Our columnist offers a no-holds-barred critique of a startup's financing pitch. Her advice? Stay focused and get advisers on board quickly
In February, 2006, George and Carol Anne Tran became concerned about the declining quality of U.S. public education. Year after year, they argue, money is being taken away from budgets while education standards slip further and further behind the rest of the world. To help make a difference, the Trans decided to build an online engine to fuel social change through entrepreneurship. The result is their Web services company DingoDaddy.com.
This week, I'm critiquing the financing pitch that they submitted to me. Below you'll find their pitch, followed by my assessment of each of its 10 sections, which range from describing the "pain" their business will try to remedy to its business model to key milestones.
While many of us think the challenges that apply to our specific businesses are highly unique, I think you'll agree that countless similarities exist across businesses when it comes to the pitching process.
Section I of George and Carol Anne Tran's DingoDaddy.com Financing Pitch (in which they describe the "pain" their business will seek to remedy)
1. Nonprofit organizations (NPOs) are constantly seeking funding to support their organizations, and have little control over the amount they receive using traditional fundraising models.
2. Mass-media marketing effectiveness is on the decline. Typically, a 3% response rate from direct mail is an acceptable benchmark. However, this means that 97% of the money is wasted on customers who are either uninterested or not ready to purchase their products.
3. Consumers don't like watching advertising or receiving junk mail, but are always looking for new ways to save money on products and services they want to purchase.
My Critique of Section I: The "Pain"
Great. The market pain is spread across three sectors: nonprofits, for-profits (you should state this more clearly in item No. 2), and consumers. Thus they'll all be possible targets to help you in reducing that pain. The more sectors that experience the pain your company is seeking to remove, the more likely your company will succeed.
Section II: The Solution
Our solution addresses all three of the above "pains" by providing NPOs an online-classifieds and Request for Proposal (RFP) service that they can offer to their supporters through a 50/50 co-venturing arrangement.
DingoDaddy.com features a unique reverse-auction RFP Web site in which consumers can list what they want to buy or services they want to have performed, and have vendors submit bids for their business locally and globally.
By offering a service where customers voluntarily raise their hands and ask vendors to solicit them for products and services, DingoDaddy.com is providing a valuable lead-generation service to businesses. Through our service, businesses are now able to contact customers who are ready and are interested in purchasing from these businesses.
Here's how our service works. For example, we are partnered with The Arc of Lane County, an NPO in Eugene, Ore. They send a notice to their support base (consumers) via direct mail or e-mail about our service. When a supporter goes through arclane.dingodaddy.com and posts an ad, we will pay The Arc of Lane County $1. When a commercial customer sees an RFP ad posted and wants to contact the consumer to submit a bid, they pay DingoDaddy a $19.95 to $49.95 membership fee. For that, they are able to submit an unlimited number of RFPs to customers. That membership fee is split 50/50 with The Arc of Lane County residually.
My Critique of Section II: The Solution
I would rewrite this section to be more hard-hitting. You previously stated three sectors in which pain exists—now reiterate these three sectors in the same order while providing the solution to each sector's pain. Please choose common terms for consumer/customer and business/commercial customer—it's a bit confusing as is. Also, I am assuming the revenue share for the nonprofit is evergreen. In other words, they will continue to drive consumers to use DingoDaddy since they will get a piece of every transaction between consumers and the businesses they use via this environment. But that's just my assumption—you need to make it clearer.
Section III: Company Info
Founded in Eugene, Ore., in February, 2006, DingoDaddy.com has five employees, including founders George and Carol Anne Tran.
George and Carol Anne Tran founded 1Shoppingcart.com, the No. 2 gateway processor for PayPal. It was acquired by Website Pros, a publicly traded company, in October, 2006. George has an MBA from the University of Oregon and a computer science degree from the University of Sydney.
Kelly Asay founded Tesseraction Games, a game development company in Eugene. He has 10 years of experience in senior management positions and is the president of DingoDaddy.com.
The founders initially invested $150,000. We are seeking $1.5 million to be applied toward marketing (40%), product development (20%), operational costs (20%), and salaries for key employees (20%).
Our five-year revenue forecasts are $750,000; $1.5 million; $4.5 million; $10 million; $25 million.
Our current burn rate is at $12,000 per month ($4,000 on salaries, $4,000 on product development, $2,000 on infrastructure/network, and $2,000 on legal/professional services).
We expect to be cash-flow positive by April, 2008.
My Critique of Section III: Company Info
Nice pedigree for the founders! I use 1shoppingcart.com and think it's a solid service. George sounds techie, but I know nothing about Carol Anne. You need to tell us what her skills and accomplishments are. I am hoping she has a strong marketing background, as that is missing in your team. Kelly has management experience, but what else? A financier needs to see that the basics are covered: sales, marketing, leadership, operations, product development.
