Ventures To & Fro
21 Dicembre Dic 2011 2049 21 dicembre 2011

Heading to the (Over) Promised Land of the Bay Area? Seeing Wizards Part 2

They’re Off to See the Wizard . . . Part 2

A couple of weeks ago I wrote about the Italian startups selected to go to Silicon Valley, courtesy of the Mind the Bridge VentureCamp competition. (I also understand that several winners of the Intesa San Paolo Startup Initiative will be joining them for part of the time.)

Here, I write about a few things they need to convert that trip into either investment or revenue (or both).

How Good Are The Italian Startups Going to San Francisco?

Almost all of the startups at the VentureCamp have gone from idea to product or service available in the market. This is miles ahead of most US startups (OK, so it’s kilometers). Many of their US counterparts seem to get stuck spending angel bucks in the development (pre-market) phase. And then disappear.

These Italian startups know how to make things; now they need to know how to make money from these things.

That means that they need to strengthen the business side of their ventures. There are at least two aspects to that side: finance and sales.

Would I Write a Check?

Yes.

Were I seed investor, I would invest. Were I a Series A investor, I’m not so sure. The track record and the teams look pretty good, but only for seed and startup funding. They don;t have a complete team--nor would I expect them to. They are at the seed and angel stage. That's where that money is used: To build out the team.

The revenue models need more work to convince me of scalability to a revenue level that would sustain the valuation I would need as an investor at that level. What's needed is some sophisticated work on the finance and sales sides of these businesses.

On the other hand, maybe they don't need Series A money. The probable exit for every one of these companies would be a quick buyout by a larger player. For example, RCS (indirect sponsor of the VentureCamp through Corriere della Serra) could easily see value in acquiring Timbuktu very early on. D-Orbit makes sense for an aerospace company. Arkimedia has a platform that would fare very well in Hollywood; perhaps Hulu? Google?

Venture Capitalists in the Valley: 3 Things They Like

US venture capitalists respond to any combination of the following three things: a great team, a credible revenue model and actual revenue. If you have a really great team—defined as serial entrepreneurs venture capitalists have financed before—then the other two factors are less important. And so it goes with revenue.

US venture capitalists respond to any combination of the following three things: a great team, a credible revenue model and actual revenue. If you have a really great team—defined as serial entrepreneurs venture capitalists have financed before—then the other two factors are less important. And so it goes with revenue.

Revenue Model & Revenue

In this case, US venture capitalists will know almost nothing about the management teams of these Italian startups. By definition, most of these teams have no prior startup experience. It will depend upon the other two factors.

To put it bluntly, the revenue models for these startups are not robust—“robust” as in explaining the cost and revenue sides of their plans in a credible fashion. “Credible” in this case means that the revenue model clearly explains making money and spending money to make that money using broadly accepted standards—starting with ARPU, ARPPU and CAC.

Alphabet Soup

ARPU, ARPPU & CAC. Almost all startups should be able to explain their revenue models beginning with their ARPU and ARPPU, expressed by time periods relevant to their customer subscriptions. A monthly subscription, then it is MAU and daily, DAU. The right numbers for each can be found in the mobile and console game markets.

On the cost side, many startups neglect customer acquisition costs or CAC. To restate the self-evident but often forgotten: You startup will fail if your CAC exceeds your ARPPU for a period longer than your “scaling” ramp-up period. How long that period is will depend upon your market and the patience of your investors. If it is, say, longer than 18 months, then enjoy the coffee provided at the VC meetings and move on.

Help Wanted: Sales & Finance

A CFO (including an interim one) with experience can create the building blocks—the ARPU, ARPPU and CAC, among others—and build it up to the millions of Euros that should be expected. And someone experienced in sales can, well, make the sales needed to make that revenue model accurate rather than just fanciful. At least they can try.

VCs are not stupid (well, most of them aren't). They will need to see the proposed efforts to get that revenue. They have enough experience to know what are good and not-so-good sales proposals. But they at least need to see that someone is aying attention to these aaspets of the business--or they will be paying attention. once the additional seed funding is in.

So, for example, let's say that you have a revenue model based on low ARPPU but high ARPU. Well, that will mean that you need a massive sales effort to generate the traffic that will lead to many people paying a little bit of money. That’s sales.

In some cases, VCs don’t want revenue in the near-term, but traffic (or audience) with a sufficient growth rate that a larger player will see a revenue potential and acquire the company. This is the more likely scenario these days for almost any startup: Let the Googles of your sector buy you within the first 18 months after VC investment.

Is It Enough?

It is not clear that a CFO and a head of sales (or at least the intention to hire them, even on an interim basis) will generate attention in Silicon Valley, but it is clear that the absence of a credible model built by someone trustworthy will mean a dearth of meaningful meetings.

Is Silicon Valley the Wrong Place to Be?

But perhaps this is the wrong advice because it is premised upon the wrong answers. Maybe Italian startups should not go to Silicon Valley; maybe it is not the right arena for them.

This has less to do with Italian startups than it does with Silicon Valley’s existing structure. The Valley is so mature as a market that there are dozens and dozens of startups seeking funding with their teams already built. They already have the “magic” CFOs VCs already know; they have those great sales teams committed.

What the Italian startups soon to be en route there have going for them—apart from being Italian (which is an advantage)—is their track records, i.e., products and services already in the market and at a (relatively) nominal cost to date. Yes, they need the financial and sales wizards, but these founders have established track records. Seed money would be used to expand market presence and restructure the revenue models. In other words, it would be used to fund a sales & marketing VP and a CFO.


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