Boom.

Profitably just closed $1.1M, and I think I am feeling every emotion at once.  While the rest of the team is ready to go out and celebrate (and has earned it!), I feel like I could use a nap, a hug, a good cry, and then perhaps a Manhattan or two.  

In July, we tried to raise $500k and barely eked out $300k.  A few milestones later, we went out again to raise $500k and closed $1.1M, literally turning away eager investors at our door…but even that came after 6 long months of grizzly fundraising grind.  So what switch was flipped where suddenly investors were clawing to get into the deal?  Nothing, actually, though I think there’s an important lesson in that, and it has to do with luck.  

I’ve read many blog posts by entrepreneurs who have raised money successfully, and honestly, I can’t relate to most of their experiences.  Maybe our situation was grossly different, or maybe folks are glossing over their struggles and mistakes.  Either way, I thought I would do my best to recount an honest and complete review of 2 very grueling rounds of startup financing.  If anything, I hope others going through the process can take heart (yes, it’s supposed to feel this way!) and learn from my many mistakes.  

The post is broken up chronologically, so feel free to jump to the end if you like.  

Mar - July 2010: $0k from Founder Institute and their introductions  

Before I quit my day job in the name of entrepreneurship, I joined up with an incubator called the Founder Institute, which takes 3.5% of your company after you eventually close an equity round in exchange for mentorship and promises of assistance during fundraising.  

I will leave the broader cost/benefit analysis of the Founder Institute to a separate post, but in short, I found them quite helpful with early-stage advice and not helpful at all during fund-raising.  When I graduated in March of 2010, I took a lot of introductions through the Founder Institute, but these intros proved weak in terms of efficacy to produce much-needed cash.  Even after we won a competition and secured the bulk of our round, not a single investor came through FI introductions, and I was pretty disappointed.  

From where I sit, Y Combinator and TechStars seem to be driving grossly different results for their graduates, particularly their strong performers.  I was awarded “Magna Cum Laude” status with FI, but that didn’t translate into anything tangible.  

Or, quite honestly, it’s possible we were just unlucky.  

June 2010: $50k from North Bridge Venture Partners Seed Competition   

By June, prototype in hand, Francis and I applied to a handful of business plan competitions to try to drive early awareness and maybe even some cash.  Though we made the finals in 3-4 competitions, we typically found ourselves going head-to-head with venture-backed startups or companies that had launched up to 18 months prior.  The old “PowerPoint and a smile” play was massively outgunned and was periodically met with laughter, which was particularly tough for me early on.  

Fortunately, this was not the case with the inaugural seed competition put on by North Bridge Venture Partners.  We were at the same stage as the other teams, which required that the competition be judged largely on concept, energy, and enthusiasm, plus perhaps basic PowerPoint professionalism and pitch fundamentals.  I had a natural leg up, and we won alongside an education startup called Magoosh.  I remember the feeling very well—our first outside funding!  It still smells sweet.  

June - July 2010: $250k more from other angels  

Armed with a $50k convertible note from NBVP and a refreshed sense of confidence, we decided to close a proper round while the going was good.  North Bridge was very gracious in allowing us to “open up” the note to other investors, and we shopped the opportunity with North Bridge ostensibly as our lead investor.  

Plunging into darkness, the 7 weeks that followed were some of the darkest days of Profitably’s short life to date.  We pounded the pavement, talking to everyone, but no one was interested.  We didn’t have enough progress at the time to get North Bridge beyond their initial $50k, and most investors with whom we spoke took that signal to be the kiss of death.  Worse, our deal was a convertible note, and a number of excellent investors find that format to be a nonstarter.  

We pushed on, but just as we were finding our rhythm, tragedy struck as we discovered the magnitude of the angel investor herd mentality.  In our particular case, we pitched Eric Paley of the Founder Collective, and he was respectful enough to pass with specific feedback right in our first in-person meeting.  Believe me, this is a better approach than a smile, handshake, and a non-response over email.  In fact, despite Eric’s passing on Profitably, I continue to have tremendous respect for him and for the Founder Collective crew.  They are the real deal, they’re respectful, and we would be very lucky to work with them in the future.   

Nonetheless, quite literally the day after Eric passed, 10-12 undecided investors emailed us a “thanks but no thanks,” and 2 committed investors flipped to “no” (can you believe that?!).  It would seem I am not the only one who respects Eric’s judgment, and this took an incredible amount of wind out of our sails.  That day that we licked our wounds and revised down our target of $500k to $350k.  

All in all, we ended up scraping together $300k by the skin of our teeth, including the $50k from North Bridge.  We had 2 investors putting in $5k.  We had folks at $10k and $15k.  Not a single angel investor was over $30k.  It was hard, it was emotional, and it was lonely.  

The day of our close, one investor called to bail suddenly and in a way that threatened the entire deal, since we had worked hard to convince our investors that we could get it done on $300k and not $350k.  Fortunately, Adam Dinow—our attorney and one of our most consistent and reliable sources of useful support—called the investor and helped talk him down off the ledge.  

A few days after our target close date, $250k was wired over and we were done.  Adding in the $50k from North Bridge, we put out a press release about $300k raised and literally forgot to celebrate as we got back to work.  I don’t remember feeling very lucky at the time.  

Sep 2010: Launch at DEMO  

We cobbled together a “minimum viable product,” which we chose to launch at DEMO (a world class platform for new technology).  The DEMO team gives discounts to early stage startups, and the reception was great.  VentureBeat picked us as one of the their 5 favorite companies, and I think we were approached by associates from every VC in the universe.  

