Apr 23 2014, 10:56am CDT | by Forbes
For many entrepreneurs the ways of venture capital investors have all the transparency of a mystery wrapped up in enigma. What’s not in doubt is that VC Funds have the resources to provide transformational funding at levels that wouldn’t normally be available from a bank or angel investor. But if you’re an ambitious entrepreneur with a good story to tell, what’s probably a lot less clear is whether your business will tick enough boxes to tickle the fancy of anyone within the venture capital community.
So what makes a business attractive to VCs and other equity investors? Identity management company Okta has raised a total of $79 over a number of funding rounds so when cofounder and COO Frederic Kerrest was in London recently, it seemed like a good opportunity to ask him how his company has done it.
Find a niche but make sure it’s a big one
Scale matters, of course. “VCs want a big market, so if you’re looking for investment you need to focus on a big and also a growing market,” says Kerrest.
If you’re lucky, of course, you might find yourself in a clear blue ocean of untapped demand but Okta is a software company providing identity management services and as Kerrest acknowledges, this is a field in which companies such as Oracle, IBM and CA have long-standing expertise.
So the key for Okta has been to identify a niche within that market. As Kerrest sees it, the opportunity was created by rapid changes in the way companies are using IT. For one thing, businesses of all sizes are happily embracing the BYOD(Bring your own device) philosophy by allowing employees to access applications and information via a range of personal smartphones, tablets and laptops. This in stark contrast to an earlier time when any machine with access to network was owned by the company and probably sat on a desk. Added to that we have seen the growth of cloud computing and also more sharing of information between companies. All three of these trends have created new requirements in terms of identifying and authenticating users. In Kerrest’s view, the established players in the identity management marketplace haven’t reacted quickly enough to the changing environment, creating a gap that Okta has been able to fill.
Room For Disruption
“That’s another important factor as far as investors are concerned,” says Kerrest. “They like to see that there’s room for disruption.”
That disruption extends to the emergence of a new and hitherto largely untapped customer base – namely small and medium sized companies. “SMEs have adopted cloud services particularly aggressively ,” says Kerrest.
But if growth potential is a hugely important factor in attracting investors, so is a degree of realism. “When you’re talking to investors it’s very important that manage expectations. You say, this is what the business will look like, but it has to be credible,” says Kerrest. “You stick with the basics and say this is what we’re going to do in the next six months or the next 12 months.”
Setting and hitting ambitious if realistic targets creates the milestones that open the door to further growth funding. For its part Okta, has gone through a number of funding rounds the latest of which being a $27 million series D deal led by Sequoia Capital with existing investors Andressen Horowitz, Greylock Partners and Khosla Ventures also taking part. The money raised will enable Okta – which has grown to company with 300 employees and 500 customers – to press ahead with an expansion into Europe.
Choosing Your Investors
Multiple funding rounds can create their own potential problems, not least in juggling the interests and expectations of an expanding group of investors. As Kerrest sees it, it’s important to select investors who “understand each other.”
And equally important, choose investors who provide something in addition to money. “Ideally, you want investors who are operators – people who know what it’s like to run a company and who can add value,” he says.
Businesses in the UK arguably a face a tougher time in securing VC capital than their counterparts in the larger US finance market but Kerrest believes the verities are largely the same. The key is to find that big market. “And make sure you’re solving a big problem.”
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