venture capital

Misadventures in VC Funding: The $24 Million Moz Nearly Raised

by randfish on August 29, 2011

Over the training course of this calendar year, I’ve published a couple instances about raising a prospective spherical of venture financing for my business, SEOmoz. At last, the saga’s more than, I’ve been produced from terms of confidentiality and I can reveal the prolonged, strange story of how I initial rejected, was sooner or later persuaded, but eventually failed to elevate a 2nd spherical of investment money.

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My hope is that by sharing, other individuals can find out from our encounter and possibly keep away from several of the mistakes, pitfalls and pain we confronted.

Raising cash for a startup is definitely an inherently dangerous proposition. You phase up to the plate realizing that the odds are slim and that, for every story of success on TechCrunch, there’s 200 companies pounding the road, getting nowhere. We went the other route - permitting traders arrive to us (a method I wrote about final 12 months). This really is the story of that experience - becoming “pitched” by investors, the decision-making and negotiation processes as well as the conclude final results.

Do We really Want to Elevate a Spherical?

In November of very last yr, 14 months right after my prior failed attempt to boost richesse, we began receiving inquiries from a number of firms - enterprise capitalists and private/growth equity investors, inquiring if SEOmoz was interested in pursuing funding. My reply was often exactly the same, and seemed pretty related towards the electronic mail below:

About the next months (Nov 2010 - April 2011) we hunkered down, focused on product, technology and advertising and marketing and grew the business, largely ignoring the possibility of outside funding.

In March of 2011, one particular certain investor (whom I’ll make reference to through the rest of this post as “Neil”) attained out to us and was specifically thrilled about the SEO/inbound marketing and advertising sector and SEOmoz in particular. He sent this e-mail right after our phone:

It had been flattering and fascinating to truly feel this great level of fascination in our business from an investor, and Neil wasn’t the one one, both. Here’s a list in the folks we talked to noticeably (indicating over only a simple cellphone get in touch with or e-mail) above the 1st 7 months of 2011:

• Bessemer Enterprise Partners • GRP Partners • Stripes Group • Insight Ventures • JMI Equity • Level Equity • Mayfield Funds • Accel Partners • Summit Companions • NEA • Standard Catalyst • K1 • Business Ventures

For the corporations famous previously mentioned, I’ll retain specifics of who we spoke to and just how far we progressed private (as I did in my publish within the 2009 knowledge) using pseudonyms.

The week of May possibly eighth, I fulfilled with 3 investors in Ny city and one particular in Boston. In preparation for these conferences, I tried to remind myself that cash might not be the best factor for that company using a manifeste weblog publish about the subject. I was focused about the objectives of developing associations, sharing our trajectory and learning around possible about how others seen our organization and market place.

Regardless of this bevvy of interest, my prior fundraising knowledge had left me gun-shy and reticent about committing. Weekly soon after the conferences in NYC, the Moz crew had a critical chat about whether or not raising a spherical might have a serious, optimistic effect on the company. That discussion integrated a lot of back-and-forth, but the good reasons we finally decided to check the waters much more severely integrated:

• Increase Engineering - For that first quarter of 2010, we had a mandate to expand the engineering team so we could increase our products more rapidly. This proved incredibly hard, as being the much-reported tech expertise wars in Seattle created a vacuum of big-data savvy SDEs. Nonetheless, in Q2, our position shifted as we have been capable of considerably increase the engineering crew - to some extent where we needed to gradual selecting as a way to help keep payroll in keeping with our bootstrapped development. Although absolutely a constructive, this change meant that we ended up minimal by income while in the financial institution for the first time in a whilst.

• Scale Knowledge - Linkscape, Blogscape and our APIs cost ~$100K/month on the commencing in the year. In Q2, this cost had risen 30% and we foresaw a close by time when it will ambigu or more. In July of this year, these fees have been, certainly, virtually $200K. We’ve gone from 40 virtual devices hosted on Amazon to 200 , and although we’re thrilled to determine our metrics (mozRank, Domain Authority, et al) attain widespread adoption, many of the heavy end users employ our cost-free API, leaving our revenue from other channels to assist these expenses. Long-term, we feel in free of charge, open up knowledge like a way to expand the brand name, the organization and our revenue-producing channels (and it’s a part of our core values to get as open up and generous as is possible with our info), nevertheless the funds limitations had eventually become a point of stress, and another purpose to seek development money.

• Broaden Facilities/Benefits/Team Pleasure - The Moz offices can easily maintain 45-50 people, but we realized that by Q3, we’d presently be at that variety. We also acknowledged the aforementioned talent wars were pushing us to develop the variety of advantages and room we offer to the team. Moz was named #6 on Seattle’s Best Locations to Function, but we’re striving for #1, and we strongly believe that the better we are able to treat our crew, the more incredible our output and outcomes will probably be.

