Iterations: Getting To Series A Is Not Sexy, It’s Really Hard Work
My column yesterday on TechCrunch featured an interesting story about a company I’ve been involved with for a long time, a company that took five (5) years from birth date to Series A — lots of lessons here for venture-backed founders.
Editor’s Note: Semil Shah is a contributor toTechCrunch. As a disclosure, please note he has been friends with the founders Scripted (see below) for over five years and is an official advisor to the company: You can follow him on Twitter at @semil.
If you keep up with all the tech startup news, it’s easy to develop the impression that money is just sloshing around the Valley and even the worst products and ideas curry investors’ interests. Thankfully, this is far from the truth. As many of you know, raising institutional funding is quite hard and the process takes a long time, sometimes years. Years ago, Pandora suffered through brutal fundraising meetings before eventually securing venture capital — the rest is now history. And, just a few years ago, it was Pinterest who had to slog through many financing rejections before turning the tables on everyone. To that end, I wanted to highlight a company that I’ve been personally involved with as an advisor, where I’ve known one co-founder (Ryan Buckley) for seven years through graduate school and have come to know his CEO (Sunil Rajaraman) over the last five years. In fact, I remember Ryan telling me about his company while we were in graduate school (around 2008), and now, five years after starting their company — Scripted — the team finally reached, secured, and closed their Series A. Below is a brief Q&A with Sunil about their journey to date, which goes into candid detail about fundraising, marketplace businesses, and the emotional ups and downs of the process:
You recently raised and closed a Series A financing for your company. When was the company founded, and when did you first start going out into the market for your first institutional round?
Rajaraman: We have a long and complicated history. We launched under a different company name in January 2008 as a screenwriting software platform – our first idea was to give away “Google Docs” for screenwriters to amateur screenwriters. We planned on convincing producers they should crowdsource screenplays from us instead of sourcing screenplays from traditional routes (not too dissimilar from Amazon Studios). Our screenwriting software program became popular, but (surprise, surprise) producers did not want to buy screenplays from us. My co-founder and I were working at separate full-time jobs as we tried to keep the company alive through 2009-2010. We managed to keep the ship afloat long enough to realize our real customers were businesses. Companies started reaching out to us at the start of 2011 effectively saying: “Hey, we don’t have the time or the resources to, hire, vet, and ramp up a freelance writer workforce…you’re that company with a lot of writers – do you think you can help?” Scripted officially launched during the summer of 2011 and we raised our first round in November 2011 (took about 6 months in all).
You drew some initial interest for your Series A in the Fall of 2012. Describe what happened? Now in the Spring of 2013, it sounds like you were oversubscribed? What changed?
Rajaraman: Without disclosing actual numbers, I’ll say that for a seed company we were generating Series A-like revenue by Q3 of 2012. As a result, we drew initial interest and figured it would be relatively easy to get a round done. The main reason we didn’t get over the finish line is that we are smack dab in the middle of two types of businesses: recurring vs. transactional. VCs weren’t sure how to evaluate us because we had some transactional business, and some recurring business. All that really changed between the Fall ‘12 and Spring ‘13 was we shifted focus to more recurring business. We also got James Currier and Stan Chudnovsky of Ooga Labs involved as advisors and investors – those guys have a TON of experience growing marketplace-like businesses. As soon as we got them involved, a lot of VCs got very interested very quickly. Rick Marini, Michael Birch, Chris Michel and Paige Craig joined our investment contingent as well, and were helpful as we evaluated prospective investors, and decided on the best option for the company. We went out to a few investors we really thought made sense for Scripted, and the story was a lot easier to share with a full year of data. Numbers don’t lie, people do.
How did you regroup, both as a person and as a company, between the disappointment of last fall to the success of this spring? Any tactics?
Rajaraman: It sucks to try for an A and not get over the finish line. I’m not going to lie, I really suffered last fall and had to get myself back together. A few things really helped: One, we have a great team. Our team stayed positive because they knew what was going on at every moment. We have a transparent culture and this is where it helps. Everyone continued to work hard, and no one gave a second thought to what happened in the Fall. Two, Belgian beer helps. A lot. Three, at the end of the day you have to find what motivates you – for me that’s obviously) my fundamental belief that Scripted is going to be a massive business.
