The lack of capital can prevent an ecommerce business from growing. But many merchants are unsure as to how to obtain capital, or how the funding process works. RatePoint, the platform for offering ratings and reviews, recently announced that it has raised $7 million in funding, and we spoke about it with Neal Creighton, the company’s co-founder and CEO.
Practical eCommerce: RatePoint’s announcement about raising $7 million said, "Series C round led by three separate venture capital companies." What do you mean by Series C?"
Neal Creighton: “The fundraising process really happens in different stages. Rarely does a company raise money one time, and when people refer to a series, they're talking about how many rounds of financing you had. Series C means you had three large rounds of financing starting with the A, followed with the B and then with the C; and in that case, generally, you probably have the same investors through those large rounds of financing. But, if you look at RatePoint in total, we've raised $23.5 million through three rounds. It also includes an early seed round, where a lot of people start financing at very small rounds to get the company going to prove out its milestones. If you add all the financing together from the day we started the company until now, it's $23.5 million that we’ve raised.”
PEC: How and why did you pick the three principal investors mentioned in the announcement?
Creighton: “As an entrepreneur, there are potentially a lot of different routes to financing. One is equity from investors. When you're looking for a partner, you want to look for people that you think have knowledge of the space that you're in. So, if you're an ecommerce merchant, you want a strong investor with ecommerce experience. And then you also want investors that have deep pockets. So, as you go through rounds of investment, they'll be there to support the company.
“I actually started working with these particular investors that are in RatePoint about nine years ago. This is my third start-up company, and I’ve had the same three investors in all my companies. I've known them a long time. I’ve worked with them. I know how their firms operate. But I did have to go through the initial introductions nine years ago to meet them and find them as a match. And because of their experience and their relationship with me and the team here, they were happy to invest with us on this round of financing.”
PEC: Does the funding come in to your firm as debt, equity, or a combination?
Creighton: “A typical company is originally financed by its founders and they will put in money in the company in the form of equity. If the company is doing well and generating cash flow, you have some options. One is you can get a debt financing where you borrow money. We have done that in the past here as well. Over time you pay it back. The benefit of that is you don't give up equity in the company or ownership to somebody, but it's often hard to get that financing, especially during a recession.
“The other way to do it (and the way we've done this round) is we actually sell equity in the company to investors. They buy it. They put the cash in it. We use that cash to operate the company and grow the company, but in turn the investors get ownership. And when the company has an X event (an X event could be a common stock offering, which we hope we have at RatePoint, or it could be a sale of the company to a larger company), the investors get paid back from that X event. So, they're in it with you for the long term. They want the company to be valuable. They're not going to be paid back unless the company does well, so they're putting their faith in you and you're putting your faith in them, and they're doing it in the form of equity.”
PEC: What is your advice to merchants who believe they've got something really unique, but don't have enough money to grow their business?
Creighton: “The key for anyone starting out today is not coming out with a business plan and going directly to investors, but it's coming out with a business plan and building something as far as you can support it to show that it works. If you can find some initial capital to prove out your concept--whether you're providing it yourself or whether you’ve got friends and family or perhaps an angel investor (which could be a wealthy individual that you’ve connected with), and get a little bit of financing to prove out your point--you want to show that the business works, that people are buying the product, and the economic model works. You can do it in a very small way, but if you can show some initial prototype or some way that the company is working out, you can attract a larger investor.
“A larger investor can be a venture capital fund. There are lots of them in the United States and they're in the business of looking for the next big thing, and they invest in a lot of companies with a lot of ideas. They turn a lot of companies down. It's tough to get in there, but if you can show some traction, show that your model works and you put some investment in it on your own or with other people, you could be able to attract these larger investors to put capital into your company.”
PEC: What are the pros and cons of going through that process?
Creighton: “To raise venture capital money in particular, you've got to decide upfront that you want to have a large company. You should probably not go outside if you want to have a company that gives you a certain lifestyle and gives you a good level of income and you want to have a high level of control over it, and you can make that work within your own means or with family investment or friends and family investment.
