Misadventures in VC Funding: The $24 Million Moz Almost Raised
This happens all too often. A firm would rush to a term sheet knowing that they haven't done all the work required and knowing that there is a chance they will pull out of the deal, only so that they can kill off the interest from the competition.
I think it is very likely that they hadn't done any real DD (on you, or the market) until after you signed, and during that DD found that the business/market was not as hot as they thought it would be.
I have been through a similar process twice. The first VC gave us a term sheet 3 days after the first meeting, only for them to drag through the DD.
and all VC's say that they have an interest in the market you are in. The only way to substantiate it is to see if they have made investments in similar industries. ie. has this firm previously invested in an enterprise SaaS company related to marketing or aimed at marketing departments? If this firm or partner had only invested in server software, or consumer, etc. then it should have been warning.
You should also look at how many deals that partner has done and what their decision making process is. There is no mention of this in the post, but it could be that he took the deal to his partners and they decided to turn it down. There is no mention of the other partners at the firm nor how they make decisions.
The solution is to go through DD with 4-5 firms at the same time before signing anything or before finalizing terms. Tell them straight up that you want to do DD with all these firms between date x and date y, and that by date z you want final committals, from where you can go over terms with those who are still interested.
Things were done in the wrong order in this case, and you said you didn't want to shop the deal -- the VC took advantage of that.
What a great article - thank you. But please, that's it with the fund raising, please stop now.
You've demonstrated that SEOmoz can get through tough times and grow organically. You've even grown SEOMoz to a reasonable size and are now able to layer on team members almost as fast as you can hire them. Next year you'll be much bigger, and it's going to be even easier.
As you say the fund raising process distracted you from the main customer cause, and I suspect that having those funds would most likely have done serious damage.
So it's good to see you are sticking to your guns and moving away from fund raising to keep building the business. There seems to be no reason to give any of it away for the sake of a few bucks a year or two earlier than otherwise expected.
Perhaps you could also slow growth just a fraction and take some more cash out to ensure that the shareholders are comfortable along the way. While it might take a year longer to get to $100 million, you'll be a lot happier along the way.
The contrarian VCs of old would be writing checks, but by the time SEO is cool with many of the current crop you'll be starting your own fund.
Great stuff.
Only tangentially related to the post: you know that bit about firms ridiculously underinvesting on SEO? This has been true over and over and over again in my experience. If you somehow manage to avoid that pathology, you will eat your competitors' lunches.
Most surprising takeaway from the post: Gillian is Rand's mother. (Mentioned in passing in the deck.)
Rand, thank you for the detailed and revealing post. Especially the parts that you didn't need to share that made the story much more concrete - such as revenue and gross margins.
I am curious - how do you think the funding would have changed your current trajectory? From all appearances your business is growing well.
What I found interesting: They pay nearly 200k/month for 200+ Amazon servers (though it's not clear what other costs, like ops, are factored in).
This has to be the most transparent article I've ever read. Very refreshing.
A great inside view.
I'm particularly impressed by Rand's ability to keep his spirits up; as one who has been through similar, I know how soul-crushing it can be, if you let it. Kudos.
Rand, I wouldn't be surprised if this post gets you that round, and at better terms.
Neil will be kicking himself at some point.
I loved this post. Well written, personal and insightful. I'm starting a SaaS company and I truly appreciate being able to learn from others experience. Thanks for sharing Rand and best of luck for you and the rest of SEOmoz.
frankly I'm surprised they even had to raise funding with their current revenue levels and profit margins.
And an investor might think that the company has peaked already. Everyone knows who they are. And SEO is something that doesn't have a lot of growth for company adoption. It's been around so long, that most people already know about it. So your hope for customer acquisition is to find that one marketing professional that doesn't know about SEO.
83% gross margin and only $1m in net profit per year? Isn't that a bit low for a tech company? (no mean to be harsh, just questioning)
This sucks.
Rand and SEOMoz have been the biggest leaders for the SEO space for years. They've been able to successful communicate the value of SEO in a way no other firm has. And their tools are killer in the hands of a good SEO.
I'm looking forward to what they can do in the next 5 years even without the extra $25 mil.
Thank for sharing your experiences openly. It offers great takeaways for enterpreneurs looking to raise funds. Only comment I have is that instead of quitting fund raising process now, use the DD work you already performed to see if you can raise funds from someone else. There is no point delaying for another year when you will need to redo DD work again. Just give yourself a finite window like another 3 months for fundraising and 3 weeks between first contact and closing for each VC whom you are considering before moving on. I believe you initially controlled the fund raising process but then gave control to Neil who just dragged it on.
I don't know much about VC, but just in my "main street" experience people always get shaky before stroking a big check. When it comes time to sit down and send away a lot of money on a business, a piece of property, whatever, that is when the doubt begins to creep in.
It could be that they loved seomoz but weren't that excited about the industry. Or, like Rand mentioned, they were nervous about the market. The July numbers probably wasn't the reason they pulled out, but it probably was the excuse they used internally to rationalize the decision.
enlightening post and comments to say the least!
I gotta be honest, that was depressing to read. Why would he want to raise $24mm when he could just build a profitable sales machine from day one, with a Scalable and repeatable sales process? I think he should read the book _The Lean Startup_ by Eric Ries.
So...who's Neil?
Why would a Seattle company try to raise in NYC vs. Silicon Valley?
