I had two conversations last week, each of which reinforces a simple phenomenon that I have constantly emphasized over the last five years in my writings.
On Wednesday, I had lunch with Brian Jacobs, General Partner at Emergence Capital. We were discussing our respective startup portfolios, and Brian mentioned that his firm’s preferred stage for investment is when a company has about a million dollars in revenues. Presumably, at that point, the experimentation with product, business model, pricing model, customer acquisition strategy, cost of conversion, and other key issues have settled down. That means, a cash infusion of, say, $7 million will result in a somewhat predictable set of outcomes. Most importantly, the fresh cash would accelerate customer acquisition, and hence revenues.
On Friday, I spoke at MIT’s Digital Economy event in San Francisco. Sharing the stage with me was Doug Leone, Managing Partner of Sequoia Capital. We discussed a company that Sequoia has recently invested in called AgilOne. Before raising a Series A round, this Big Data company had built up substantial revenue, customer traction, and validation. In a sense, raising money from the best-in-class VCs in the Valley was easy because of the unambiguous customer momentum.
Both Brian and Doug agree that getting enough customer validation, business model validation, pricing model validation, and customer acquisition strategy validation makes it significantly easier to get venture financing.
So, at the risk of repeating myself, folks, please remember: Validation is the operating word. Bootstrap first, raise money later. And ideally, get into the Million Dollar Club before you go out to raise serious capital.
Today, in support of this premise, I will introduce you to some 1M/1M portfolio companies who have already made it into the Million Dollar Club, as well as some that will in 2013. If you follow my Xconomy columns, you’ve heard about a few of these successful companies before.
Ifood.tv
It was 2006, and Vikrant Mathur and Alok Ranjan were learning how to cook. After seeking out advice from every cooking website they knew, they found that text-based sites were lacking in their instructional capabilities. No resources existed that incorporated visual elements or a means to reach out to recipe authors with any questions. The two decided to take matters into their own hands.
Drawing upon the resources they found most helpful, such as the Food Network channel, Vikrant and Alok began the process of adapting them to an on-demand platform. Ifood.tv, launched the next year in 2007, is a multi-platform video channel that focuses on learning to cook visually. In addition to written recipes, the site is comprised of a media library that is always growing. The content is created in-house by ifood.tv’s editorial team, as well as crowd-sourced from authors, professional chefs, video producers and other media companies. Every video is hosted, managed and streamed through the company’s own content management platform.
Ifood.tv works as a cook’s online community for every skill level in the kitchen. But its unique selling point is the number of ways users can interact with and factor themselves into the site. Users exchange recipes and resources in huge numbers, as up to four million monthly unique visitors rate and review existing content in addition to providing their own new materials.
The site initially encountered competition from brand-name media, like the Food Network site and Epicurious. But these sites ignore ifood.tv’s principal aim to engage with their user community. Years later, their closest competitor is YouTube, as the de facto platform for online video content. However, the site remains unique through ease of searching and organizing information, as opposed to YouTube’s generic approach.
Ifood.tv is a fully bootstrapped venture. Vikrant and Alok contributed $100,000 in personal funds, which has gone a long way toward hitting $3 million in revenue in 2012. The site has been profitable for three full years, generating revenue primarily through advertisements.
In 2013, this Menlo Park company sits in a strong position to explore a new business model: e-commerce. But with over four million users, validating a new business model won’t be that difficult. Besides, many proven business models are already floating around in the industry, flash sales being but one of them.
Orangescape
Chennai, India-based Orangescape, a platform-as-a-service (PaaS) company, has reached its million-dollar mark by catering primarily to large enterprises trying to move out of Lotus Notes to Google. Co-founders Suresh Sambandam and Mani Doraisamy spotted a gap in Google’s App Engine and over the last couple of years, successfully plugged it for many large customers.
By immersing themselves among Lotus Notes customers, they were able to get a visceral understanding of
