For years, many investors have advised all startups to take all the money they can get.
The last 12 months have been tougher for all startups, including marketing technology companies. The darling among marketing technology companies and IPO candidate – Snapchat – raised a more-or-less flat round last year despite a growing advertising business and Foursquare raised a down round (a round with a lower valuation than its previous fund raising round). Noted financial services firm Fidelity cut its valuations on a number of marketing technology companies, including Domo, Turn and Taboola.
That’s why I’m encouraging marketing technology companies to right-size their funding rounds and valuations and raise the money that they really need because both taking too much funding and not taking enough funding can hurt a startup’s chances of succeeding.
Raising Money and Valuation
For the Seed and A Round, a startup needs to think strategically regarding its needs for the coming two – three years before embarking on the fund raising round. Taking too small of a round might require raising more money before the company is ready, and raising too much can dilute the founder’s stake in their Startup.
And for the A Round and beyond, startups that raise a lot of money based on strong sales targets use the funding money to ramp up sales and marketing expenses in order to achieve those targets. But if initial sales are less than expected, many companies find it difficult to make the necessary cuts to right the course or buy time until they can recalibrate. Or they might hire the wrong kinds of people and take too long to rectify their staffing. That’s why startups need to act strategically and be proactive with their teams and their board to ensure that expectations are correctly managed.
One of the potential challenges that can be associated with a large round (at a high valuation or even after smaller rounds in today’s funding market) is that if the startup fails to achieve the promised growth, it runs the risk that the next funding round is a down round at a lower valuation.
This is why management of a company’s valuation alongside the funding is critical for the entrepreneur CEO. The entrepreneur must work to strike a balance between the desire for a high valuation now and attainable traction / revenue goals in the years to come.
With those startups seeking some kind of exit, every dollar secured raises the bar for an exit exponentially. That’s why founders need to ask themselves: “Are we building a $50 million company, a $500 million company OR a multi-billion dollar company?” If you’re building a larger company with true market potential, you should go for it. And if you’re building a smaller company, then take funding accordingly.
For most marketing technology companies, an exit will come either via an IPO OR an acquisition, and both have their challenges. Most of the marketing technology IPOs over the last few years have seen their stock prices plummet. RocketFuel (FUEL), YuMe (YUME) and Tremor Video (TRMR), which peaked in late 2013 or early 2014, are currently trading significantly below their IPO price and at only 5 – 33% of their peak stock price. Even retargeter Criteo (FRA:CI5A), which had what is considered one of the most successful marketing technology IPOs, is down significantly from its peak in July 2015.
Though an acquisition is usually an easier exit, the list of acquiring companies, either Internet technology leaders like Google or Facebook, telcos like Verizon or Marketing Stack providers like Oracle, Salesforce, Marketo or IBM, is limited. Once one of these companies buys a Startup in one space, it will most likely not buy another one. And quite a few marketing technology companies have recently been acquired below their last valuation.
Having spent the last decade managing an early to middle stage investment fund and now a mar-tech focused incubator, I’m bullish on marketing technology and its potential for improving relationships between manufacturers, marketers, retailers and consumers, and of course, on generating a healthy return for investors. I also believe that lots of great companies will be funded in 2017, including some that will gain large rounds based on deserving metrics and business models. But having invested in and mentored startups through the last few cycles, I believe that prudence is necessary when marketing tech companies manage their funding.
Ultimately, it’s about trying to include as much certainty into the planning of your startup – something which I know from experience is difficult – in a process that is full of uncertainty.