“But, if you're trying to make a company that's worth $100 million, $200 million or $1 billion, venture capital would be the way to go, because it's hard to get there on your own. But, you have to realize when you do it, you basically lose control. That's not necessarily a bad thing, but you have to sell a large percentage of the company to get the investment inside because every venture capitalist that invests wants to get a certain return, and that return is generally anywhere from four to six times the money they put in your company. So, if they invest $20 million, they are looking for a return that's four or five times that. They're going to need a large ownership stake in your company. What you get in return, though, is the capital to build your business.
“As time goes on, you may lose control where you're no longer able to run business if things aren't going well. They [the investors] may bring in somebody else to take your job because they have control. But, if things go well and generally they're in it with you, you have the opportunity to create a very large company, and get a very, very large return on that. The venture capitalists bring not only the capital, but they bring in the contacts. They bring in partnerships, potentially. They introduce you to other investors.
“There are obviously trade-offs, but with money you get the ability to do things a lot more quickly and move a lot faster than you would if you were trying to finance on your own.”
PEC: What's the current market like for raising venture capital for ecommerce businesses?
Creighton: “I've raised $50 million or so in venture capital money in my career, and I’ve found there are cycles. Sometimes the cycles are good, where venture capitalists are looking at ideas and they're investing more heavily. During recessions, they're looking a lot more carefully at the business models and how they operate and they're not financing as many deals.
“I advise entrepreneurs that, when they seek venture capital, they really need to understand their economics, their financial model, how their business is going to scale, how they acquire customers. If they have a working model for that, they're going to do a lot better than someone coming in with a business plan that's not well thought out. It is a very tough time, but if you have a very good idea and you have really good people in your company, especially people that have been successful in the past, you understand your economic model and you have domain expertise in a certain area that's very strong, you can get venture capitalists to listen to you.”
PEC: Tell our readers a bit about RatePoint and how it could appeal to them.
Creighton: “RatePoint is trying to provide the most powerful word of mouth marketing tool a small business can have. We know that 70 percent of consumers today look for reviews online before they decide to pick a business--whether it's a contractor or a product they want to buy or a merchant they want to buy from. The reviews are being fed to them via Google or Yahoo! or Bing or Yelp. RatePoint provides a platform that integrates into any ecommerce site or any business' website to collect reviews and syndicate those reviews back out.
“In the case of a positive review, RatePoint will push it back out to Google, Yahoo! and Bing so if people are looking for your services, they can see what your customers are saying about you. In the case of a negative review, we have the ability to do a dispute resolution to try and resolve that issue with a customer before it gets published. About 90 percent of them get resolved. So, it's a very, very powerful retention tool.
“On top of that, we focus on email marketing and surveys for small businesses, which is also a very powerful tool to acquire new customers and to get more out of your current customers. It’s all about your business reputation–what people think about you and your relationships to your customers–at an affordable price. Today, we have tens of thousands businesses using our services. We're growing rapidly and we're helping a lot of small businesses grow.”
PEC: What would a merchant expect to pay for your services?
Creighton: “A typical merchant pays about $40 a month and with that they get all the review platforms. They get the email marketing and surveys included. They could end up paying more based on how many reviews they want to publish out or how big their email contact list is, but they have a very strong ROI and they're able to track that ROI back to show what it's doing for their business.”
PEC: Anything else our readers should know about RatePoint or about fundraising?
Creighton: “I've always believed that if you're extremely passionate about what you do and you stick in there and you've got a good idea, there are a variety of different ways to fund your business. A big part about being successful is surviving. In my first venture, I basically went into 50 venture funds and I was politely asked to leave within 49 of those, but I found one that would invest in my company and we ended up doing a $10 million round. That first venture was called GeoTrust, which were just three people in a garage and then within six years, we sold it for $125 million to VeriSign. But, it was a tough road. We had a very successful business, but if we weren't persistent, if we didn't keep after it, and if we didn't knock on 50 venture capitalists' doors, we would never have made it.
“So, a lot of it is just being really persistent about your dream. If you have a good idea and you don't give up, you have a chance in making a really big company.”