The following is a post I outlined in 2009 about our fundraising process that was never finished. We decided to publish this anyways because it’s apparently never to late to publish stuff like this and because, though the environment for raising capital has changed dramatically, it’s still a useful story.
I share this story not to pat ourselves on the back, but rather to share some lessons for fellow entrepreneurs. Nobody’s story is going to be the same, and the more you hear, the more you know. I know I’ve learned a ton from reading what others have posted, so hopefully this helps someone out here.
In December 2008 we decided to make a serious go at raising a seed round. We'd been sniffing around for about 6 months prior but with the launch of our paid services on the horizon we decided that now was the time it had to happen. Yes, the market for raising capital was terrible but we were running out of time. I was going back to family members every couple months to get another cash infusion to keep us afloat and that well was rapidly running dry.
We had decent traction. 40% monthly growth on sign ups and a decent list of leads for people interested paying us for a premium offering. (We had just announced pricing plans; you couldn't sign up, just express interest – a lead list basically. It should be noted that just announcing the paid versions cut our monthly sign ups in half.)
We set a goal of raising $500K.
We had our first investor meeting in December. It went well and we actually got an offer but the valuation was too hard to swallow. Getting that offer gave us the confidence to say “we can do this” and so I set about setting up meetings with investors after the holidays.
Fast forward 4 weeks to the end of January 2009 and we're sitting down for our first meeting. We drove up US1 from Santa Cruz to San Francisco, EVDO cards blazing, working on our pitch the whole way. I’m not sure if it was nerves or motion sickness but by the time we got to San Francisco I thought I was going to hurl.
The meeting went pretty well. Over the course of 90 minutes, we had lively banter back and forth and delved into the specifics. We went a bit off the script but it felt good. We pulled up our internal dashboard and it showed that we were on track to make $89 that month (we had just launched our paid services earlier that day and it was cool to point to the fact that we had people willing to pay… even if it was only a single person).
The Low Point
A couple of weeks later we got the call back. They were going to pass. They didn't see the big opportunity. I realized we had made a huge mistake in letting that meeting get off track. We got mired in details and didn't sell them on the bigger story (we had figured we'd surely get a 2nd meeting and could get into that stuff then). We let them come to their own conclusions and they concluded it wasn't a big enough opportunity.
We had had a couple of other meetings but we just didn't click like we did with this investor. We had one meeting devolve into debate over core business metrics.
What was frustrating was that we felt that our pitch was getting better with every meeting but it was still not quite there. We had lined up a few interested angels but not enough to get us to $500K and probably not enough to get the critical mass required to close a round of any size.
It didn't help that in early 2009 there weren't many angels or early stage VCs to pitch. What angels were left in the market were savvy: they didn’t go in alone and they didn’t do notes. It also didn't help that one of our primary competitors had already raised capital from a lot of them.
I was starting to get worried that this might not work out and that we needed a plan B. That first offer we got was really tough but we needed the money. Money is money, valuation be damned. I went back to that first group and told them we wanted to talk. I was trying to figure out how to position it so it didn’t seem like we were crawling back with our tail between our legs to their original offer. We set up a meeting in 10 days.
Just a few days before my scheduled “mea culpa” meeting I got an intro to another angel (Dave McClure). An angel I had specifically told people NOT to introduce me to. Not because he wasn't awesome (he is) but because he was very metrics-focused and I was worried that we would get eaten alive by him on what I considered our mediocre efforts in metrics and instrumentation. My fear went something like this: “Have you talked to Dave McClure?” “Yes, but he passed.”
Against my better judgement we took the meeting with Dave anyways. We showed up and launched into what was by now a pretty polished pitch. I reluctantly showed him our various internal dashboards and metrics. Then something crazy happened. He was impressed. The thing I figured he’d eat us alive on was the very thing he was most impressed by. 30 minutes into that meeting he wanted in on the round. I was absolutely stunned and elated (and struggled to put on my best “of course that went well” face).
We now had some momentum (enough to change the whole dynamic of our other meeting from “mea culpa” to “we're making progress”) but we still didn't have a lead investor. I was feeling that we had enough interest that we could probably write our own term sheet and pull together a round without one. After seeing friends try to push the envelope with valuation and come up empty I figured that less dilution was not worth the risk at this point. So we sat down and picked a valuation we felt we could be comfortable with and that would be a no-brainer for investors. Our counsel drew up a term sheet to present to the band of investors we currently had in the “yes” column.
It's always easier when you have a lead investor to rally the troops, so in parallel we continued our search. With a decent group already committed, things started to get a bit easier. I got an introduction to David Lee at Baseline Ventures (now at SVAngel). I had a bit of a deja vu moment. We had talked to him & Ron Conway 9 months earlier. They just didn't get it, compared us to people we were clearly not and eventually passed. So I was a little hesitant. Man how things had changed! That meeting went well and led to us sitting down for drinks with Steve Anderson (Principal at Baseline Ventures) at Perry’s on Union St. a week later. We spent two hours covering everything about the business. No deck. No pitch. Just us and him talking about the business and where we saw it headed.
One week after that and roughly 6 weeks since our first meeting I was standing in front of our small “compound” in Santa Cruz when I got the call from Steve Anderson of Baseline Ventures saying that they would be happy to lead our round. Yes! We left for SXSW a few days later completely renewed and reinvigorated about our future.
Our first meeting was on Jan 22 and we had our “phoneshake” and closed the round on March 5th. We ended up bumping up the round from $500K to $800K to fit everyone in, and still we had to tell a lot of people that we simply couldn't take their money. We had offers for about double the capital we took, but since we had already set our valuation, taking more money would have hurt our dilution.
Because I'm a huge nerd I kept track of all of our leads, who introduced us to whom and who invested (click for a larger image):
Some takeaways from the graph:
- I’m using the term VC here for anyone who has LPs. Our lead investor, Baseline Ventures, is about the furthest thing from a VC that I can think of (in a good way) but they have LPs so I’m putting them in the VC column. (Sorry Steve!)
- Angels refer more people than VCs. David Shen was one of the first people to say they were “in” and he was crucial helping us bring the rest of the round together.
- Lawyers and bankers are your friends – Andre Gharakanian (Silicon Legal Strategy; who’s truly awesome) and Shai Goldman (Silicon Valley Bank) see a lot of deal flow and can provide a lot of intros. They’re obviously not as strong as an intro from another angel but still better than a random email on your own.
With that geekery aside I'd like to reflect on what did and didn't work for us:
What DIDN’T work
Going to your A-list targets first
Our first meeting was with our #1 target for funding. That was foolish. If we had to do it over again we would have cut our teeth on meetings with “lesser” investors and work our way up. We were so confident that it would go well that we didn't even think about this.
Letting investors drive the discussion
There's a fine line between a good meeting where you've got investors excited and a friendly back-and-forth banter and a undirected meeting where you're just having a conversation rather than selling the story. The few times we let the conversation go off the rails we got burned badly. Stick to your pitch, allow for some leeway, but don't be afraid to bring the conversation back to your carefully-crafted story progression.