At the beginning of the session, the attendees were asked how many of them were trying to raise funds for their startups. A sea of hands went up. The three panelists, Frank Morse (an investment banker), Konstantine Drakonakis (a venture capitalist) and John Seiffer (an angel and entrepreneur), spoke candidly about key issues to consider when raising funds and selling equity in one’s startup. There were some key takeaways from their presentations:

• There is often a huge difference between the entrepreneur’s and the investor’s estimate of value. The entrepreneur’s first priority should be to GET THE FUNDS. Traditional scientific approaches that rely on income, discounted cash flow or asset value to value a company do not always work for early-stage companies. The process is largely an “art,” the result of creative negotiations that result in a mutually accepted value. So, don’t get hung up on valuation, but work hard to get to an agreement with the investor, because getting the funds will propel your company forward.
• Investors invest in the belief that there will be future cash flow; they do not invest in products.
  
• Capital-efficient models – those in which small amounts of money are used to efficiently bring products to market – are preferred by investors.

The panel also discussed some factors that investors weigh when evaluating startups: (1) a proven technology or product, (2) some revenue, (3) reasonable cash flow break-even projections, (4) an experienced management team, (5) regulatory compliance systems in place, (6) intellectual property, and (6) an exit strategy.

A videotaped recording of the January 26 workshop is available on the CTech Web site. Please also check the site for details about future CTech workshops.

Charlie Moret
Managing Director, Business Development

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The Kelsey Group, a leading market research firm, reports that mobile advertising revenue was $160 million in 2008 and should grow to approximately $3.1 billion by 2013. As of 2008, about 63% of mobile ad revenue came from Short Message Service (SMS), 24% from Search and 13% from Display. By 2013, Kelsey estimates that 73% of the $3.1 billion in mobile ad revenue will come from Search, 18% from Display and 9% from SMS. The continued shift from traditional advertising to digital is fueling this growth. Kelsey also predicts that local mobile will have a material impact on mobile search revenue. Given the nature of mobile devices, local queries (i.e. searches limited to an immediate geographical vicinity) conducted on mobile devices are expected to outnumber local queries on the desktop. Local queries on mobile devices made up about 28% of total mobile queries in 2008, and this figure is expected to grow to over 35% by 2013. Local queries made up about 50% of total mobile search ad revenue ($20 million) in 2008, and Kelsey predicts that they will make up over 56% of mobile search ad revenue ($1.27 billion) by 2013.

According to telecommunications giant Verizon Communications, mobile display ads have a click-through rate (CTR) of about 2%, while desktop display ads have a CTR of just 0.2% to 0.4%. In addition, GfK Group, one of the largest market research companies in the world, reports that mobile ad recall rates are 33% (41% for iPhone users), response rates among recalled ads are also 33% (50% for iPhone), and purchase or store visit after seeing a mobile ad is 14% (25% for iPhone). Industry analysts believe these metrics exceed online ad metrics — and as use of smartphones increases, these metrics will likely improve.

A quick look across the venture and M&A landscape confirms that “Hyperlocal” is emerging as a major hotbed of deal-making activity. Calling local services “hugely important” to the future of the mobile user experience, Google product SVP Jonathan Rosenberg said that location-based services will become more deeply integrated with mobile advertising and commerce services in the “not-too-distant future.”

Anil Vasagiri
Director, Investments

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The program, called the Small Business Innovation and Diversification Program (SBIDP), kicked off in late December and offers small manufacturing businesses (with fewer than 500 employees) assistance with product diversification. Maybe you have an improvement to your existing product line that would position you more competitively, or even an innovative piece of equipment or software that would revolutionize an industry. Or perhaps you’re considering expanding into a new market but need some additional resources to go forward. If you are contemplating a technology product or service that’s innovative or will diversify your markets, we want to help you.

The program will provide grants of up to $25k and requires a dollar-for-dollar matching investment. To find out more about it, go to the Small Business Innovation and Diversification Program page on Connecticut Innovations’ website.  But don’t wait too long. Although the program is scheduled to run through early June 2011, it will run only while funds last – and there’s already lots of buzz around it, with applications coming in steadily. Why not check it out? It could ultimately mean dollars for your business and jobs/revenue for the state.

Roberta Rossi
Project Manager, SBIR

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Connecticut has a clear interest in starting and supporting companies that provide quality employment opportunities, particularly in the areas of bioscience and high technology. Connecticut Innovations and CURE (Connecticut United for Research Excellence) are shining examples of that interest, although certainly they are not the only organizations supporting entrepreneurial activities. My move from the large corporate environment to the startup arena has provided many challenges but also the opportunity to probe the system, both locally and beyond, for any assistance or ways to stretch a dollar. 

