Venture Capital Firms - Companies invest more in PR as they seek VC funding

Copyright 2004 Haymarket Publishing Services Ltd PR Week (US)
April 5, 2004
PR Week

With VC firms seemingly ready to increase funding, Andrew Gordon finds both they and the companies they are assisting turning to PR in an effort to attract investors.

Technology companies have staggered out of the downturn to find - in addition to media, analysts, and investors - yet another important audience that has raised its standards: venture capital (VC) firms.

After a few years of listening to companies that were all promise and no profit, VC firms have become more tight-fisted coming out of the downturn.

According to a recent study by VentureOne and Ernst & Young, investors provided dollars 58.3 billion in funding to 3,552 companies in 2000 at the height of the bubble. That number plummeted to dollars 9.2 billion for 1,102 companies in 2003. But there appears to be a light at the end of the tunnel. Since the second quarter of 2000, funding dropped each period until the fourth quarter of 2003, when the slide stopped and the money flow started to increase again, albeit slightly.

It may be too early to say whether we will see a VC gusher. But with an increase in the number of tech companies going public - Shopping.com and Brightmail just filed their IPOs, while Orbitz recently went public - along with more M&As, VC firms seem primed to increase their funding again.

'VCs have always had the money, but they've been a bit gun-shy,' says Lisa Kelaita, president and CEO of PR firm VCPR. 'They're getting pressure to invest again, since we've gotten rid of the bad companies and the duds. They're starting to raise funds again, and they have to put those previous funds to work. It's time to get back on track.'

The message has changed

However, much like those journalists and analysts, these investors are looking for companies with a solid track record of partners and profits.

The strategy of conveying a company's success hasn't changed all that much, Kelaita admits. But the message clearly has.

'You can no longer just go in with a good idea and enthusiasm and expect to get funding,' she says. 'There needs to be market validation from partners and industry influencers, and real revenue. You're basically saying, 'We already have traction, we're looking for money to get us to the next level.''

PR is most effective in attracting customers and partners, which goes a long way with VCs these days, advises Jason Green, general partner of VC firm Emergence Capital Partners. Showing the value proposition to customers and the ability to build a profitable company is what VCs want to see.

With an increase in technology IPOs and M&A activity, optimism is creeping back into the market. In turn, investors are once again looking for the opportunity to pick winners.

Press coverage alone is helping some companies attract investors. A recent announcement of management changes at Face-Time Communications, which develops instant-messaging software, got the phone ringing with calls from VCs, says company president and CEO Kailash Ambwani. PR has helped the company gain traction with VCs, he adds, particularly when generating press about customers and revenue.

VCs are much more interested in the value proposition companies are currently providing customers and partners, not just the deal of the day. Showing how your company is genuinely helping customers is a key differentiator, adds Ambwani, whose company recently received dollars 6.5 million in funding.

Press about customers lining up for a company's products provides the market validity VCs are looking for, adds Tony Sapienza, principal partner of PR firm Topaz Partners.

'Money is loosening up, but VCs are still holding tight,' notes Sapienza.

His firm works with WiFiMed, a mobile software company that recently moved from Atlanta to Boston. Positive press coverage in The Boston Globe and Boston Business Journal attracted investors. 'They're demanding solid answers and proven results before they jump on board with a start-up. Start-ups face greater challenges communicating that, and that's where we can help.'

What's resonating these days is a strong management team that can clearly point to past successes and a strong future in a growing technology market, argues Steve Bird, general partner at VC firm Focus Ventures. 'We really want to see what kind of momentum they have with customers,' says Bird. 'But the bar is much higher at all levels. The companies that do a better job explaining their revenue and high-quality customers are getting the funding they're looking for. Before, companies were focused on website hits and other odd measurement.' The VC market wasn't as bad as companies thought, adds Bird. It's just that the level of investing dropped off so sharply, it appeared that the funds had dried up. He considers the funding level the industry is at today to be pretty healthy, and now the onus is on companies to do a better job presenting themselves.

Many start-ups are looking to partner with PR firms not just for media and analyst relations, but also for the PR firms' connections in the VC community.

VC firms also up comms efforts

Start-ups, however, aren't the only ones looking for PR in the VC market.

The VC firms themselves are looking for PR help to attract institutional investors who are hungry to start investing again, particularly as many private companies that once received funding are now going public or are being acquired.

VC firms want to attract the best investors and entrepreneurs, points out Kelaita.

VC firms are focusing on events, where they directly speak to investors and can also present their own strong track record of funding the right entrepreneurs and start-ups.

And while entrepreneurs are hungry for funding, they're also being more careful about which VC firms they team up with, says Alex Wellins, MD of investor relations firm The Blueshirt Group. Start-ups want to know what kind of track record VC firms have had, from taking companies public to helping develop acquisitions, so it's in the VCs' interest to clearly differentiate themselves as start-ups want to attract 'smart money.'

That's what Cornice did when it started using PR last summer. The mini-hard-drive company acquired dollars 22 million in funding in August 2002. Its second round of funding netted dollars 51 million in January, a dramatic increase that PR manager Melissa Kutrubes attributes to PR. The company's strong media coverage helped shape positive perceptions in the investment community.

And PR also helps company executives prepare for investor meetings by making sure they focus on key and consistent messages.

'The economy is getting better, but not enough to get money just based on ideas,' says Kutrubes. 'PR is the only way for us to get our message out because it gives us the best bang for the buck. Advertising is not an objective point of view, and objectivity is what investors look for.'

'There are fewer really good deals, which is why it's tougher,' adds Kelaita. 'You can't just tell a good story. You have to tell a great story.'

FINANCING NUMBERS OF RECENT YEARS 
 
The number of IT companies (including communications, electronics, 
information services, semiconductors, and software) receiving financing 
since 1997 and the amount received: 
 
YEAR      NUMBER OF         FUNDING 
 
COMPANIES      dollars bn 
 
1997          1,264             7.5 
 
1998          1,441            10.6 
 
1999          2,441            28.6 
 
2000          3,552            58.3 
 
2001          1,857              23 
 
2002          1,281            12.6 
 
2003          1,102             9.2 
 
Source: Recent study by VentureOne and Ernst & Young