THE LOW ROAD: If you can't afford the $1 million it will likely cost you to erect a bare-bones Internet business, seal a deal with a company that is positioned to help your business take off once you do go live. Chad Carpenter's Klickback.com, an Internet-based rewards program headquartered in San Diego, recently forged a strategic alliance with paging company Metrocall Inc. "When we go live, we will be selling their paging services on our site, and they will use our rewards as their loyalty program for their 1.4 million consumer customers," Carpenter explains.
4. In approaching venture firms, home in on a specific partner and make your initial contact through one of your advisers.
THE HIGH ROAD: As Guru.com did so well, do extensive research on the venture firms you might want to have involved with your company. Look in their portfolios for companies with revenue models similar to yours and for businesses you could partner with. Ask your angels or advisers to give you entrÉe. Active angels can drum up VC interest in your business even before you have your foot in the door.
THE LOW ROAD: If you have no VC ties, tap into the goodwill of other Internet entrepreneurs. Contact executives at companies that are funded by the venture firms of your dreams. Would they be willing to introduce you to their venture partners?
5. Don't marry your first date.
THE HIGH ROAD: There's a lot more money out there these days than there are good deals, so explore all your options. Guru.com's founders resisted the urge to snatch up the first term sheet that VCs threw down on the table. It's smart to be choosy about whom you take money from. With every firm that grants you a meeting, take time to get to know the partner who will be your company's primary contact (and possibly a board member). Ask the entrepreneurs at portfolio companies what their venture firms have done for them and others at your stage. Play your cards close to the vest, but be clear with VCs that you're shopping around. VCs start to salivate if they have reason to think that your deal is in demand.
THE LOW ROAD: It's not the end of the world if no venture firms come courting.
6. Take the best deal, not the biggest deal.
THE HIGH ROAD: Whether your capital is coming from angels or VCs, go with the deal that will not only carry you to your next planned round of financing but also add genuine strategic value. Consider the questions that Guru.com asked of its prospective investors: What's the relevant experience of the partner who will join our team? What future partnership opportunities exist among the firm's portfolio companies?
THE LOW ROAD: Measly pickings? Take what you can get and run with it. Financing options for Salt Lake City high-speed Internet service provider STSN Inc. had become so thorny in early 1999 that founder Will West resorted to bridge financing. But as soon as West had inked a long-term deal with the Marriott International hotel chain, investors stepped right up: STSN vendor Intel and another major chip manufacturer suddenly wanted an equity position, as did two VCs.
7. Keep up your momentum.
THE HIGH ROAD: In today's supercharged Internet economy, even the leaders are constantly reinventing themselves. You should be, too. Momentum equals execution. When the founders of Guru.com discovered they had formidable competitors, they could easily have become distracted -- and derailed their financing. After an initial panic, they instead came to view the competition as proof of just how hot the market for their services was, and got back on track.
THE LOW ROAD: Even if money isn't pouring in, stay focused on the business and look for other ways to fuel growth.
And If You Can't Get Venture Capital...
Blaise Barrelet admits he "didn't even know that there were venture-capital firms" when he and his wife, Agnes, started WebSideStory, back in 1996. The starting gun had just gone off in the race to cyberspace, and as he watched the throngs jockeying for position, Barrelet wondered, "How do all these people measure returns on their investment?" To answer that question, he built HitBOX, which measures Web-site traffic, taxing his credit-card limits in the process. At first, Internet start-ups refused to pay for the tool, forcing Barrelet to give it away free in exchange for ads on customers' sites. Against all odds, the ads drove traffic to Barrelet's own Web pages, where San Diego-based WebSideStory ranked sites by their traffic. "Instead of being paid with dollars, we were paid by traffic, and we found out a way, very fast, to make money," says Barrelet, a 36-year-old Parisian. In short order the Barrelets' fledgling business achieved positive cash flow as Internet companies lined up to advertise on the site -- at the HitBOX opening page, as well as on pages with category-specific site rankings.
Three years later WebSideStory is a booming business, with 350,000 HitBOX subscribers to date and more usage-tracking products in the pipeline. WebSideStory's Web sites now get close to 500,000 visitors a day. And unlike the vast majority of Internet businesses, WebSideStory actually makes money. "They have been able to finance the business through internal cash flow," observes Kurt Jaggers, a managing director at the Menlo Park office of TA Associates, a private-equity firm. That, says Jaggers, was a key factor in his firm's decision last June to join forces with Summit Partners in plunking down $30 million for a minority position in WebSideStory.
