June 5, 2012, 11:38 AM

IRCE 2012 Report: How to snag venture capital cash

Venture capitalists are looking to finance retailers that can shake up the market.

Lead Photo

Venture capitalist Josh Goldman (left) and e-commerce executive Cotter Cunningham discuss how retailers can garner venture funding at IRCE.

Online retailers hoping to be handed a bagful of cash from a venture capitalist need to figure out how they might shake up the e-commerce market and also plan to hire attorneys with expertise in funding.

Getting comfortable with the idea of being fired might help, too.

During the first morning of the Internet Retailer Conference & Exhibition 2012 in Chicago, Josh Goldman, a former e-commerce entrepreneur turned venture capitalist, and Cotter Cunningham, an e-commerce executive who is a veteran of multiple funding rounds, gave advice during a session entitled “Striking the right deal when you go for funding.” The presentation was part of the E-Retailing Profitability Workshop.

Online retailing represents an attractive prospect for investors, given the industry’s continuing growth and the increasing tendency of consumers to shop online, said Goldman, general partner at Norwest Venture Partners. And with mobile and social promising to further shake up—or, in investor speak, “disrupt”—retailing, the money will keep coming.

But that doesn’t mean e-retailers can simply wait around for a call from a deep-pocketed investor—at least not the first time a web merchant seeks funding. “Investors look at an idea and ask if it makes sense, is it disruptive,” he said. “To say you are going to do the same thing everyone else is doing isn’t really going to get you far.”

Goldman ran attendees through a list of metrics and attributes, and explained how different ones become more important to investors over time. For instance, investors consider the experience that employees at a start-up have not only in the particular corner of the market they hope to conquer, but also in guiding companies through the birthing stage; those can be two separate things, Goldman said. Investors also focus on customer acquisition costs and, as a business matures, how “addictive” the e-commerce operation is—an attribute that can be measured via such metrics as daily active users and the ratio of those daily users to monthly users.

Investors also will study month-over-month growth rates. “It’s the first thing people look at to see how you’re growing,” Goldman said. As the business grows, investors will pay more attention to gross margins and profits. “Financial predictability becomes much more important as you approach the IPO (an IPO for Café Press: http://www.internetretailer.com/2012/05/03/e-retailer-cafepress-moves-california-kentucky) stage.”

One of the most awkward parts of the capital-seeking process involves the valuation of the online retailer. “Don’t give out a valuation when an investor asks,” said Goldman, advising that retailers rely on other market observers to provide such information.

He also advised that online retailers seeking capital rely on attorneys with expertise in the area instead of, say, the same lawyer—perhaps a friend of the company’s owner—who shepherded the young company through its incorporation and related matters.  Such lawyers are not sophisticated enough to handle the venture capital process, Goldman said. “That’s not a good sign for me. It’s going to slow the process down a lot if you don’t have the right attorney,” he said.

The first couple of funding rounds for e-retailers typically will involve knocking on a lot of doors across the country and all but begging for money. But then it gets easier, says Cunningham, founder and CEO of WhaleShark Media Inc. It operates such coupon and deal sites as Deals.com, CouponSeven.com and CouponShare.com, and in late 2010 bought Australia-based coupon site RetailMeNot.com. Cunningham said that WhaleShark has raised some $300 million since its 2009 launch, including about $150 million in its third funding round.

That round differed from earlier ones because investors were coming to Cunningham, he said. “It was better, and more fun,” he told attendees this morning.

His experience is not unusual for e-retailers that have proven themselves successful but which still need help from venture capitalists, Goldman said. Investors will start auditioning to give retailers money, instead of the other way around. “It’s a complete role reversal,” he said. “It’s the investor pitching you why his money and his team will help you grow”

But with growth and capital come compromise—or, perhaps, a new level of worry for those who have toiled at an e-retailer since its launch. That’s because funding rounds bring investors onto the board of directors, bringing more outside control into the company, which means founders and employees run the risk of being booted out. “We wanted the money,” Cunningham said, “so we got comfortable with it.”

He did note, however, that he had no expectation of being fired.

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