Article

Venturing into fundraising

Kiosk-related companies in the United States and United Kingdom have recently landed venture capital funding. But economic volatility - fueled in part by the dot-bomb implosion - leaves question marks over future funding opportunities.

February 21, 2002

As the United States economy officially enters a recession and technology-driven companies drop like metal ducks at a carnival shooting game, a number of kiosk-related companies found their financial prospects brightened by landing venture capital funding.

There is NetShift Software Ltd., which obtained $5 million from Shell Internet Ventures BV. Kudos Development landed $3 million from the Venturos Group. Integrated media platform developer Anark Corp. acquired $5.8 million during a round of equity funding, most of it through venture capital funding.

Meanwhile, Netkey Inc. announced that it raised $10 million in a second round of funding that ended in February. And Pixel Magic Imaging, which provides digital imaging for Internet-enabled photography kiosks, raised $10.5 million in March.

So is the kiosk marketplace starting to attract investors on an industry-wide scale, bucking a trend that sees VC funding shifting away from the wild, profligate days of the Internet explosion? Probably not, according to one industry expert.

"No, there's no trend," said Francie Mendelsohn, president of kiosk consulting firm Summit Research Associates Inc. "Those companies (receiving funding) are pretty lucky, because a lot of venture capital funding has either dried up or they're very, very careful with what they do."

But while industry experts are not ready to declare the success of these companies an industry-wide trend, it does point to one simple truth concerning today's VC funding practices: prove you can achieve, and the money will follow.

Netkey chief financial officer Theresa Yerkes believes proof of concept is a vital component to landing venture capital funding.

"Our being able to raise money was testament to the fact that the stuff we've got is real and that customers need it and enjoy it," said Theresa Yerkes, Netkey chief financial officer. "Probably most important was our existing customer base. Of the many things we had going for us during our fundraising, this was the most compelling thing. Our potential investors spent a lot of time talking with customers and they got one clear message: We delivered excellent service and totally knew their needs."

A new kind of venture

Venture capitalists played the role of willing friend to the mischievous scamp as technology start-up companies blossomed during the mid- and late-1990s. Flush with investor-generated funds, VC firms invested in numerous dot-com enterprises. But when the dot-com explosion dramatically shifted to a dot-bomb implosion in early 2000, many VCs either shut down or reconfigured their philosophies.

"We're going to have a shakeout in venture capital like we've never seen," CBS Marketwatch.comreported Joe Schoendorf of VC firm Accel Partners saying at the European Technology Roundtable Exhibition in Rome during early October. "You just can't deploy the amount of cash they have efficiently."

Suddenly, companies that featured strong concepts but were light on revenue-generating models became passé.

Stephen Collins, Anark president and chief executive officer, said his company's success in obtaining $5.8 million, much of it coming from Wolf Ventures and Murphee Venture Partners, was an extremely involved process.

"It was not easy," Collins said. "In addition to giving strong proof of the value of our products and our ability to enable our integrated media experience in a way no one else can, we had to go down a path with our investors and develop a really strong relationship with them."

Collins said having a bright idea is simply not enough these days.

"Investors are looking for more than that," he said. "They want a strong management team that can execute and also form the right partnerships. So it's more demanding for entrepreneurs to prove you've got your bases covered. At the end of the day, if you can come through in all those critical areas, you're ultimately a better company because of it - which is really the important component beyond what your product offering is."

When asked how long it took Anark to obtain the funding, Collins said it was impossible to pinpoint a specific length of time, but noted that patience and persistence were crucial.

"In today's environment you're always fundraising," he said. "But the rule of thumb is that you should anticipate between six and nine months, even 12 months, to get a deal funded."

Collins said the time frame has shifted dramatically since the dot-com gold rush.

"(Funding could be landed) in less than three months, sometimes significantly less," he said. "And the problem was that people were raising enough money to last them only six months, expecting money to be available again everywhere you looked. So a lot of entrepreneurs were not encouraged to look at sound business principles nor control their burn rate as a result."

New investment, new partners

In some cases, companies that receive funding pay a price in terms of autonomy. They often have to provide an upper-level position or board membership to a representative of the VC firm.

Netkey, which to date has raised $15 million, expanded its board of directors to include officials from firms that contributed to the company's funding - Glen S. Lewy of Hudson Ventures and Jennifer S. Schmelter of Fleet Development Ventures.

Generally speaking, such arrangements carry the danger that companies will find their decision-making hampered by outside influences.

"I wouldn't touch it," Mendelsohn said. "Those kind of deals often come with a lot of strings attached."

Yerkes, however, said that Netkey is not shackled.

"I understand what Francie is saying. She has a good point," Yerkes said. "And in a younger business company, perhaps that would be a risk. But we're already so well established. One of our assets is the board and advisory group we put together. We clearly have the right connections in financial services and in the software arena, and the effectiveness of that board has already been felt."

The Atlantic divide

While Netkey, Pixel Magic, and Anark have all received VC funding on this side of the Atlantic, the funding that caught the attention of many in the kiosk industry were the ones landed by software developers Kudos in July and NetShift in early October.

Mendelsohn argues that the two London-based companies have received major backing because the UK is far ahead of the U.S. in kiosk popularity.

"When I flew into Heathrow recently, I saw more kiosks in the airport on the way to catch a high speed train than I'd seen in the U.S. in three to four weeks," she said. "In the United States, I'd have to go out of my way to use a kiosk. I wouldn't likely just encounter one. But they're all over the place in England."

"One of the big reasons you see more kiosks outside the United States is that the penetration of the PC in the household isn't nearly what it is here," she added. "In time, more and more people overseas will have PCs in their homes, but I don't think it will ever reach what we have here. And we'll get to at least 80, maybe 85 percent."

NetShift vice president of marketing John Purcell said he was hesitant to disclose anything specific to the company's fund-raising process because it is in its second round of fundraising.

Kudos president and chief executive officer Thor Ibsen said the company's business strategy contributed to a successful round of VC financing.

"Our VC partner, Venturos, was eager to support our continued innovation in the burgeoning kiosk and remote terminal space sectors," Ibsen said. "Venturos's decision was based on the demonstrated success of Kudos as well as our solid approach to the market."

Mendelsohn believes that retail kiosk application in the United States will grow - and that greater levels of funding will become a reality as a result.

"It's certainly going to happen, and certainly in retail," she said. "There are lots of projects underway. But the economy was already in trouble, and Sept. 11 only made a bad situation worse. We've seen since the beginning of July that things were really starting to get very, very slow. And a lot of companies, while not canceling projects, have stretched the timeline much longer than originally anticipated. So a lot of things will happen. They'll just happen more slowly."

Officials from American kiosk-related companies that have landed VC funding are also confident that the sector is sitting on a period of expansion.

"Notwithstanding the economic downturn, the reports that we've seen paint a pretty good picture for the kiosk market," Collins said. "It's something that we're paying attention to and something that will grow over the next few years. We think it will become a stronger and stronger option, something that's very comfortable for customers in a number of settings to get information they need in an environment in which they're really in control."

Yerkes holds a similar view. A key reason there are only a handful of companies receiving major funding now, she said, is that the market is still young and going through typical growing pains.

"It's always a question of how fast, but certainly the market is there," she said. "It's clear to me that even hardware vendors are targeting this market for growth, and it's clearly accepted that this market is there for the long run. But in any emerging market you'll see lots of fragmentation, and that's what makes it look confusing in the beginning of market development."