Very early “seed” investment in technology startups — the up-front money that kickstarts an idea into a functioning company — has changed significantly over the last decade. Ten years ago when a company raised an angel or seed round of one-half to $1 million, the funding would be used to form a company and start building a team, but that was about as far as things could go on that amount of cash.
“It didn’t really take it to a milestone of generating revenue or having a customer or getting a product ready for sale,” says David Horowitz, partner at Genacast Ventures, a seed-stage investor, based in Philadelphia. To reach this stage, the company would need to raise another $5 to $10 million.
But in the last five years $1 million has allowed companies to hire teams, get products out the door, and start generating revenue. First, where previously they had to obtain software licenses from Microsoft and other companies, today lots of open source software is available. Second, instead of owning their own servers, they can rent servers cheaply through the cloud.
As a result, what were formerly fixed costs for software and hardware are now variable costs. Finally, the idea of a “lean startup” has taken hold, where companies get out the door at the beginning a “minimally viable product” created by two or three developers, rather than a complicated product that requires hiring a dozen engineers. With this “good enough” product, the company can start to generate revenue.
Cognizant of these new realities, Horowitz convinced Comcast Ventures, the company’s venture capital arm, to take advantage of these new investment realities. To go after these opportunities they started Genacast Ventures, which has made about eight investments since 2008 with lots of success.
Horowitz will be part of a panel of five to seven early-stage funds, new to the New Jersey Entrepreneurial Network, Wednesday, April 3, from noon to 3 p.m. at the Princeton Marriott, 100 College Road East. Attendees will be able to meet individually with each of the panel representatives. Cost: $55, which includes buffet lunch and dessert. For more information or to register, go to www.njen.com.
Horowitz considers several criteria when deciding whether to invest in a company:
Team that can deliver. The team must be experienced and must give potential investors confidence that it can produce the product it is proposing.
Product that solves an existing problem. Usually the team has witnessed a problem that it wants to found a company to solve. Double Verify, for example, was started by an entrepreneur from the online advertising space. In his previous company he had witnessed bad behavior toward online advertisers who were not getting what they had paid for.
Advertisers were being told that they were getting a million impressions, says Horowitz, but some of these may have been on inappropriate content sites or not even visible to customers. To reassure advertisers, DoubleVerify confirms that online ads are doing what they promised. “They knew there was problem, and no one else had solved it before,” Horowitz says.
Another example of a company created to solve a problem is Enterproid, whose founder came out of Morgan Stanley, where he was in charge of administering the mobile devices used by the company’s employees. He came to realize that people wanted to use their own phones rather than company-distributed devices for company business — a phenomenon called BYOD, or “bring your own device.”
Understanding that corporate work needed to be security protected, Enterproid’s founder created Divide, a product that creates a second, dual mode on cell phones for office applications. In the work mode, employees can securely access information and applications, but they can flip back to the personal mode without being encumbered by corporate policies. “It is as if the user has a corporate device,” says Horowitz — an elegant solution to a widespread problem.
Product that has a large market. The critical question is simple: “Is it a large market with a lot of people who will pay a large amount of money for the product?” Also critical is market timing. “Is it a product now or sometime in the future?” he asks, adding, “A lot of companies fail because they have a good idea but the market is not ready today to adopt the product.”
To find the right venture capitalist, Horowitz recommends that entrepreneurs do lots of research, looking at who has funded other area companies; talking to the lawyers and accountants of funded companies; or checking AngelList, a directory of different angel and seed-stage investors, at angel.co. They might also want to consider how the venture capitalists themselves reach out to entrepreneurs: via networking, developing a referral network, meeting with entrepreneurs, or going to technology meet-ups or to conferences where companies might be presenting.
Horowitz grew up in Paramus, New Jersey. His mother is a schoolteacher and his father owned a retail business. After graduating from Michigan in 1998 with a bachelor of business administration, Horowitz completed a two-year investment-banking program at Bear Stearns, where he worked with many startups during the dot.com era, including companies that went public. Much of his work was in the cable industry, and Comcast was one of his clients. So when Comcast decided to start a venture fund ithired him.
Genacast Ventures, where he is a partner, funds a relatively broad array of companies involved in Internet-enabled technology, focusing on enterprise software, data analytics, advertising or marketing, and digital home. The companies are in the seed stage, and Genacast generally invests one-half to one million in companies looking for a total of $1 million to $2 million.
In dealing with the startups it funds, Genacast uses standard terms set by the National Venture Capital Association. The investor generally gets preferred stock in the company as well as a board seat, with the board member working with the company to help add value and make it successful.
If the company does fail, there may be some salvage value in the technology or assets, or there may be a private company interested in the technology and team (venture capitalists might merge their equity into the other company’s equity, thereby ending up with a smaller percentage of a larger company.)
For entrepreneurs who are making a presentation to venture capitalists, Horowitz notes that they have to be able to articulate the problem that their product is solving in a short time, using five to ten slides. “Business plans are pretty archaic,” he says. “It’s mostly a visual presentation. If they can’t explain what they are doing in five to ten slides, it means there is probably something wrong.”