TEACHING & LEARNING
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OUTREACH
Return
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Faces of Wharton Entrepreneurship
RESEARCH
Bridge
Over the River Why
Is There a Robot in Your Future? Helen Greiner Thinks So
Meet the VC
Public
Square Off Between Wharton-bred Entrepreneur and Seasoned VC.
The 20-something entrepreneur, dressed in a jacket and tie, betrays little nervousness. His voice doesn't quaver, and his hands don't shake. He may look youthful, but he talks like Bill Gates.
Local internet search, he points out, has the potential to be a $10 billion market by 2010 and will soon replace the Yellow Pages as the way that consumers find small businesses ranging from auto mechanics to obstetricians. And his little startup, he says, is closer to delivering it than some of the giants of the Web. It's already selling ads to dentists, other professionals and tradesmen in Philadelphia and Washington, D.C.
The venture capitalist, wearing an open-necked shirt and sitting with his arms crossed, cuts in. "You're up and running?" he asks.
"Yes, we have about $500,000 in sales."
"What's your cost per client acquisition?"
"About $300. And we have about an 85 percent retention rate."
And so the conversation goes. The entrepreneur keeps trying to gently steer the conversation back to his PowerPoint presentation, clicking through his slides and offering up new facts and forecasts, while the venture capitalist keeps jumping in, peppering him like a prosecutor. He's friendly, but relentless.
In other words, it's
a typical pitch for funding except for one thing — it's
happening in front of an audience of about 100 Wharton students.
The entrepreneur is Wharton senior Nathaniel Stevens, founder of Philadelphia-based
Natpal.com.
And the venture capitalist is Doug Alexander, a University of Pennsylvania
alumnus and managing director at Internet Capital Group in Wayne, Pa.
Stevens and Alexander
agreed to stage the meeting as part of the lead-up to this year's
Wharton Business Plan Competition. Their seminar, called "Meet
the VC," aimed
to give students a real-life sense of the sorts of questions to
expect if they get a chance to present their plans to a pro.
Though the meeting was fictitious, Stevens' and Alexander's resumes aren't. Natpal really is a local search advertising company that's selling its services in Philadelphia and Washington and aims to open offices in New York and Boston by the end of this year. Late last year, BusinessWeek named Stevens one of the country's top entrepreneurs under age 25.
Alexander, for his part, not only invests in companies, but he has also launched several entrepreneurial ventures himself, including Reality Online, a financial-planning and investment website. He transformed Reality into a site serving retail brokers and sold it to Reuters in 1994.
Part of Alexander's motivation in agreeing to do the seminar was to correct misunderstandings about the ways in which venture capitalists operate, he said. "There's this perception that there's three hungry wolves on one side of the table and the poor entrepreneur on the other. But most of the meetings we do are pretty friendly and open. We're just trying to understand the company. Both sides learn a lot from these encounters."
Stevens agreed, saying that Alexander's tough but genial interrogation will help him bulletproof his presentation before he gives it to other venture capitalists. "I'll use more anecdotal evidence in the future," he said. He'll build his pitch on Natpal's particulars, rather than projections about the size of the total market.
Stevens added that, if anything, he was more nervous giving the presentation in front of a crowd of his fellow students than fielding Alexander's questions. "I tried to zone them out a little bit," he said. "It was more people than I expected."
Stevens and Alexander's exchange offered lessons for anyone who is considering approaching venture capitalists about funding.
Alexander, for example, hammered on the necessity of offering up real metrics from a startup's experience, if they're available. "A good VC will zero in on empirical evidence," he warned. In Natpal's case, he wanted to hear about the rate at which the company converts sales calls into clients and the amount of revenue that each client generates. Add that to the number of dentists in Philadelphia, and he could quickly make a back-of-the-envelope estimate of the company's potential. "You may be presenting this backwards," he warned Stevens. "Maybe you should present it, ‘I can generate 2,000 calls a month for dentists in Philadelphia.'"
Too often, he said, aspiring entrepreneurs try to make grand, global claims about the nationwide size of a market. "We know those numbers. We hear them all the time, and we know that the folks who come up with them make them up," he quipped. "I want to know that you're running a bunch of your own numbers."
Alexander likewise pressed Stevens on the specifics of the process by which Natpal acquires and serves customers. Stevens explained that his company's software allows it to bid on key words on search engines on behalf of clients, just as L.L. Bean might bid on the word "boots" on Google. A small business simply can't afford to do that on its own; it has neither the financial wherewithal nor the technological smarts. Natpal also creates web pages for clients, so their potential customers will have someplace to land when they go searching for, say, a dentist. Clients pay Natpal based on either the number of calls or clicks that it generates for them. "Natpal's solution completely automates the advertising function for them," Stevens pointed out.
"Why do some dentists turn you down?" Alexander asked. Stevens deftly sidestepped that query, pointing out that, "Our appointment close rate is about 75 percent, and we have 80 customers."
Of course, not everything
Alexander asked took Stevens by surprise. Some of them were the
sorts of thing
any investor would want
to know.
Alexander, for example, bore down on the
defensibility of Stevens' niche:
Is all of your technology proprietary? How
have you protected it? How many other companies
are competing in this market?
He also wanted to know what precisely Stevens would use his money for and why he wanted $5 million versus, say, $2 million. Why not, he suggested, ask for a smaller amount now and show the power of the business model by locking up your home market.
"You could nail Philadelphia, and then you could raise a ton of money.
The sort of math a potential investor or acquirer goes for is, ‘They've
got Philadelphia, and they've got $20 million a year. That's 3 percent
of the U.S. population. We could blast
this out nationwide, and get X amount."
Stevens responded that he wanted to become
the market leader before some internet
leviathan lumbered into
his niche. "If we wait a year, then Denver, Seattle
and Houston will get gobbled up."
"I'm not sure that locking up customers is that valuable," Alexander offered. "There's not a huge first-mover advantage here."
As the presentation ended, Alexander addressed not just Stevens but also the classroom full of students. After complimenting Stevens, he said: "You guys see on TV that VCs are vicious animals. That's not how it really is. Every VC is an optimist. But when they talk to you, they're thinking about how to pitch your idea to their partners. You've got to give them that."
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