I also want to see that "little something extra" that shows you're going to kick some serious butt with this company. Why no advisers? This is a great way to add virtually free team members that can massively boost the company's image and the confidence of investors (see BusinessWeek.com, 2/1/07, "Don't Go It Alone: Create an Advisory Board"). I'd add advisory board members with experience in:
a) Nonprofits. We need to see that you know how they work, how to do deals with them, how to make them perform as your partners.
b) Consumer marketing. Show that you have solid expertise in whipping consumers into a frenzy, getting them psyched about your service, getting them to do the work to submit their RFPs.
c) Small-businesses/service providers. Why should we believe that the system will work as you envision? I want to know who the businesses are that are currently using the system and how to get more of them. I want to believe that you'll have your three sectors of clients rooting for you and pushing your business forward.
d) Alliances. I'd love to see an adviser in sales who is terrific at business development and strategic alliances. It would be fabulous to have some corporate sponsors of the DingoDaddy site, or at least a ton of businesses that are promoting it.
The success of this company is all about adoption—adoption from consumers, nonprofits, and businesses. I need to see who will be driving this on a daily basis and what campaigns they'll use to achieve their goals. And, of course, the site needs to scale and perform well, but I'll wager that George will see to this.
Based on the revenue ramp of DingoDaddy, I think you'd be well-served to avoid venture capitalists. There's simply not a big-enough upside unless the company becomes insanely viral, and I don't see the plan to make that happen. I think this would be best served as an angel financing deal, where they'll likely be able to scoop up some passionate and connected board members that will work hard to increase the value of their investment.
The burn rate is low, and it's clear the team is living on minimal salaries. It's encouraging that all involved have this degree of commitment, as well as an aggressive cash-flow positive date. The use of proceeds (allocation of funding to be raised) is reasonable—I would expect about 40% of the funds to be used for marketing as this is key to launching a consumer-facing company.
Were it my company, I'd look at the current possible valuation and then might consider doing two rounds of financing to minimize the stake I'd have to sell. Companies at your stage are rarely given super-high pre-money valuations. Please consider what percentage of the company you're willing to sell on this financing—I hope it's 30% or so. Then look at what the investors will pay for it.
From this info, you'll know if it behooves you to do a smaller financing round now, and another later when you've made more progress. Also, the value might be significantly boosted if we could see additional applications of this service—what other sectors will you tackle to get to the $25 million run rate? Show us the long-term vision so we understand how massively applicable and extensible your service is.
A great way to find angels is via a Web site affiliated with the Kauffman Foundation. Check out www.angelcapitaleducation.org and click on "Info for Entrepreneurs." Angel investors will want to check out www.angelcapitalassociation.org.
Section IV: Product
The Web site that supports our business is complete and is ready for launch. We are continually improving our system to provide better functionality and streamline our users' experience.
We are currently recruiting NPO partners to join our network and are working with them to market our services to their spheres of influence.
My Critique of Section IV: Product
Good. How many NPO partners do you need to recruit with how many annual transactions (consumer RFPs that are responded to) in order to reach your revenue goals? Help us understand this and boost our confidence that you'll achieve these numbers.
Section V: Defensibility
To ensure maximum penetration in any target market we enter, we will grow our business one city at a time during our launch phase. This will allow us to recruit an optimal number of NPO partners for any given city and develop relationships with them. Competitors such as Craigslist, Elance, and Priceline do not have a city-by-city focus approach, nor do they have co-venturing distribution relationships with NPO partners.
1Shoppingcart.com achieved market dominance in its segment through its ability to create private-label versions of itself and licensing its technology to would-be competitors. DingoDaddy.com also offers would-be competitors the ability to license our technology and participate in a 50/50 co-venture private-label arrangement. This offers us defensibility against new entrants in our market.
We are in the process of filing a patent on our RFP model. The patent search and definition is complete, and we expect to complete our filing process by late April.
We will be branding our RFP service to distinguish our offering. While other competitors such as Craigslist, Microsoft (MSFT), and Google (GOOG) offer classifieds services, we offer a unique RFP model that differentiates us. Furthermore, our socially conscious co-venturing marketing through our NPO partners will appeal to members in communities we market to.
My Critique of Section V: Defensibility
Per-city rollout is OK, but slow. I'd recruit a team of people (pay them stock options only—that's how Prosper.com did it, and wow, was it effective) based in your target cities. Let them round up the nonprofits. Give them a few thousand dollars' worth of stock, and vest it in a one-year time range. Then set aggressive goals for them and provide terrific support and encouragement via e-mails and FAQs and monthly teleseminars. That's how to help make this baby viral.
Second, I love the private labeling. I still regret Apple (AAPL) not doing this with their operating system! Third, intellectual-property protection is key. Make sure you nail it (see BusinessWeek.com, 2/7/07, "To Patent or Not to Patent?").
Since you're relying so heavily on your nonprofit partners, please reread the first paragraph of this section of my critique. Expand your team to recruit more nonprofits and faster—you don't need to pay them a salary—compensate them with stock, and let it be OK that they'll work nights and weekends. They'll likely recruit the nonprofits they know best first, which is fine.
