C-360 Inc., a Providence-based startup, is gearing up to launch a cool new imaging system for the display-advertising industry.
The product allows an illuminated image to be seen from any position within a 360-degree radius of it, so the viewer can walk a complete circle around the display and constantly see the same graphic. The company has several potential customers lined up, – Nike and Sony Play-Station among them – has garnered some seed money and has solid patents on its technology.
OK, so exactly what is C-360’s value at this point, and how much of an equity stake should it be willing to give up to an investor?
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That’s what company founders John Kilkelly and Neil Salley hoped to answer by participating in the latest Brown Venture Forum on Feb. 21: "Winning the Pre-Money Valuation Game." C-360 was one of three companies to go under the microscope of seasoned venture investors, who get paid to probe entrepreneurs’ business plans and place value on startup firms.
The companies got plenty of pointed advice in front of an audience of about 100 entrepreneurs, investors and students at Brown University’s Bio-Medical building.
"As a tech investor, I want to see a steeper (sales) ramp," said David R. Johnson, a partner with Rosecrest Venture Management in Newport, a consultant for early-stage firms. "I want you making more money," he told Kilkelly after his presentation.
Kilkelly and Salley also were advised that the $300,000 in equity they were seeking wasn’t enough to attract future venture-capital investment.
The pair heeded both pieces of advice: They’re now seeking $500,000, which will help beef up marketing efforts for their first two products. They also boosted their three-year revenue projection from $6 million to $8 million, with hopes that the enhanced revenue will speed development of a streaming-video version of the technology.
"It was extremely valuable to present to real-life venture-capital guys, to see what they thought," said Kilkelly.
The monthly forums presented by Brown Venture Forum help entrepreneurs network and devise strategies to grow their businesses. Last month’s objective: to shed light on how venture investors place values on early-stage companies, and how startups can position themselves for maximum valuation.
After summing up their business in 10 minutes, the three startups were challenged to examine key aspects of their business models that ultimately would sway valuations:
Are the potential revenue streams clearly defined for investors? Are the projected gross margins too large – or too small? What will be the customer’s return on investment? Does the management team need more talent at this stage? Have partnership or licensing opportunities been explored? Does the pricing strategy make sense?
Rhode Island-based Collaboration Catalyst, for example, presented details for launching its new software application called Digital Enzyme, which can detect critical breakdowns in a company’s supply chain and alert it to problems instantly, before major damage is done. Founder Jim McGwin used the example of BASF, which stands to lose as much as $8 million to one supply-chain snafu.
While investors praised the company’s targeting of a key "pain point" for companies, they questioned whether the proposed pricing structure for the application – between $75,000 and $200,000 – was too low.
"If you’re solving an $8 million problem with a $200,000 solution, maybe the price is not set where it should be," offered Robert H. Rosen, a vice president at Gemini Investors, a late-stage venture firm in Wellesley, Mass.
The audience also heard from FarSounder Inc., a Narragansett startup that makes sonar equipment to give boats a three-dimensional view below the water surface in front of them. After spending five years and $1 million developing the technology, the firm is seeking $5 million in venture capital, CEO David Wood said.
Rosen said the company’s self-tagged valuation of $4 million was "reasonable," given its strong intellectual property, large target market and partnership opportunities. FarSounder was encouraged to pursue strategic investments from key boat builders in each boating market, such as Raytheon in the defense segment.
Entrepreneurs also got advice on the type of financing they should look for at different stages.
Most early startups – those still developing prototypes and defining their market – should look first to friends and family and seed funds, such as the Samuel Slater Technology Fund, according to successful entrepreneur William O’Farrell.
Such startups generally require less than $1 million in capital, said O’Farrell, who co-founded SpeechWorks International, a Boston-based software firm that went public in 2000 with a $500 million valuation. Although seed investors put up comparatively little money, they are crucial, he said.
"They’re doing it because they like you and trust you," O’Farrell told the audience. "They deserve a return."
Startups looking for first-round financing – typically between $1 million and $4 million – should seek early-stage venture funds and angel investors, O’Farrell said. These companies generally are hitting their first customer deployments and still defining their target market.
Firms seeking second-round financing usually are ironing out market-timing and execution issues, and require investments roughly between $5 million and $15 million, O’Farrell said. Late-stage funds, venture leasing and corporate investors are good options at that stage, he said.
Johnson of Rosecrest Venture Management said many startups make the mistake of seeking venture capital too early. He said that happens when companies underestimate the amount of time they’ll have to "boot strap" their companies, or scrape together as much cash and credit as possible before receiving significant capital from outside investors.
For information on the next Brown Venture Forum, visit www.brownventureforum.org or call (401) 863-2780.
