When Disco decided to raise venture capital, I benefited from a variety of blog posts by venture capitalists (especially Fred Wilson, Brad Feld, Mark Suster, and Jeff Bussgang), company executives (especially Gabriel Weinberg and Rand Fishkin), lawyers, and others (especially Paul Graham). I also read several books about venture capitalists and the venture capital process and benefited from many of them (especially Brad Feld and Jason Mendelson’s Venture Deals).
This is my effort to pay it forward. Disco does not have Moz’s culture of transparency or anything like it, so I won’t be sharing our deck or the details of our numbers, other than in general terms. But I will describe what it was like to raise money, how we went about it, and how we undertook the negotiations.
As background, Disco makes ediscovery software that helps lawyers find evidence faster in the tens of millions of documents that get exchanged in major cases and investigations. We sell Disco as a SaaS product to law firms and corporate legal departments. We are in an established crowded-looking market with kCura, Symantec, Access Data, LexisNexis, ThomsonReuters, Kroll, Recommind, Xerox, and others as competitors. We launched in January 2013. In general, we deliver a 10x speed and price improvement over their offerings.
We first seriously began raising money in September 2013 and closed our round in December 2013, so the process took four months from beginning to end. (The process with the firm we eventually went with was even faster: first meeting on Halloween, closed on December 17, or 48 days from beginning to end.) We drafted a two-page executive summary with a revenue chart up front and one-paragraph descriptions of our product, team, competitors, market, and proposed deal terms. We sent this and a backup revenue spreadsheet to partners at venture capital firms whose bios indicated interest in enterprise SaaS products (interest in the legal space is too rare to use as a filter). The email contained a two-paragraph description of our numbers and the company. We had not prepared a deck at this point.
We compiled the list of venture capitalists to target (a) from personal knowledge of people on our team, (b) using Google (the bulk of the list), and (c) from a list that Blake Masters of Judicata kindly shared with us of venture capitalists with an interest in the legal space. We targeted firms in Silicon Valley and Boston plus Austin Ventures in Austin and Mercury in Houston. We received warm introductions to two Silicon Valley firms, but both of those introductions went nowhere (not even to an initial meeting). So, contrary to popular belief, warm introductions are not necessary — all of our meetings and our final funding came from completely cold, out-of-the-blue emails to partners. Midway through the process, we started receiving inbound calls from associates at firms that we had not reached out to. One of these turned into a term sheet; two others were from later-stage investors who wanted to “meet us early.”
Also contrary to popular advice, we did not commit to the funding process when we began pursuing it; indeed, we were deeply ambivalent about taking funding at all and remained so essentially until the day we signed our term sheet. Before raising our Series A, Disco was bootstrapped on cash from the law firm I founded and revenue from Disco sales. We turned profitable during the fundraising process (and had the luxury either way of continuing to fund Disco personally or from law firm profits), so we faced no definite end-of-runway date by which we were forced to secure funding or shut down. But at the same time we were interested in investing in growing our team and business at a rate faster than we were comfortable financing personally or from profits.
We initially set out to raise a very small round leaving room for a big raise at a higher valuation later. Under no circumstances were we willing to give up control. We ultimately raised double the amount we initially intended at approximately the target valuation and retained control. Every venture capital firm we talked to cared much more about the percentage they could buy than about the valuation. We considered raising angel money in Houston, but found that most Houston angels did not want to participate at what they described as a “Valley valuation” (actually low by Valley standards). We also had no success on AngelList (one serious investor, but he could not do the full deal size).
In our initial meetings, the hardest questions focused on market size and whether our revenue is really recurring revenue (ediscovery software is very sticky during the life of a case, but it is essentially case-based; that said, once lawyers like it on a case, they almost always continue using it on subsequent cases, and litigators’ average caseloads are quite consistent over time — so our space is somewhere between one-off sales and true sell once, recur forever revenue like Salesforce). After our first two meetings, I revised the way I discuss market size to describe ediscovery software ($1.6 billion) as the innermost circle of a larger market that includes lawyer review (~$70 billion) and legal compliance (>$100 billion). This let me talk about much larger market size numbers and seemed to resonate with venture capitalists. Previously I had talked only about the first circle.
