Here is an article discussing venture funding during this economy and includes one of our recently funded clients.  

(Phoenix, AZ) February 19, 2009 - For start-up companies vying for increasingly scarce venture dollars, talk is cheap. According to AKF Partners, a boutique advisory services firm that works primarily with hyper-growth start-ups, many of which have recently secured early-stage financing, VCs will not seriously consider an investment in any business that cannot demonstrate a quick and viable path to profitability.

Venture investment has always been risky, but in a world where assets traditionally viewed as ‘safe’ are imploding all around us, the risk in start-up companies hasn’t increased substantially, says Kevin Fortuna, a partner with AKF.  Venture capitalists, just like everyone else, are belt-tightening in this environment, but they are still on the hunt for great ideas and great management teams, and they are pulling the trigger if the deal is right.

So what are the venture firms looking for?  Professional investors want to see a great idea, a great team one with a track record for building shareholder value and, above all else, they want to see that the company is executing on a plan that will quickly lead to profitability and scale, continues Fortuna.  In particular, investors want to see that a technology platform can scale well past the point of profitability. Our clients recognize that, so they’re attracting venture investments while others are failing.

In the past month alone, three clients of AKF Partners, Outbrain, Achieve CCA, and Snooth, have secured early-stage venture financing. In its role as a key advisor and partner, AKF is helping these and other hyper-growth companies align their strategy and operations and get the right financial backing, so they can succeed in today’s challenging environment.

Snooth.com, the world’s largest wine site, which grew 400 percent last year and has more than 500,000 unique visitors a month and over two million reviews, has been working with AKF Partners as a key advisor.  

“When we started, we had great organic growth and all the traffic we could handle,” said Philip James, Founder and CEO of Snooth.com. “But when we needed to take the company to the next level, we turned to AKF Partners.  Kevin Fortuna at AKF Partners had the established contacts to get to the right people at the right level, and his advice on strategy and positioning has been invaluable. It’s also great to have access to AKF’s unbeatable technical and scalability expertise.”  

Today isn’t necessarily a bad time to be starting a company. During the last deep recession in the 1970s, companies like Microsoft, Fed-Ex and Costco were started. But you need to get the wheels turning and show that the model is working before venture firms will be giving you money to expand, sums up Fortuna.

The key to managing through this downturn is focus, hard work, and capital. After a certain point, if a company has the right ingredients, then survival will pay off.

General Douglas MacArthur was a quote machine. One of my favorite is “War’s very object is victory, not prolonged indecision. In war there is no substitute for victory.” What’s true in war is true in business. Swap “war” with “business” and “victory” with profitability and you have a statement we all should heed: ““Business’s very object is profitability, not prolonged indecision. In business there is no substitute for profitability.”

Why do we keep forgetting this? What’s wrong with us that we continue to focus on businesses metrics such as unique or concurrent users and growth in both? None of these matter if they don’t directly relate to profitability. Don’t fool yourself folks – don’t think that getting the “traction” of users is the hardest part of the business. Don’t think that you’ll just layer on advertising later and have a profitable business.

If you aren’t building in profitability from day 1 you are creating a cash incinerator. The folks at Google are still trying to figure out how to make YouTube profitable. Great idea? Maybe…if it ever becomes profitable. Anyone can build something to burn cash. After all, it’s just a free hosting environment for videos. Going to business without a plan for profitability is like going to war without a strategy to win. The only difference is that you’ll burn cash rather than lives.

If you are one of those people who think that a startup consists of a couple of years of hard work followed by a large payout, think again. Most venture backed companies never make it to that payout and those that do often take much longer than two years to do it. Furthermore, those “years”, be they 2 or 10, are very stressful years packed with a roller coaster ride of emotions that any theme park would be proud to call its own.

Life in a startup, especially an early stage startup, is full of ups and downs. On Monday you are on top of the world, having signed a new customer and released an enhancement to your base product; champagne corks pop and party hats are worn by all. By Wednesday you fear that the most recent release from one of your competitors will be the end of your business and you hold an all night product roadmap session to re plan how you will spend the rest of your product manpower and budget through the course of the year.

In our experience, the entrepreneurial CEO most often has the greatest emotional amplitude in the highs and lows and the resulting incredible mood swings are not healthy for the company on either the euphoric peak or the abysmal trough. Behaviors and actions vary so widely in many young CEOs that the organization simply cannot react optimally to them. For instance, during the peak, the CEO talks about the IPO, high-fives and knuckles the team and takes them out for drinks. Within three days, people are hearing of layoffs, cut backs and certain business death. During the highs, the CEO talks about what a stellar team he or she has and during the lows he or she complains how no one really works hard enough and how no one cares about the success of the company.

Sound familiar?  If it does, listen closely.  YOU MUST STOP!  If you want to lead, then you must be the pillar of the company in both good times and bad.  Don’t let yourself believe that you get a pass on this advice just because its “the way you work”.  Don’t be an enabler of yourself in behaviors that run counter to creating shareholder value.  You must absolutely be the firm guiding hand in good times that reminds the company that there is still a fight for survival going on even as the celebration reaches its crescendo and you must embody the hope that the company seeks in bad times by reassuring them of the strategy and how exactly it will be successful against the competition.

While we agree that flexibility of strategy especially in the ability to sense and respond to competition is a key to success, we argue that changing strategy weekly is a lack of strategy and you are suffering from IotD (Idea of the Day) as we discuss in a previous article.   Making course corrections through the year to capitalize on a competitor’s weaknesses or to defend against a competitor’s attacks is absolutely appropriate.  Holding all night sessions the day after a competitor’s release, especially given that the development cycle for any product course correction will likely dwarf the hasty strategy development time is ludicrous and fraught with perils such as a lack of competitive information and a complete lack of an appropriate product discovery phase.

What are the lessons for each of you in this?  For the entrepreneurial CEO, recognize this ride is going to happen and monitor your reactions to the highs and lows.  Be the leader for your organization and keep a level head in front of your teams so they can remain focused on delivery.  If you’ve been complaining lately about how nothing ever gets done and no one cares enough about the company, look inward and ask if you aren’t the one causing this problem.  For the CTOs, recognize this behavior in your boss and don’t jump on board the rollercoaster.  Try to get your CEO to read this article, and if that fails, just keep reminding them to stay the course.  The upside if you resist is that you are being the leader your team needs to buffer them from the whipsaw and tomorrow the CEO will probably change his or her mind back again.  For the engineers, ask during the interview how focused the team is and how long projects are given to complete.  If they brag that they change product strategy everyday to keep up with the competition consider this a warning sign.  If they are contemplative, understanding the true cost of changing direction, and reactive only after a well thought out discussions, then consider those as good signs of a mature leadership team.