. Build to Enjoy is a strategy that I am very much in favor of. [Two case studies worth reading in this context are eClinicalworks and ClubPlanet].
About Online Strategy Roundtables
I started doing my free Online Strategy Roundtables for entrepreneurs in the fall of 2008. These roundtables are the cornerstone programming of a global initiative that I have started called One Million by One Million (1M/1M). Its mission is to help a million entrepreneurs globally to reach $1 million in revenue and beyond, build $1 trillion in sustainable global GDP, and create 10 million jobs. In 1M/1M, I teach the EJ methodology, which is based on my Entrepreneur Journeys research, and emphasize bootstrapping, idea validation, and crisp positioning as some of the core principles of building strong fundamentals in early stage ventures. In addition, we are offering entrepreneurs access to investors and customers through our 1M/1M Incubation Radar series. You can pitch to be featured on my blog following these instructions.
About Sramana Mitra
Sramana Mitra is a technology entrepreneur and strategy consultant in Silicon Valley. She has founded three companies, writes a business blog, Sramana Mitra On Strategy, and runs the 1M/1M initiative. She has a master’s degree in electrical engineering and computer science from the Massachusetts Institute of Technology. Her Entrepreneur Journeys book series, Entrepreneur Journeys, Bootstrapping: Weapon Of Mass Reconstruction, Positioning: How To Test, Validate, and Bring Your Idea To Market and her latest volume Innovation: Need Of The Hour, as well as Vision India 2020, are all available from Amazon.