Most firms had a three-step process: an initial meeting by phone or in person; a call-back meeting with multiple partners; and then a full partnership pitch. We prepared a deck between the initial meetings and the multi-partner callback meetings and used the same deck for the second and third meetings. Our deck was short and focused on the numbers with an appendix of slides addressing FAQs and technical details. We also did a brief live demo (demo.csdisco.com) as part of the presentation.
Because of our ambivalence toward raising money, it was not much of a distraction to the company up until we signed a final term sheet. (This is contrary to the widely repeated warning that once you start raising, it consumes your life.) CeCe compiled the list of VC firms and sent the initial emails. I prepared the materials and the deck and took the meetings. No one else was involved. And pitching and getting term sheets was never a top-of-mind priority for me. By contrast, after we signed the final term sheet and before we closed, closing the round was my almost all-consuming priority and consumed a fair bit of time for others in the company as we completed legal diligence.
One side effect of our relaxed approach was that we did not discover other venture capital firms in Austin (other than Austin Ventures), including LiveOak, the firm with whom we ultimately closed, until very late in the process. I went to Austin Ventures to pitch, had a good time in Austin, was tired of traveling to the coasts, googled other Austin VC firms, and then sent a second wave of intro emails to those firms. That wave went out in late October, we had our first meeting with LiveOak on Halloween, signed a term sheet on November 22, and closed on December 17.
The venture capital partners we dealt with left very different impressions on us. Some of them asked questions that didn’t seem very intelligent or appropriate; others instantly grasped our business and asked questions that we ourselves regarded as central. Some of the first category improved significantly between our first meeting and our second meeting, suggesting that they prepared seriously in between the meetings. Some seemed to have cohesive and cooperative partnerships; others, not. Some were prompt in dealing with us and immediately helpful (customer intros!); others disappeared for weeks at a time, then reengaged with much excitement. I think we encountered some problems because the amount we were raising and ultimately raised is odd: it is a large seed round or a small series A and so falls between two categories of investor.
LiveOak, the firm we ultimately did a deal with, impressed us the most with the speed of their responses, the quality of their questions, their helpfulness during diligence, and the quality of the interaction between partners. Indeed it is fair to say that they blew us away along all these dimensions and that is why we decided to work with them. Particularly impressive were (i) that the first diligence meeting, which was initially going to be just our partner visiting our offices, turned out to be the entire partnership showing up at our offices; (ii) that all our meetings felt like genuinely helpful strategy sessions that refined my own thinking about our business; and (iii) at the beginning of diligence, three high-level introductions to large potential customers (who also vetted us for LiveOak).
We ultimately received term sheet offers from three firms: one in Silicon Valley; one in Boston; and one in Austin. Following the common advice, we negotiated along only two dimensions: valuation and control (mainly the latter). But by this time we had a strong preference for LiveOak and were willing to give up some valuation in order to work with them. Indeed, we turned down an offer from a firm that essentially told us to hold an auction and “we will match the other terms and won’t be outbid on valuation.” LiveOak’s willingness to close quickly was also important because we wanted to finish the process before the holidays. Our thinking here was along the lines of Paul Graham’s recommendation: accept the first decent VC offer and get back to business rather than spending lots of time optimizing terms.
Two takeaways from this: (1) for venture capitalists, it is definitely true that the quality of your interactions during pitch meetings and diligence can win you the deal and save you money on terms — it is really not an auction; and (2) from the company perspective, there really does seem to be extreme variance in what it is like to work with different VC firms and VC partners. Revenue traction and positive customer feedback really do trump everything (including lack of intros).
Total legal fees paid by the company (the fees we incurred plus our share of the fees our investors incurred) were about $50k, which is more than I would have hoped, but less than I would have charged as a lawyer, so I can’t complain. Counsel on both sides (Steve Kesten at Boyar Miller in Houston for us and Bill Volk at Vinson & Elkins in Austin for LiveOak) were easy to work with and the process went smoothly. Principals negotiated the term sheet and lawyers negotiated the definitive documents.
Overall, I enjoyed the process except for the period between term sheet and closing. I hope this post proves another helpful data point for others raising in the future. Houston startups, feel free to reach out to me if you want to discuss our experience further.