How did you keep the company afloat?
Rajaraman: Through a combination of two things: growing revenue (nothing beats growing a business the old-fashioned way), and a venture debt round we put together with WTI. Venture debt is a great tool for entrepreneurs to have in their back pockets, and very few folks actually take advantage of it. The cost of debt capital is far cheaper than equity capital (which is why we raised debt rather than an insider round) with one major caveat: you have to be able to make the interest payments. Venture debt firms recognize this, and only make investments in companies that look like they are fundable (eventually), and won’t default on the debt. Entrepreneurs benefit by not taking unnecessary dilution if all they need is a few extra months of cash to hit their funding (or revenue) milestones.
How did you know you could re-enter the funding market for your Series A? What was different this time?
Rajaraman: My confidence-level was much higher this time. I’d reiterate nothing beats revenue and growth – if you have both, raising money becomes much easier. We ultimately ended up with many options, and had the good fortune (for the first time in the company’s history) of picking between investors.
Which investors did you decide to go with?
Rajaraman: Eric Chin from Crosslink Capital and Chris Moore from Redpoint ventures. Note that I list the partner first, and the firm second – when you receive investment from a VC firm, you’re really working with the partner that invests in you, but it’s easy to caught up in the brand names of firms.
The process of picking the right investors is not all that straightforward, and my biggest advice here is to do your homework. We had a working relationship with Eric and Omar from Crosslink for a year and change, so we knew what it would be like to work with them, and vice versa. When the time came for us to raise our A, both sides already had a bunch of data, and we knew we wanted to work together. We still went through a traditional, thorough diligence process but all of the questions about whether Eric could be a great board member were already answered.
Chris also conducted a thorough diligence process on Scripted, but we did not have the luxury of knowing him for 16 months like we did with Crosslink (and vice versa). Over the period of a few weeks, we spent a lot of time together (including a long Easter Sunday meeting) to understand how we both work. What it ultimately came down to was the references – we asked for numerous references from Chris, and conducted several of our own (outside of his list). The feedback was consistent and positive.
Now, having closed the A round, what three pieces of advice would you give a seed-stage company that is just on the edge of raising Series A or closing shop?
Don’t give up. I can’t believe how many entrepreneurs who I personally know, or who are friends of friends who just give up. It’s saddening, but it’s typically the best filter to figure out who is cut out for this stuff. You’re going to suffer and you’re going to look at the bank account and figure out you only have a week or two of payroll left – that’s when you really figure out what you’re made of. Read this if you need inspiration.
Stay healthy. I wish I’d done a better job of this – I ate like crap, stopped working out and wish I’d taken better care of my health in general. Don’t make that mistake – this process is stressful and you’ll be better off for it if you manage your own health first.
It’s all about the story- When a VC bets on you, they aren’t just betting on you as a person, but what you’ve been through. Don’t be afraid to share your story – you don’t need to get too personal or anything, but show that you actually have a human side. It’s the little things that you don’t think matter that can sometimes make the difference.
Any other tidbits you can share about VCs in general?
Rajaraman: Lots, but here is an abbreviated list:
Don’t waste time with funds that aren’t actively investing. Danielle Morrill blogs about this a bit (her list is not entirely accurate), but you should know that firms you meet with are actually making investments.
You have to get to the heart of the reason why VCs passed on you. Often times it’s not the stated reason, but a combination of things. You should reach out through advisors and other investors to find out the real scoop as to why folks pass on you so you can adjust accordingly. I’m not suggesting you make adjustments to your business strategy based on VC feedback, but if you want to raise outside capital you really need to understand why VCs decided to pass on you.
The reality is that some VCs won’t get back to you. That’s ok – VCs are super busy and get a ton of inbound interest. Most of the time, it means they’re not interested, though sometimes they just get sidetracked. Focus on the guys that are most responsive – they’re telling you they’re interested. For the less responsive guys, send an email with positive company news/update to tease out whether it’s lack of interest, or they just got sidetracked.
That being said, there are a ton of VCs out there who will commit partner time, allude that they are interested, and not get back to you at all after like they are. These are folks you ultimately wouldn’t want to work with anyway.