Attracting Financing is a Marketing Problem — Kleiner Perkins trial, Part II


LawyerAs a followup to my last blog, I can expound what I mean that financing is a marketing problem.  Essentially, I mean that you present your company in light of what the investors are looking for.   Let me give you a couple of real life examples.

A New York tech-finance, software company was seeking several millions for a first round. Its initial capital was financed by a couple of seasoned NYC investors. The chairman and CFO in place had founded the first Korean bank in NY and he seemed like a reasonable fellow. The product, a software to handle online data, had been granted a patent by the PTO. Yet, after one year, the company had been stumbling raising capital.  After my due diligence, I discovered that this company had one severe eyesore since one of the major 5 T’s had been violated.

The most severe problem existed with the “T”eam.  Investors look at a team’s experience and academic credentials initially. In this particular case, the management team had reasonably acceptable resumes. A couple of the senior managers had worked in banking  – which is the market for the software.

But another observation I noted, investors prefer to have the CxO’s to be geographically close to the investors and to each member of that team.

The “T”eam problem here was fairly obvious:  the CEO was situated in Vancouver.  The President in Texas.  The marketing guru in California.  The Administrative manager in NYC.  And this company was seeking investors in the East Coast.

Granted that there is a lot of chatter regarding “virtual offices.”  But the real world of investors  expects a startup team to work closely together.  They would find it difficult to swallow such a wide geographic distribution of senior managers.

And, since in the investment theoretical weighted scoring for the “T”eam is approximately 20%, that is not the right way to start out to seek capital.  The company is already close to failing.  Again, common sense should prevail.  Assume that you are an investor of a young company, which you, as an investor, would like to visit at least once a month. And the focus will be to meet two executives: the CEO and the CFO.   That is hard to do when the CEO is 3,000 miles away. Early stage investors expect to “kick” the tires of their investments. They frequently need to attend frequent board meetings.  And face-to-face meetings help to forestall any issues.  The concept of conference calls, frequent for publicly traded company board meetings, is not that well embraced in early stage investments.

I have also observed that there has been a tendency in Silicon Valley to invest in European companies.  But I myself have asked those European CEOs the investors precondition to the investment, and the response was unanimous — the Silicon Valley investors expected that the CEO and CFO relocate their families and themselves in Silicon Valley.

In the case of the NY software company, I also noted that the fragmented management indicated to me the lack of communications among them.  It seemed that not one would take leadership of the business plan or product.  And that might be a strong enough reason to keep CxOs geographically near each other.

So any seasoned investor would naturally expect to invest in companies where the senior managers are near each other and those managers are within a two-hour drive from the investors. So, again we can see easily why this company failed to attract investors — not knowing what the parameters expected from a management “T”eam.  This is not an insignificant factor in attracting investors.  Note that this is a “marketing to investors” problem.  Had the company selected CxOs in the NY metro region, they would have increased their chances for funding tremendously.

Let’s continue on the “T”eam theme. Last month, I was introduced to another company looking for investors in Silicon Valley.  Yes, it has a patented semi-conductors. The inventor has many years of experience in this field. And, yes, it is demonstrating traction via sales. But let us focus on the “T”eam. The inventor, situated in Silicon Valley, is the CEO and in his 60’s.  But the CFO is in Chicago and is also his son. The son has long-standing ties to Chicago.  So it is unlikely he would move to California. (Another red flag is the possibility of nepotism. As I noted in earlier blogs, investors look for reasons to say no. Unless the individual has stellar credentails for that role, it begins a trail of suspicion. It does for me.)

I already commented on the fact that every investor expects the CEO and CFO to be next to each other.  And this is not the case here.  And like the NYC company, this company has been seeking capital, with little or no success. And the father-son team wonders why.

I do believe that these observations make common sense.  Yet, I see too many companies not considering the “marketing to investors” factors.  And these startups will keep hitting stone walls when seeking capital.  Just some days ago, I met a gentleman who had a patented energy type technology.  He was searching everywhere for investors in Silicon Valley.  My comment was that he had a better chance in Southern California since NorCal investors are looking for the next Uber, AirBnB, etc.,  — software products with more than 10X returns. Energy related technologies barely hit single digit returns.  The only investors who seem to have any appetite for energy conservation technologies have been in Southern California or East Coast. Of course, he ignored me. And I certainly suspect that he will  be continually searching for capital to no avail.  Again, this is a “marketing” problem which this inventor has chosen to ignore.

The best funding guys I know are very cognizant to the 5Ts and how they can attract investors.  In fact, some of these guys have very mediocre products, and, yet, since they understand and embrace the marketing to investors rules, they can easily raise capital. Then I meet stubborn headed individuals with poor understanding of the investor profiles and fail miserably.  So which startup manager do you want to be?

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About Juan Ramón Zarco, SVVGP 胡安•雷蒙•扎尔科

Juan Ramon Zarco, 胡安•雷蒙•扎尔科, Silicon Valley Ventures Growth Partners llp, Hygieia Healthcare Technologies Company, AllRest Technologies LLC, Crimson Growth Partners LLP, jrzarco2001@yahoo.com, is an experienced as CxO, General Counsel and Secretary to public and private companies with global operations. Established track record of producing practical, revenue-focused solutions. As Counselor and Secretary, demonstrating vision, integrity, and sound business judgment, to CxOs. Managed complex, strategic transactions, M&A, contracts support, PE Financing, IPO, SEC compliance, Corporate/HR governance, IP licensing, Budgeting, Staff, outside counsel management, International market access strategies, Domestic & foreign government relations and advocacy. Creative in designing and implementing market access strategies. Practices law beyond conventional model with low-overhead and project-based fees. Effective at managing departments, formulating marketing strategies, balancing budgets, and implementing cost-saving measures. Extensive in-house and private practice experience, advising clients on commercial, corporate, international business, and technology law and policy. http://www.docstoc.com/video/89135472/make-your-business-an-international-presence; http://www.youtube.com/watch?v=fx5gijf3yoc For Sprint, he managed iDen international development in Southeast Asia, Middle East, and Africa, and contractual issues with Verizon. In Private Equity, he worked with Pegasus in vetting international investment deals and interim President for portfolio companies, such as Data Foundation, a data storage company, handling marketing, strategy, fund raising, and accounting. Before Pegasus, Mr. Zarco, as CLO and V.P. of Corporate Development, played a principal role in the structuring, international expansions for 2 telecom companies, U.S. Cable Group and Viatel, Inc. in financing and M&A deals exceeding $200 million. Mr. Zarco earned a J.D. from NYU Law School, M.B.A. from Cornell, and B.A. from Williams College; is fluent in Spanish, Portuguese, French, and German, with working knowledge of Russian, Arabic and Japanese.
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