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Finding the Golden Needle
Netpreneurs Discuss Their First Funding Experiences

By Hook Or By Crook

Mr. Riechers: Brandy Thomas is chairman and CEO of Online Monitoring Services. OMS was founded in 1997, and has developed sophisticated proprietary technology that allows them to monitor the Web, pinpointing sites that misuse a company's intellectual property, and prioritizing those sites according to their greatest business impact. The sites that cause companies the most pain include those that pirate music, software, videos, broadcast or text, that misuse corporate trademarks or that associate companies with material that would be inappropriate, such as pornography. OMS's key clients include the National Basketball Association, Nielsen Rating Service, the Motion Picture Association, the Recording Industry Association, the Software Industry Association, Time, Pfizer and NBC. OMS is located in Alexandria, Virginia, and currently employs 13 people. The company raised its seed round of $150,000 in November of 1997 and just closed its first round of institutional funding for more than $3.1 million, with a little help from the Netpreneur Program's NET-INVEST service. Investors included Lazar Technology Partners, Capital Investors LLC, B. Perry Investments Ltd. and Graystone Venture Direct LP.

Mr. Thomas: Thank you. We have been in existence for 14 months and we have tried to raise capital three different times, two of which failed. About three months ago I was sitting in the bar across the street saying, "That's it, we can't do it, guys, we are not going to make this." So I'm really excited that we closed our first round just last week. Focus on what you need to do before you start looking for money. As I said we failed in our fund raising twice, before we really got it going.

Investors are looking for people looking for people who have profit-and-loss (P&L) experience; who have run start-ups before. If you have that proven team, it's a lot easier. We didn't, so we had to prove to ourselves and to the investor community that we could handle it by just going ahead and doing it. We had to run the business, get it going and build it from scratch to get key clients before we had money.

When we started, we had a prototype. It was a nice prototype, but it was still months from production. We struggled and fought until we got something to ship. Then we went after real, referenceable clients. When we didn’t get funding the second time, we went back with a key initiative to get some clients who would say that they liked our company and our product, and that the marketplace is going to be big. Our goal was to get five of these clients. We got six before our third attempt to get money.

Finally, understand the size of the marketplace. We are in a brand new market. There are no analogous companies out there. It's an idea, a vision. It’s hard to sell something like this. We struggled to figure out the size of the market and the demand. We did finally make some good analogies between what was out there and what we could be.

So, what do you need to do to get the money? Three things come to mind. Have a great story that is exciting, clear, easy to understand and quick to convey. It's the elevator speech everyone talks about.

Your projections have to be aggressive, but not unreal. VCs are looking for returns of 10 to 20 times their initial investment, so you start with projections that go from zero to $50 million in the first year, $50 to $200 million in the second year. But think about it—are you going to take a company from no revenue to $50 million revenue in one year, and to $200 million in revenue the second year?

So decide what is reasonable and what you can do. Balance that against what these guys are looking for as a return. Until you have that story down straight, you have a long way to go. We definitely did.

We got burned several times in the beginning by legal issues. We didn't have our documents in order. We didn't have our past investors in order, we didn't have our equity split all structured out. It takes a lot of time and money to fix that stuff later. Get in there early and understand how you need to structure your company and what you need from a legal point of view, because it makes a big difference.

It takes a tremendous amount of effort to get money. We didn't get going until we dedicated one person full-time to raising the money. We had a full team that continued to run the business behind this person, which is why it worked at all. The business didn't stop running when we were raising the money.

We listened, learned and refined. We had to learn the difference between a legitimate concern and a blow-off, something we didn't understand in the beginning. When people told us things we sat back and said, "Is the problem they’re pointing out real, and do I need to fix it?" Know whether you have an issue you need to fix, or whether you did you not explain it the right way at first. When you talk to VCs, they're going to send you back many reasons. You are going to chase your tail all day if you don't figure out what's important. Ask potential investors, "If I fix A, B, and C, are you going to invest?" Maybe? Well, maybe I don't need to worry about A, B, and C right now. "If I fix A, B, and C, are they going to invest?" It makes a big difference if they say "Yes."

Two things kept us going. First, while searching for this funding, we kept the company up, running and advancing. Second, we took some good advice—stay alive at all costs. It's a hard road, and this is not an easy crowd to fight against. By hook or by crook, get the money to keep your company rolling. We put our own money into it, we got people to throw in a couple of dollars here and there, and we got people to trade for services. Do anything you can do to keep the company running, because getting funding is not a quick process. Thank you.

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