DOOH Investing Series, Pt. 3: Raising Capital & Defining
LARGO, Florida (July 11, 2011) – DOOH.com’s Original Articles by Tony Hymes (Editor) – Multiple Strategies for DOOH Investing.
The first couple of articles in our series on DOOH Investing featuring CEO of UR-Channel, Ira Terk, laid out information from the standpoint of the investor, looking at companies and how to enter the DOOH space. These articles discussed some of the different strategies available, including Terk’s strategy of finding an established company and altering some aspects to make it a digital signage company.
Terk lays out what investors are looking for across any industry: “you’re looking for a great concept, entrepreneurial talent, a business model, some customer development plan that seems to make sense, and a model that can scale and is repeatable.” It is the same for digital signage and DOOH companies. The reference to scalability is something that can be heard frequently around the DOOH industry, for it is the key to achieving a revenue stream that can turn a profit.
Yet investing is not a one-way medium, it goes back and forth, and it is important to understand how to successfully raise capital, and how to define what success is for the entrepreneur. According to Terk, “there are a number of companies that have been successful [in the DOOH space] in penetrating the market, but we are not sure of the financial success of the entrepreneurs that have started them up. It goes back to the definition of success in an investment environment.”
Terk points to the earlier days of the industry where investors flocked to ad-based DOOH models. “Early on, most business models were related to advertising, just like they were online, but it’s a more complicated revenue versus return relationship when you’re building a capital intensive digital network with a physical presence in bricks and mortar locations. Most investment made on the promise of advertising failed, and that’s hurt the ability of the industry to attract investment now, even though technology costs have come down substantially and more suitable business models have come to market.“
“There have not been too many exits with all cash buyouts; some mergers have occurred, but there isn’t a lot of information on the metrics behind how the founding entrepreneurs did,” explains Terk. This is where he dives into the definition of success in an entrepreneurial environment. “Generally, in an industry like this, in most cases, the entrepreneurs have been diluted very significantly when they raise tens of millions of dollars during start-up and growth phases. The company may have become a success in the marketplace, but how did the entrepreneur who founded it do financially, and/or even the early stage investors for that matter? “Success” is relative to each stakeholder’s goals and perspective. ”
Companies looking for investors live and die by their valuation, which, when not all the data in the industry are available (until more companies are floated publicly), requires some comparative mathematics to define. Terk states “if you do look at the private transactions that have begun to take place, you can compare relative to others what your company might be worth. There are a number of companies that have raised multiple rounds of capital; it can give you an idea of how much you can obtain by looking at the information those companies have disclosed, such as sales, customers, number of locations, etc., on a relative basis.”
Essentially, “there are different levels of risk for investment and working capital; a company that has already piloted, for example, will likely have a greater valuation than one which is in conception mode. If you haven’t piloted yet, that’s a different risk factor, hence, in general, you’ll receive a lower valuation. Once you’ve got revenue, you’ve got some traction and investors will be able to place more value on your sales pipeline.”
Terk provides some parting advice about the strategy for raising money. “If you think your business is worth $10 million and you need $3 million, you’re going to sell 30% of the company on a pre-money valuation basis. You make your pitch to investors, and find you are getting offers for $3 million but only on a $5 million valuation, representing 60% dilution. Do you still seek the $3 million or try to raise $1 million instead, only diluting 20% at this stage, with the goal of trying to get your company to the next important milestone, creating the higher valuation that you were seeking. It’s a balance between what’s truly required to develop the business, dilution and the entrepreneur’s motivation, which is important to investors as well. If you dilute the founding entrepreneur’s ownership too much early on, they may lose their desire to build the company. So sometimes it’s more advantageous to break your business plan down into smaller steps within a longer term vision to incrementally create value and minimize dilution.”
In short, the strategy for raising working capital and growing a company to success is just as fundamental as having a well thought-out technology and communications strategy to sell to customers. Equity expert Bob Burtis recommends enlisting a specialist to help to package the company, which, in the DOOH space, is proving nearly as important as the products DOOH companies are selling.