Section VI: Competition
While competitors exist in this market, they only service specific niche segments and do not service communities on a local basis. These include Elance.com, which specializes in professional services; Priceline.com, which focuses on travel and accommodations; and LendingTree.com, which focuses on mortgage rates.
While Craigslist does offer some wanted ads, they are not categorized, nor do they offer notification services to merchants for customers requesting RFPs.
There are a number of other organizations that offer co-venturing opportunities for NPO organizations to earn commissions for recommending these companies' products and services to their supporters, such as goodsearch.com, cafepress.com, and others. However, none of these companies offer such a high percentage of revenue share, nor a residual income stream. Some even require NPOs to invest money up-front for inventory. We are different because we work directly with our NPO partners to help them communicate our service to their support base. This includes creating fliers, brochures, writing articles for their newsletters, and doing public relations on their behalf.
We offer a unique RFP model for all products and services locally and globally. This means consumers can receive quotes for body-shop repair work locally or local bookkeeping services through DingoDaddy.com. No other service exists today that offers this level of local support nor the breadth of the range of products and services available for RFP. Competitors in this industry validate the viability of the RFP business.
My Critique of Section VI: Competition
Again, working with the nonprofits will be more work than you think. Assign someone to focus on this niche, pronto. Empower them to get creative in finding ways to recruit more nonprofits and faster. Provide outstanding tools to help the nonprofits market you to their constituents. This is key.
Section VII: Business Model
Our business model is to provide a platform of services that NPOs can provide to their supporters. This way, when a supporter spends money on our services, they gain utilitarian benefits while at the same time know half the money goes toward their favorite NPO.
To help nonprofit organizations get off the fundraising treadmill, we concluded that instead of spending money on advertising, we can achieve the same results by paying our NPO partners a direct incentive to access their spheres of influence in target launch cities.
To grow our network, we are paying our NPO partners a referral fee for their introductions to other NPO organizations that they can introduce to join our network.
We offer our RFP service free of charge for consumers wanting to obtain bids from businesses, and charge commercial customers a subscription fee between $19.95 to $49.95 per month to place bids and receive notifications for new RFP requests.
We also license our technology through selling private label to partners such as newspapers and radio stations. Private-label partners participate in a 50/50 revenue split.
My Critique of Section VII: Business Model
Good call on referral fees—sharing the wealth is always smart. What do you pay an NPO to refer another NPO to you? You'll need some shining examples of nonprofits that are enjoying significant (or at least rapidly scaling) residual income to get resource- and staff-constrained nonprofits excited about your program.
Who will be driving support of the business community—the commercial customers? What if you get a ton of nonprofits that market like crazy to their constituents who submit a ton of RFPs, but no businesses show up to bid? You'd be hosed. Show us you have this handled. Also, you need to make the RFP submission process very easy—it sounds like serious work to me right now.
Section VIII: Key Milestones
February, 2007: Phase-one product development is complete.
March, 2007: Established NPO partners in our target market, including The Arc of Lane County, Kidsports, and Willamette Valley Babe Ruth Baseball. The combined sphere of influence is approximately 30,000 people. This is significant because the population of Eugene, Ore., is about 150,000 people.
July, 2007: Achieve critical mass in Eugene, Ore. Projected revenue $50,000 per month.
August, 2007: Roll out to Salem and Corvallis, Ore.
October, 2007: Roll out to Portland, Ore.
February, 2008: Roll out to Seattle.
April, 2008: Roll out to California.
October, 2009: U.S.-wide adoption.
My Critique of Section VIII: Key Milestones
Good progress. Now you need to track the percentage of consumers who jump on board. If the above sphere of influence is 30,000 people, will 300 people submit RFPs? Will 50% of those result in bids from businesses? Track this carefully so you can tweak your approach to crank the numbers up.
Study www.volunteermatch.org. (Disclaimer: I am on the advisory board, but have no financial interest in the company and receive no compensation.) This company has mastered multi-city and ultimately U.S.-wide rollout and gotten millions of consumers engaged by getting thousands of nonprofits engaged. Lots of great lessons to learn here.
My Net-Net Critique of George and Carol Anne Tran's DingoDaddy.com Financing Pitch
Overall, I like the philanthropic nature of this business. The idea has the potential to be powerful and well-adopted. But it must be super-easy for all involved, for consumers, nonprofits, and businesses. I am confident you can get there, but it's going to take a lot of work. Get those advisers on board pronto, divvy up areas of sector-based business development responsibility, find and compensate (with stock) the city-specific NPO recruiters, and stay focused!
Want Your Financing Pitch Critiqued?
Use the worksheet below to organize your pitch, and e-mail me no more than three pages total. Be sure to include the term "Pitch Critique" in the e-mail's subject line.
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1. Company Overview. A few sentences describing your company's purpose/goal.
2. Pain. A few sentences describing the specific market pain you will reduce/remove.