Last year, when we raised our Series A, I wrote Reflections on Raising Venture Capital to recap our experience for the benefit of future startups. I benefited immensely from the material I read before raising and wanted to contribute back what we had learned.
This post, in the same vein, highlights some things we learned in the course of raising our Series B. Unlike the Series A post, I’m not going to include a full narrative of our raise, but only some of the highlights and the most important takeaways.
We wound up raising just over $10 million in a round led by Bob Goodman at Bessemer Venture Partners. BVP is one of the top-tier VC funds, with 111 IPOs, including 11 in the past four years. Its successes include Cornerstone, Broadsoft, LinkedIn, Yelp, Millenial Media, Eloqua, LifeLock, Bladelogic, Gartner, Vertica, and Endeca and its portfolio includes Pinterest, Box, Twilio, and lots more.
(BVP is also famous for its public “anti-portfolio,” companies it could have invested in but passed on, which includes Apple at a $60M valuation, eBay, FedEx, Google while it was in a garage, Intel, Intuit, Lotus, Compaq, and PayPal. Ouch!)
We had our first call with BVP on October 3, and the round was closed and funded on November 17, 46 days later. This compares with 48 days from first meeting to closed and funded for our Series A.
Here are the tips:
Warm intros were not more effective than cold outreach or VC inbound. The common wisdom is that the way to raise money is to secure warm introductions to the appropriate partners at venture-capital firms. Many prominent VCs have publicly stated that they do not consider submissions “over the transom,” i.e., without one of these intros. This is a nightmarish requirement for those of us who are not already well connected and who hate schmoozing. In my Series A post, I observed that contrary to the common wisdom, all our term sheets came as a result of completely cold email outreach. Likewise, the two term sheets we seriously considered for our Series B came one from cold outreach and the other (BVP) from inbound from the VC. While warm intros from our existing investors this time around certainly converted to meetings at a higher rate, we did not find warm intros to be either a requirement to doing a successful round or even more likely to convert into term sheets.
If you commit to a raise, it will monopolize all your time as CEO. In my Series A post, I explained how we were ambivalent about raising money and turned profitable during the raising process. This meant that raising money was actually not much of a distraction and really more of a background process for me. This time, we committed up front to doing a Series B to fuel rapid growth (although we did arrange a backup bridge round with our existing investors), and, as is the common wisdom, it took 100% of my time during the raising process. For roughly two months, I was able to participate only minimally in engineering, operations, sales, finance, and other essential company functions. If you are a very hands on CEO like me, this is not fun.
Lawyers affect the experience, but not the outcome; push, push, push on the other side’s lawyers; do not assume they are working if you aren’t pushing. The style (not necessarily the quality, as all the lawyers you will deal with for major funds are baseline good) of the lawyers greatly affects how pleasant the document-drafting process is, but it does not affect the bottom line outcome in terms of financials or control. One practical tip here is not to assume that the lawyers are quietly working on documents; instead, you should continuously push to ensure that things are moving quickly to a conclusion. Lawyers who are working hard on your deal will turn documents daily. Delay beyond one day between turns of drafts between your lawyers and theirs is caused by either the deal not being a high priority or unavailability of someone on the other side (read: usually, the same thing). If lawyers are instructed by their clients to go quickly, this speed is definitely achievable. The trick is to do this while still appearing pleasant to deal with (I probably erred on the side of being too pushy, but I recommend doing the same).
Enlist a great UI guy to work on the pitch deck. VC run-throughs are invaluable. If you are a SaaS company like us or otherwise have beautiful end-user-facing software, then you have brilliant designers on staff working on your UI. Use them to help you with your pitch deck! I am shocked in retrospect at how ugly our Series A deck was and how beautiful our Series B deck was once our head of UI agreed to help me on its design. As with all design, this is not merely about polish or surface appearance; great design makes the ideas flow better and makes the story more persuasive. Don’t neglect this. Similarly, in designing the content of the deck, run-throughs with your Series A investors are invaluable; we made many major changes (including adding something called an “innovation and incumbency chart,” which is apparently a McKinsey thing that I found at first blush absurd but that resonates with MBA types) after a first run-through with our investors that we would not have come up with had we not done the run-through.
If you are a VC, the personal touch matters deeply. Relatedly, once you decide you want a deal, don’t negotiate unless it really matters. Lots of personal contact between the partner leading the deal and the founders is the best way to make your firm attractive and to make the founders comfortable with you. You can jump way up the list (over “more prestigious” firms and even over firms making better financial offers) by doing this. A corollary is, once you decide to do the deal, stop negotiating over stuff you don’t deeply care about. It is better to get the deal at slightly worse terms than to snatch defeat from the jaws of victory by trying to negotiate in the endgame. If a founder tells you what will get the deal done and you want to get the deal done, the safest answer is, “Yes, we accept. Here are the definitives.” If you want to tinker with things later in a way that you and the founders think really is win-win, you can do that later; but first, lock in the deal.
Round sizing is hard, especially outside the Valley. A small round by Valley standards is a big round by Texas standards. So it is very hard to know what to ask for. I don’t really have a good solution here, other than to flag the issue. If your baseline sense of what is normal is set outside the Valley, you should probably raise much more (2x or more) than you think you need or than you think is appropriate, not so much out of conservatism, but because, even knowing this and trying mentally to take it into account, you will likely be wrong. If you are a first-time founder like me, and you are not steeped in Valley valuations, just remember to adjust sharply upward. It is easier to move the ask down than to move the ask up.
Negotiate control and financial terms in that order; everything else is much less important. This is what I said in context of the Series A. It is also the conventional wisdom. It is correct. Retaining control is most important. Financial terms are next most important. Everything else is stuff for the lawyers (and you should try to keep your lawyers from slowing things down by fighting about stuff in this “everything else” category).
If some customers are great for you and other customers are bad for you and it is hard for VCs (or perhaps even you) to tell which is which, then luck of the draw during VC diligence will strongly affect your outcome with particular funds. We sell ediscovery software that lawyers use themselves. This contrasts with all other players in our space, who sell ediscovery software aimed at litigation-support or IT staff who work for lawyers. In sales, this means we have a magical close rate when showing a demo to lawyers, and a horrendous close rate when showing a demo to litigation-support or IT staff (or to lawyers who are just there because a VC asked them to go to the meeting, but really they defer to their staff). Because of this, some VCs had awesome experiences in diligence (everyone they showed the product to loved it) and some VCs had awful experiences in diligence (they could not find a single person who would buy it). Obviously the first category moved forward and the second did not. If your market is similarly bifurcated, you will experience this frustrating “luck of the draw” effect while raising. You can explain what’s going on to the VCs, but they will naturally trust the market feedback more than anything you say.
VCs who have had bad experiences in the space are going to be out (and this is the only thing we encountered in either raise that trumps growth numbers). Two funds that were initially enthusiastic backed off because of a bad prior experience in our space. One of them had a partner who was the CEO of a startup in our space; the other had a partner who was the CEO of the company that acquired that startup. While the startup had a good outcome, it was a slog for them. This experience caused both former CEOs to be strongly negative and caused both funds to pass on the deal. This competitor did more harm to us this way than it ever has in actual competition for customers!
Collect all diligence materials up front and have an online document room to make sharing them easy. We did the former, but not the latter. We might have been able to shave a week or so off the schedule by doing the latter. Not a big deal, but super easy to do and something I would definitely do next time around.
* * *
These are the things I wish I had known before raising, so I hope they are helpful to those who come after. Houston-based startups, feel free to reach out to me if you want to discuss any of this in more detail.