VCs Share 7 Strategies for Hyperlocal Startups Looking to Raise Money
The ideas are there. The technology is there. What the founders of early-stage hyperlocal startups really need to succeed in the year 2016 is cash. As access to venture capital funding softens within the startup community, it’s becoming even more important for hyperlocal firms—with products used by merchants or consumers in well-defined geographic locations—to think more strategically about how they’ll fund their great ideas.
“When the financing market goes up, the emphasis tends to be on growth and market share; when the financing market goes down, the emphasis is on business models and long-term sustainability. We’re certainly in the latter category right now,” explains Matt Turck, managing director of FirstMark Capital, an early-stage venture capital firm based in New York. “In additional to the usual—great team, big market, differentiated product that people want—I’d encourage startups to emphasize that they have a sound business model when presenting to VCs, and most importantly, real, repeatable revenue traction becomes more crucial than ever.”
With that advice in mind, we spoke to five industry experts and got their take on how hyperlocal firms should go about securing funding this year.
1. Explore funding from corporate venture capital arms. “Investment activity levels of corporate venture capital (CVC) arms are at all time highs right now and companies as diverse as JetBlue and Campbell Soup have announced the formation of venture groups in the past years. Nearly one-in-five VC deals include strategic investors. For hyperlocal startups, pursuing corporates with venture arms and an interest in delivering hyperlocal products or services represents a broad cross section of potential targets. From Comcast to Walgreens, P&G and McDonalds, corporations today are increasingly dedicating time and resources to connect and invest in startups, as well as the innovation ecosystems around them.” (Neal Hansch, Sherpa Foundry)
2. Consider alternative funding sources. “There’s a whole range of funding options that did not exist a few years ago and should be considered, although it’s unclear how those will evolve when confronted to a tougher market — AngelList and crowdfunding, for example. I also think strategic and corporate investors have evolved dramatically over the last few years, and are now much more in sync with the needs of startups.” (Matt Turck, FirstMark Capital)
3. Focus on a growing sector of the market. “With our focus on consumer-driven innovations, we look for software companies that have a vision worth fighting for and can attract and retain millions of customers. In any geographic market, the startups that demonstrate those qualities stand out. As far as new areas we’re looking at, we see several major trends that will lead to consumer software innovations in the coming one to two years. A few focus areas include consumer health, self-driving car technology, esports, and virtual reality.” (Sara Thomas, Maven Ventures)
4. Show off existing hyperlocal assets. “Companies with existing assets that leverage the hyperlocal market are well positioned in today’s environment. It can very expensive to build the assets necessary for VC-backed hyperlocal companies to succeed—assets such as a scaled sales force with merchant relationships, a large community of consumers with credit cards on file, or a trusted brand among merchants and consumers. As VC investment flowed freely over the last several years, a handful of companies were able to build such assets, which would be hard to replicate from scratch in today’s tougher funding environment. Therefore, I expect companies who have already built those assets to either be acquirers of smaller companies who find themselves orphaned without access to capital or attractive acquisition candidates to larger companies looking to broaden their relevance to merchants and consumers in the hypoerlocal space.” (Tige Savage, Revolution Ventures)
5. Demonstrate the ability to scale. “Funding is certainly harder in general this quarter vs. the last year. The market has shifted and valuations have declined on average. Hyperlocal companies have to prove that even though they are focused on very specific markets, they can scale and have that level of precision and hyperlocal focus across many markets to achieve a large impact and build a meaningfully sized business.” (Jared Fliesler, Matrix Partners)
6. Get involved in yield management for SMBs. “Given the major technology trends of cloud resources, hosted software, and mobile computing, there is less reason that small companies should have access to sophisticated tools that mimic what was once available to only the largest companies. An area I expect to see increased value for hyperlocal merchants is in sophisticated yield management, where technology makes it possible for merchants with limited inventory to optimize their revenue through dynamic pricing. Booker, a company in the hyperlocal space that Revolution backed in its first funding round, recently announced the acquisition of Frederick, a yield management platform. I expect to see continued development in this area of the hyperlocal category.” (Tige Savage, Revolution Ventures)
7. Expand your personal network. “In the funding environment, we are seeing longer lead times and a wider network necessary to raise funds. Most founders can expect to speak with more investors over a longer time period in order to close their funding round. However, great companies are absolutely still getting funded—often even achieving oversubscribed rounds as investors flock to the strongest teams.” (Sara Thomas, Maven Ventures)
Stephanie Miles is a senior editor at Street Fight.
Interviews have been edited for length and clarity.