One area in which our Nutmeg State could aid startup companies is to provide matching funds for federal Small Business Innovation Research and Small Business Technology Transfer grants. A number of states provide matching awards to successful SBIR/STTR applicants. An awards program would be easy to administer, as the work has already been peer reviewed by experts and deemed worthy of funding. These grants are focused on commercial realization, presumably the basis for success, and continued employment opportunities. Calculating the budget amount required for matching awards is also relatively easy, as SBIR/STTR awards are public information and projections are simple math. 

SBIR/STTR awards are wonderful, non-dilutive funding – but they rarely are sufficient to fund the work required to achieve key milestones. The possibility of driving SBIR/STTR projects even further toward commercial realization should be very tantalizing to the state. Connecticut already faces serious budget concerns, but the opportunity to leverage an existing program even further – to support the development and stability of high-tech employment in our state – seems too good to pass up.

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It was a pleasure to convey uplifting news about CI’s long-term performance. Despite two serious economic downturns during the 14-year period covered by the study, CI made significant contributions to Connecticut’s economy. Our investments in early-stage companies – our portfolio companies – enabled many of these firms to grow and provide employment opportunities and tax revenues that would otherwise not have existed.

Here are a few of the key findings of the study:

• CI Creates Jobs – CI’s investments grew Connecticut employment by an average of 1,610 jobs each year during the study.
• CI Contributes to State Tax Revenues – The cumulative, net state revenue generated exclusively by CI’s investment activity exceeds $209 million. This represents an average increase of $14.9 million in net state revenue every year.
• CI Brings Additional Outside Investment into Connecticut – Connecticut’s cumulative investment in CI of $106 million leveraged an additional $1 billion from CI’s investment partners over the period studied.

We are proud of these accomplishments and intend to continue to be a leader in the technology community – identifying promising entrepreneurial businesses, providing the right support and leveraging capital from other sources.

Here is a link to our press release about the study, “The Economic Impact of Connecticut Innovations’ Portfolio on the Connecticut Economy.”

Peter Longo
President and Executive Director

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The launch of our first product, WakeMate, a cell phone accessory (wristband) that helps awaken users at an optimal point in their sleep cycle, was exhilarating - but I think it took about five years off my life. We launched in late November through a TechCrunch article and took pre-orders on our website www.WakeMate.com. We really didn’t know what to expect. Would consumers actually give this unknown company their credit card information for a product that wasn’t even out yet? Once the article posted, we immediately saw a huge stream of orders coming in; hundreds in the first hour. My co-founder Greg Nemeth and I manned our live online chat as best we could, but our screens were overflowing with IM windows from inquiring customers. All in all, the reception was very positive with a bunch of orders and some great feedback and ideas. It was an experience I will remember for the rest of my life.

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CI recently strengthened its support of Helix by making a follow-on investment in the company. Click here to read our press release.

We are in the process of exploring other Yale-grown technologies with hopes that there will be additional partnership opportunities for CI – where our early-stage support can make a difference in helping launch startup companies.

Russell Tweeddale
Managing Director, Investments

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Over the holidays I was cleaning out my paper files and came across Regis McKenna’s seminal article, “Marketing Is Everything,” published in the Jan-Feb 1991 Harvard Business Review. That’s a pretty long time ago, but during the early to mid-1990s the paper was a touchstone for marketing leaders and transformed how many organizations thought about marketing. Its main message – that marketing’s role is to “create, sustain and interpret the relationship between the company, its suppliers and its customers” – was controversial at the time because it challenged the prevailing attitudes that marketing was distinct and subordinate to the core functions of the organization. McKenna, in contrast, believed that marketing must become a way of doing business, all-pervasive and part of everyone’s job description.

The imperative that marketing must be a way of doing business is especially true in emerging companies because resources are scarce and their employees wear multiple hats. I agree with McKenna’s message and would add that marketing, and business, is primarily about building relationships. What’s exciting is that today there are more tools and techniques than ever to help. Here are three great examples that build on each other in important ways:

1. Buyer Personas. Noted marketing strategist, author and speaker David Meerman Scott defines a buyer persona as “a type of buyer that you have identified as having a specific interest in your organization or product, or having a market problem that that your product or service solves.” In his 2009 book, The New Rules of Marketing and PR, Scott makes the case that buyer personas are the single most important thing you must build before creating your marketing or PR plan. I’ll be bolder and suggest that doing so will also significantly improve your odds for a successful business. Without buyer personas you will struggle to achieve market focus. With them, you’ll have a clear picture of who to target, what they want, and what solutions or content they need to solve their problems.
2. Social Media. The core of social media is building relationships. Blogs, Twitter, Flickr, YouTube, Facebook, LinkedIn, e-books and e-zines, tools that are often free (except for your time), can help you create awareness, boost PR, enhance customer service and have online conversations about your company. Creating a social media strategy that targets your buyer personas is a terrific way to strengthen relationships with the people most important to the success of your business.
3. Thought Leadership. A company that is identified with innovative insights into a specific set of business problems or industry issues inspires trust and confidence, differentiates it from its competitors and helps build a strong brand name, all of which contribute to increased sales and margins. Imagine delivering your unique vision through whitepapers, webinars, podcasts, videos etc. via social media accurately targeted to your key buyer personas. This is very powerful indeed.

