The ABCs of the VC World: What Marketers Need to Know
It's important for marketers to be aware of the details of the venture capital world before they consider taking a job at a start-up, so here is a primer on VC funding for marketers.
VC, IPO, series A, pre-market valuations – do all these financial terms make your head spin? Think that as a marketer they’re not relevant to you? Well, think again. Your next job could be caught up in this world. And it helps to know enough to ask the right questions before you leap. Yes, being employee #10 at Google would have been a great career move – in hindsight. But taking a risk with some Harvard dropouts who haven’t turned a profit? Not sure I would have made that call.
VCs are called “venture” capital for a reason – it’s not a sure thing. VCs hedge their bets by investing in many companies at the same time. That’s hard to do as employee, and it makes it even more important to do your homework. One of my colleagues, and a very astute investor, Mike Adler, once told me that you need to choose that start-up employer very wisely. He said, “You are investing like a VC – investing yourself, your time, your sweat equity. Unlike a VC firm, you can’t hope that one in 10 investments will pay off – you have to pick the right one every time…It’s especially critical if you took below-market salary to get some options. Make sure you are not wasting three years of your time.”
With that in mind, to help you spot the right employer, here’s a primer on VC funding for marketers.
1. The earlier the stage, the bigger the risk – and the reward. At a seed round, or even series A, it may only be a kernel of idea. It may turn out to be the next great marketing tool but at this point, there are no clients, no income, no sales, not even a working technology. The goal of the business is to raise some funds to build that technology. If you love the thrill of the chase, this can be a great working environment. But not everyone can stomach that breakneck speed. You may be better suited for an expansion or later-stage company (series C or later).
2. Series A? Series C? Subway Series? Seriously, these terms have meaning. Series A is very early stage, where the company is worth maybe $1 to $3 million and is just a concept. They are setting up the business, developing the basic product, and doing a business plan. This is early-stage financing, where tests and pilots abound. By the end of a series B round, companies are usually worth more than $20 million. These companies are scaling quickly – and hiring. Opportunity knocks.
3. Look at who is funding the company. You are not the only one evaluating this company; the funders are as well. Funders will have different goals than you do (most VCs are looking for a “successful exit,” which means IPO or selling the company; you may be looking it as a career move, either long or short term). Venture capitalists move in groups, and very seldom will you see just one firm investing in a company. Look at the firms’ names, see what other investments they have made (look at the “portfolio” or “exits’ page of their website). Have they picked some winners in the past?
4. Are those firms “private equity” (PE) ? That’s a good sign if you like a later-stage company. PE firms come into the picture with more rapidly growing companies worth at least $25 million and where there is some tangible asset (yes, that means the technology actually works!) This is usually series C or D round, where the working capital is used for expansion of an already viable product. The product or technology is working, there are paying customers, and the company may actually be showing a bit of a profit. Usually any profit is put back into the company, to fuel the growth, for things like marketing, staff growth, and product expansion.
5. That successful exit or IPO (initial public offering) – the holy grail of an entrepreneur. (I remember being in Times Square the day of Facebook’s IPO and seeing their name in lights outside NASDAQ.) For this later stage, the companies are stable and growing, but a bit slower than before. Ironically, the company may or not be profitable – remember Google spent $1.6 billion on YouTube when YouTube wasn’t even close to profitable. There’s much less risk but much less reward to an investor.
Finally, I would be remiss if I didn’t address options. Stock options can be the pot of gold at the end of the rainbow for employees. Simply put, options are your chance to buy shares at a later date at a hopefully lower price. You will then own a little piece of the company you are building up. So you don’t need the funds the day you are hired, and due to your sweat equity, you will be offered a sweetheart deal later on. That’s the conventional wisdom, but as with most financial deals, the devil is in the details. Strike price determines the cost at that later date (hopefully at less than market value, otherwise your options are worthless). Most companies have a vesting schedule, typically four years. Stay less than four years and you get less than 100 percent of your options value. The key factor? The number of outstanding shares. Will you own 1 percent of the company or .00001 percent? The option pool for employees can range from 10 to 20 percent of the total company. That’s shared among all employees, and sometimes the first employees get more. Do your homework before you sign that options agreement!
There’s a lot to understand here. And as marketers, we know that sometimes a picture is worth a thousand words. Below is one of the best infographics I’ve seen on how start-up funding works:
