Proof is now in profits, start-ups are finding

A new word was on the lips of entrepreneurs at the Fourth Annual Early Stage Investment Forum. Customers.

By:
John Cook
Seattle Post-Intelligencer

With the venture capital well continuing to dry up, early-stage entrepreneurs have been forced to build their businesses the old- fashioned way. That not only means maxing out credit cards and tapping friends for start-up capital, but also finding customers who are willing to take a flier on a new product.

That was more than apparent at yesterday’s conference, which brought together 14 entrepreneurial companies from around the Pacific Northwest that pitched business ideas to investors.

Nine of the 14 presenting companies had already landed paying customers. Of the 94 that applied for the event, more than half were generating revenues. That’s a far cry from four years ago, when most of the entrepreneurs were doodling business plans on napkins rather than touting new customer wins.

But the change in mindset certainly mirrors the times. Venture capitalists no longer have the time or patience for concept companies. Rather, they want to see start-ups that already have a management team, a product, customers and, in some cases, profits.

Entrepreneurs are certainly getting that message. Nearly every presenting company at the Seattle conference talked about customers or partnerships that will drive sales.

VoiceBox Technologies, which has developed speech recognition software that allows individuals to access Internet content through voice commands, didn’t even consider raising venture capital three years ago. Executives knew it was too early.

Instead, the Kirkland company, which is led by brothers Mike and Rich Kennewick, funded the company on their own as they built the product. Executives did not take salaries for the first year. They also paid for computers, office space and airfare out of their own pockets.

The bet paid off. Earlier this month, one of the world’s largest automotive companies bought the company’s software. That customer, which was not disclosed, now is being used as leverage to attract about $2 million in financing.

"We decided to fill out our team, get a released product, build a sales pipeline and get our first customer before we went seriously after the venture community," said Rich Kennewick, president of VoiceBox. "That is what the venture guys want to see now."

David Senan, president of Alki Networks, also was touting some of its customers at yesterday’s event as he interacted with local investors. The Seattle company, which develops software that integrates digital marketing campaigns at gas station and billboard video displays, has raised about $500,000 from friends and angel investors. He also stressed the importance of customers.

"What I have found as an entrepreneur is that you have no choice but to bootstrap," said Senan, whose customers include Travel Centers of America, Duncan Oil and The Lucky Eagle Casino.

"These days people aren’t throwing money at good ideas haphazardly. Therefore they are saying go back out and get customers, make some first downs instead of going for the touchdown.

"The revenues that we have realized have gone a long way to help us, but not enough," he said. "We definitely need some research and development money."

Geir Hansen, senior vice president at Silicon Valley Bank in Bellevue, said customer validation is more important than ever. Without customers and a defined path to profitability, he said, few venture capital firms are willing to place bets.

"It takes a lot more sweat equity to get to the point where VCs want to invest," Hansen said.

Rich Karlgaard, the publisher of Forbes Magazine, who gave a keynote address at yesterday’s event, agreed.

"Speed to profitability matters more than speed to IPO," Karlgaard said.

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