The prescient McKenna predicted that new technology would allow companies to build strong relationships with their customers, effectively integrating them into their operations and therefore allowing the company to own its market. With a thoughtful approach, today this is more possible than ever.

Dan Wellers has an office at CTech in New Haven and may be contacted at wellers@snet.net  or 203-438-7504.

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We brought him to the vet very early on a sunny morning, and after working one last time on the wound, the vet quietly said, “It’s time folks.” Like everything else in life, Günter was not going down without a fight. He tried to get off the table and struggled with the vet tech until he was slipping into sleep.

Now you are asking: “Why am I reading this?” and “What does this have to do with selecting prospects for investments?” Please be patient and read on.
My wife and I were true empty nesters for the first time in over a half century of marriage. We had always talked about the wonderful trips we would take and adventures to be experienced when we no longer had responsibilities. But now it didn’t seem important. The house was dead, and we had never realized how important our dogs and cats were to making us happy and whole.

So the big decision was made – email the GSD breeder and put our name in for a puppy. The breeder emailed back that a litter was expected in October. Now we were hooked. We sent our deposit immediately so we would be first to choose a male. Then we started worrying. How does one select a puppy that will fill Günter’s big paws? We asked to see the puppies as soon as they were born. The breeder said we could come see them once they were two weeks old. We visited, met the bitch who was very friendly and outgoing, and met eight blind, deaf bundles of hair. We asked to come back, and four weeks later we returned to meet eight little hellions trying to tear down a gate to get outside. I asked the next question: “When confronted with options that all seem acceptable, how do you choose? Eenie, meenie,miney, moe?” The breeder said, “That works as well as anything.” 

That approach, however, does NOT work with investment prospects. Read on.

Now the big day arrives, and it’s decision time. All the way down to the kennel, we kept asking ourselves: “Are we doing the right thing?” After all, these are rambunctious puppies.
The five males were segregated in a pen with different color ribbons placed on their necks, so we could distinguish one from another. One was rejected immediately because he needed to put on more weight before leaving. One just didn’t seem interested in us. We were then told to enter the pen. I picked up one, and he pulled his head back; his look said “Why do you touch me earthling?” Reject. Now we were down to two: the one sporting the red ribbon and the one with the green ribbon. My wife picked up one and then the other. They both responded to her, so she copped out.  Then it was my turn. I picked up “greenie,” and he was okay, then “red.” Smooch, smooch, lick, lick. I declared, “This is the one!”

Now the Smooch Test is a well-proven method for choosing a GSD puppy, but I wouldn’t use that method to select investment prospects.

So let’s perform a thought experiment. Picture a quiet room where we mingle with investment prospects and carry on casual conversations with them, discussing their business plans and aspirations. We begin to notice that the prospects can be separated into two categories: those offering products or services that satisfy wants, and those offering products or services that satisfy needs.

Now wants are those “things” that drive our consumer-oriented economy. Wants are things we don’t need, such as that new cell phone with the larger screen, but items we just have to have because the advertiser says so. Wants come and go quickly, and while there often are big profits to be made, the success of those products or services will depend more on the timing and correct reading of market conditions than on long-term demand for the products or services.

The other prospects are trying to satisfy needs, offering products or services that go to the very heart of our daily lives
.
Now it’s due diligence time. We must seek answers to many questions about the prospect, its technology and its market. What is the market size? Who are the key players? What other companies offer competing products? Is there any intellectual property? Does the prospect have “freedom to operate,” i.e., is it stepping on someone else’s toes? Have the founders done this before, and what is their track record? Does the team “mesh” well, and will other talent have to be brought in?
  
I think you are getting the picture. BUT, there is one test that only comes with experience and is something an investor probably has to be born with: an “educated gut.”
While one’s “gut” may guide one to select the “best” puppy, it alone should not be used to select the best investment prospects. One must consider several factors – the sum total of one’s due diligence AND one’s “gut.”

Good luck with your puppy and prospect shopping!

Russell Tweeddale, Managing Director, Investments

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Like Andy, Connecticut Innovations has reviewed hundreds of business plans and listened to countless business pitches from entrepreneurs who are seeking startup capital. Over our 20-year history, we have seen examples of each and every one of the 10 mistakes that he highlights and would encourage the next generation of entrepreneurs to keep this list handy and give it due consideration before raising capital.

This blog post is a quick read and worthwhile…Here is a link.

Peter Longo
President and Executive Director

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