• Release New Goods - Our big information assignments have already been tough, but in addition amazingly gratifying, and we felt a strong generate to do far more, more quickly. We would like to supply marketing analytics beyond pure Search engine optimization, moving to field like social, content marketing, local and verticals (cell, video, websites, etc. - anything at all that sends targeted traffic about the world wide web organically). Several of individuals call for hefty upfront investments in data resources, engineering and market place investigation. One particular in the strange items I’ve identified (which probably warrants a publish of its personal in some unspecified time in the future) is that the larger your scale, the longer it will take to create solution. You’d feel that obtaining 15 full-time engineers as well as a significant assistance team about them would imply faster improvement, however it does not - the dimensions we need to support (virtually 14K having to pay customers and 250K end users of our free goods) for something we release implies far higher interest to architecture, reliability and high quality then once we had two devs and five hundred users.

• Put money into Marketing and advertising - These days, almost all of SEOmoz’s acquisition of new consumers is by way of inbound/organic channels (~80%). We identify there is a great deal of room for progress in the two organic (subject material advertising, a lot more neighborhood expense, Seo, social, and so on) and in compensated advertising. An investment right here would enable us to have a longer watch on client payback period (the time till we recoup an investment in acquisition) and experiment in new channels, way too.

• Provide Liquidity to Founders - Gillian launched the company that might become SEOmoz in 1981 and I’ve been functioning along with her considering that 2001. As Gillian’s stepped other than day-to-day tasks (publish 2008) and taken on more of an external evangelism function, most of us felt that providing her a more formal exit and liquidation path would be a great solution. I also personally felt it was wise to consider some cash off the table.

I’d be remiss if I did not also point out one more meeting in Boston - with Hubspot’s Dharmesh Shah. For the past couple of years, Dharmesh has become a tremendous mentor to me, and someone whom I usually turn to when huge choices similar to this look. On the subject of funding, he gave clear, well-reasoned assistance (and afterwards, made that advice public). We fulfilled in May possibly, just following my in-person meetings in New york, and noted that the mixture of a fantastic marketplace for investment as well as powerful growth at the company created for exceptional fundraising conditions.

Testing the Waters to get a Big Financing Round…

As a result, in mid-May, when Neil asked to stick to up by having an in-person check out to our offices in Seattle, I sent the following e-mail reply:

Right after that meeting in Seattle, items obtained hot and hefty. Neil wanted to do a deal and we commenced speaking phrases. It had been at this point that our government group and board of directors decided to get some steps to insure that we were creating the correct moves. These included:

• Meeting with and, ideally, obtaining offers from 2-3 in the other corporations who had reached out to Moz to help you exam the waters on valuation and deal phrases, and to make certain we had a spouse and investor we cherished.

• Deep-diving on Neil and his agency. We ended up speaking directly to individuals at two of their portfolio firms, several individuals who worked with Neil in his earlier roles and back-channeling to nearly 50 percent a dozen other people who’d labored with him in one way or one more via our network of contacts (each at Moz, and through Ignition Partners, our investors from 2007).

• Doing work difficult on long-term, strategic planning for 2012 and over and above - what did we want to accomplish, the amount would it just take, and in which would the money be put in?

• Planning a semi-formal slide deck to pitch the partnership at Ignition, as we needed them to take part while in the round at the same time. We also created a mild model of this deck to deliver close to to numerous people in the area and support drum up any possible fascination without having becoming also ahead or pushy.

• Investigating the fundraising market for self-service SaaS businesses like ours by chatting to as a lot of just lately funded business people while in the house as is possible. Through this analysis, we hoped to obtain an excellent idea of what sorts of terms and conditions and valuation we must always assume, and what was “market” (VC-speak for “normal”).

In mid-June, I built a trip to San Francisco, ostensibly to participate in SimplyHired’s Search engine optimization Meetup, but additionally for numerous Bay-Area conferences with VCs. About three of those become far more critical discussions.

June was also after we began to really feel a bit cocky. We ended up in lively negotiations with Neil. We had many talks heading with traders in the Bay Place, and almost every single week, we had a ping from a whole new source reaching out to see if we had been all set to begin a conversation. I spoke to dozens of folks by phone and e mail and learned a lot more about the industry - and people discussions gave me a good deal of reasons to get excited. As in 2007, a whole lot of startups were reporting a very very hot industry for raising cash. Valuations of many SaaS companies I talked with had been in the 6-10X earnings range (and people who raised in Q1/Q2 received valued on their 2011 believed revenues)!

Narrowing Down the Discipline

Through the process, we’d been additional cautious on the investors we engaged. We turned absent one firm due to a negative knowledge we had with them in 2009 (electronic mail under).

This instance wasn’t alone - we turned absent yet another soon after speaking to a few of their portfolio organizations plus a company they’d seem at but didn’t put money into and hearing about some questionable habits.

Our largest filter wasn’t deal conditions or cost, but cultural fit. We’d been warned many times against including an investor who did not share our core values or who displayed any dishonest/manipulative strategies in our conversations. That ruled out a few folks, and also produced us more thrilled about Neil, “Reggie” (an investor in California) and “Todd” (at one more California-based agency).

