Our mission is to unify all enterprise data in a single, coherent graph managed by Stardog. After 18 months of great revenue growth, we decided to raise capital. You won’t believe what happened next…
We raised a first round of equity financing from institutional investors (i.e., not from angel investors), Core Capital Partners and Boulder Ventures. In what follows I’m speaking only for myself and not for anyone (or anything) else.
The why in this story is pretty simple: we were fiercely independent bootstrappers, but then it became very clear that it was time to scale the business. We raised money because we couldn’t keep growing without raising.
The why was very simple. The how wasn’t. I will now attempt to generalize some of the lessons I learned in order to seem like a wise and innovative business leader. Note that this is all relevant to my situation as a first-time founder, with a strong technical background, and cofounders with stronger technical backgrounds, working on a very hard problem—all of whom preferred to bootstrap as long as possible.
That said, a few things became clear very quickly:
- Finding investors, who are likely to become board members, that you can work with is key; this can’t be stressed enough…not everyone thinks about the world and the business of software and startups in the same way. You need investors who make you smarter. This is one of the main non-pecuniary goods from raising capital; you need to max it out.
- You are always pitching, which is to say that VCs operate, maybe more than most people, in information scarce environments and they (not unreasonably) will try to compensate by extracting information from everything about you. The perils of this approach are well understood. I only want to remind you that it really happens and you need to accommodate it to be successful.
- If you aren’t a new company, you will probably have some “hair on the deal”, which is to say that once you have a term sheet and the process gets turned over to the lawyers, the difficulties scale proportional to the number of years in business times the number of customers. These obstacles are rarely (or so I’ve been told) insurmountable, but you may need to work hard and be patient in this phase. Most of what is required is good for the business although it may not always seem that way.
Who should you raise money from? You will of course make mistakes, especially early on when you are trying to find the story you want to tell about your business. Investors will also make mistakes and pass on deals that they shouldn’t pass on. Sometimes they are too busy with another deal to even pay attention to yours. (That’s very frustrating and unavoidable. Don’t waste time in the absence of strong signals from investors that they are very interested. Move on as fast as possible.) You may need to pitch to a lot of people and some of that attrition will not be your fault. It doesn’t mean your business isn’t a good investment. Don’t take it personally.
So if you think some day that you might raise capital, don’t wait till you really need to do it to start meeting investors and people who know investors. I learned this the hard way. I wish I’d been smarter. Don’t be dumb like me. I don’t really know how you should meet investors but there are ways. Just do some of them till something works.
You also have to pay attention to the strategy (their “investment thesis”) of investors. We are a mid-Atlantic, enterprise company focused on data unification, with a relatively complex underlying technology. VCs specialize. It’s not an accident that Core and Boulder invested in Stardog. Being the first money into enterprise infrastructure companies with a focus on data management is their specialty.
Pitching to an investor who isn’t a good fit for your business is often a waste of everyone’s time. Avoid it whenever possible.
The other who-question is who should lead and participate in the process? This is very dependent on situation but of course the CEO must run things from the business side. Who else? Maybe the CTO if you aren’t technical. Or the CFO if you aren’t financial. In our case I did it solo because Evren Sirin and Mike Grove, the other two founders, were busy running and growing the business in my (relative) absence. It seems impossible, but you have to raise money and grow the business at the same time. That seems impossible because it is impossible. You will find a way.
Enough that it makes a difference to scaling the business and enough that it makes the effort worthwhile. But I’m a believer in not raising too much the first time. You may find that sets expectations too high to manage. There aren’t too many other general rules of thumb beyond that. You don’t want to raise again too soon. You want to raise enough that when you have to do it again you’ve made sufficient progress that you can raise on good terms.
Concluding Unscientific Postscript
I wish there were advice about raising money that was specific and generally applicable. I’ve never seen much of that. But if it existed, then raising money would be a very different sort of thing than it is. But in my view all business advice is provisional and should be continually subjected to analysis and review. You have to find your own way. There is no way but the way.