A single of my favorite email messages in our process came from Reggie, who sent this just before their in-person go to towards the Mozplex:

Adorable, proper?! Occasionally, it is the minor stuff. Neil always asked about my grandmother in New Jersey (she had a rough drop, a concussion and spent some weeks in hospitals, but is now almost 100% and doing properly). Todd wolfed down multiple helpings of phenomenal braised pork shoulder built by our programs engineer, David. Sarah and I dragged both Neil and Reggie to meals with each of our significant other individuals.

But, the fundraising approach undoubtedly wasn’t all entertaining, and it did demand a tremendous level of perform, particularly from Sarah, Moz’s COO, and from Jamie Joanna on our marketing and advertising crew, who held several calls with traders on a ton of membership acquisition/retention-related matters. Here’s a brief snippet of the saturday and sunday email thread that Sarah sent to Todd:

In June and July, the funding method most likely entailed numerous merged hours of work within the portion of our team - much of that was me, but a lot distribute to other departments and functions. We knew this was an extremely big choice - 1 that would massively effect the future in the business - and therefore, we desired to be as diligent, thoughtful and careful as possible.

By early July, we have been down to four perhaps serious investors. One determined against producing an offer throughout the middle in the thirty day period. The other folks had been Neil (from NY), Reggie (from CA) and Todd (also CA).

Closing the Offer

With the beginning of July, 1 in the investors produced a proposal at a $50mm pre-money valuation for any $25mm expense. Here’s my e mail reply:

That provide was subsequently raised to $65mm pre-money, which was matched by another agency (equally Neil Reggie). I was feeling quite good about my negotiation abilities, until finally a couple weeks later on.

Todd was an early favored of several Mozzers. With the stop of his go to to our offices, I gave him a journey back towards the airport (I borrowed Geraldine‘s only-slightly-dented 2003 Kia Spectra, since I really don\\\'t actually possess an automobile). Near the finish from the conversation, Todd famous that his organization “would possess a tough time getting to $100mm” on our offer. I almost certainly should have corrected him at that point (it might are already the TAGFEE thing to accomplish), but I as an alternative explained a thing like “this isn’t entirely concerning the best pre-money valuation; it is in regards to the appropriate match for us.” This might serve being a good case in point of why I shouldn’t try and “play the game.” A week later, right after lots of back-and-forth, Todd noted that his agency simply couldn’t match our valuation expectations, and although interested, could be backing out.

I’m unsure if our approach with Todd was an enormous misstep or even a small 1, nor regardless of whether they might have made an offer while in the $60-$70mm variety if they’d assumed which was our focus on. I also really do not know why he thought we had been offered people a lot larger numbers, nor what we should have done from there. We might have gone again and pushed on what they imagined we wished, but it appeared some time had passed (challenging to explain why/how just).

We created our decision, sent a polite note to Reggie thanking him and one more to Neil declaring we ended up prepared to maneuver.

Pitching Ignition Partners

Furthermore to raising resources from an external partner, we also wanted Ignition, who had set $1mm in to the firm in 2007 to take part during this subsequent spherical. Their assist will be valuable in producing outside traders feel fantastic regarding the deal, and would assist us have much more shared possession between our board members.

Below will be the pitch deck I used for Ignition (elements of this built it to the “light” model we sent to a few other individuals previously in the process): SEOmoz Pitch Deck July 2011

See more shows from Rand Fishkin

We’ve had a wonderful romantic relationship with Ignition more than the several years, and I proceed to recommend them to startups of all types. As a part of the “thank-you” for his or her assist, Geraldine baked some cookie bars the night ahead of our pitch meeting, which I brought to their offices and handed out previous to the presentation. I took a image hoping that I’d have the ability to reveal it about the website the moment the offer was completed:

Be aware the delicious-looking baked merchandise on the table

Ignition verified, just after this meeting, that they’d enjoy to take part in our following spherical, in what ever amount built perception towards the external, lead investor. We ended up energized, and put in some significant time in July organizing a comprehensive technique close to the best way to develop using the funding. We even began some conversations with other firms we had been thinking about obtaining.

Neil introduced numerous people from his organization to our yearly Mozcon in Seattle. Around the last afternoon, we satisfied to negotiate some closing conditions with the deal. It ended up seeking such as this:

• $24mm invested; $19mm from Neil and $5mm from Ignition • $65mm pre-money valuation, $89mm publish • $18mm to SEOmoz’s balance sheet; $4.75mm to Gillian, $1.25mm to Rand • No liquidation preference for Collection B (Ignition has a 1X around the Collection A) • Straight most well-liked (meaning the investor either will get their money out within a sale Or perhaps the p.c in the business they possess, but not equally) • New board would come with myself and Sarah (our COO), Michelle (from Ignition, who’s been on our board because 2007)