While DEMO and their team are great, it probably wasn’t the right move for us in retrospect, particularly given our stage in development.  The best part was getting Francis and Chad out of the building and interacting with the critics.  We got hard feedback, and that’s critical.  

But there weren’t a lot of media there representing our space, and frankly, I started to feel like a carnival mountebank, drumming up excitement about the product vision rather than focusing on delivering that promise.  Ultimately, we could have benefited from less exposure and more time/effort on our product (I hear you, faithful reader, saying, “obviously,” but we’ve made worse mistakes than that).   

Either way, we left DEMO with a packed schedule of meetings set up with eager VCs, and that felt like momentum (another rookie mistake on my part—VC cold calls and first meetings aren’t momentum.  I promise.).  

Sep - Feb 2010: $0k from institutional Venture Capital firms  

I have mixed feelings about venture associates and have been advised by many to turn down their cold email requests to meet.  The rumor is that if you don’t start with the partners, you aren’t going anywhere.  Well, we didn’t go anywhere, so perhaps it’s true.  However, though we didn’t source any seed funding through these associate meetings, we did get A LOT of great feedback, and we got the chance to build some genuinely valuable relationships, particularly with a few teams.  Given the situation again, I would still take all (or some) of those meetings without hesitation, though I probably wouldn’t log them in a financing pipeline.  

Often enough, we actually found partner meetings to be much worse.  Garden variety interaction?  A partner emails asking to meet and that I send all my files over in advance.  The day of the meeting, he shows up 15 minutes late (at least) and calls me Neil.  He hasn’t read a thing I sent.  Then, as I describe my life’s work, he checks his emails on his iPad and asks questions as if he hadn’t heard a word  (“Well, we’re not really a location-based technology, actually,” I reply bleakly, or “No, we don’t integrate with foursquare yet.”)  After 60-90 minutes, I pack up my laptop and am almost relieved when there’s no follow-up.  And I have been told I am really good at pitching!  

But don’t click away!  For every dozen of those meetings I stomached, I had a meeting with someone truly impressive like Devdutt from CRV.  I learned more in my hour with Devdutt than I learned in any hour all year, and though he—like Eric Paley—passed verbally on our very first meeting, I knew why and walked away from the meeting smarter.  Hopefully we will be able to attract this rare breed of VC for our next round once we are at their stage and have the proof points.  

In the meantime, as an entrepreneur searching for a lead investor, I began to feel like an actress in LA trying to “get found.”  September through December I had my chin up and took the rejections in stride.  By late January, I started to grow tired of the process and resent the disrespect I kept encountering.  I am not sure if I got cranky around the office—you would have to ask Francis.  ;-)  

Nov 2010 - Jan 2011: $0 from our “lead,” New York Angels  

Rewinding to November, I was convinced that I needed a lead investor for this round and that the problem with our July round was the absence of a lead.  So in addition to meetings with VCs for seeds, I submitted my company for consideration to a syndicate called the New York Angels.  NYA has a pretty spotty reputation among entrepreneurs, but we were leaving no stone unturned.  

All in all, the process was in some respects successful, but the process itself was grueling, lasting nearly 13 weeks (!):

• Week 1: Online application submitted
• Week 2: Screening committee with ~8 investors
• Week 4: Large group monthly meeting with 30-40 investors and 3 other entrepreneurs
• Week 4: “Due diligence” meeting with 12 investors
• Weeks 4-11: “Due diligence” lead assigned (1 investor) to “begin” due diligence
• Week 11: Green light that New York Angels will lead the deal (Boom!)
  • No commitment yet wrt amount (uncertain interest across individuals in their network)
• Week 12: I offered to produce a term sheet based on agreed terms to speed the process
• Week 13: Our due diligence lead committed personally to $25k

We were lucky to have someone strong do our due diligence.  He was a technical guy, and it was clear that he “got it.”  So as of early January, it seemed like we had a very strong lead on the deal who understood our space, spoke with a customer, spoke with Intuit, met the team, ran a former business through our model, and committed to the deal.  We thought we were all set and began showing our NYA term sheet to other investors to get them into the deal.   

The bad news was that we didn’t have a lot of transparency into who was in charge of beating the drum and driving participation within NYA.  This is when we came to learn that they don’t invest en mass and that individuals can participate however they like.  I figured once a deal passed diligence and NYA gave it a thumbs up, someone was going to pass a hat around or that I would at least get a $250k slug from the group.   

In the end, our lead ended up missing our closing deadline, so despite having a term sheet from the New York Angels, we had $0 participation in the round.    

No doubt, there are a handful of credibly amazing investors who attend their meetings, but from my perspective, clearly the New York Angels process is broken.  If you’re going to have a lengthy and involved process, it should be pass/fail at >=$250k.  If you’re just going to screen opportunities and let individuals make their own call, it should take a week or less total, as with AngelList.  

Either way, in all seriousness, it’s possible we were just unlucky.  

Jan 2011: $75k from AngelList (2 investors)  

AngelList, in contrast, rules.  Their curated list of angel investors is available for free and has been massively powerful for many.  We dropped our opportunity out to AngelList and got 17 introductions over the next week or so (22 by the end).  These introductions were far more qualified than those I had been taking, and I thought we would have 10 investors and $400k from that crop without a doubt.  We had social proof, initial traction, a lead, a term sheet in hand from NY Angels…  

Of those introductions, 2 investors ended up committing for $75k total, which was a little underwhelming, but I am still quite bullish about AngelList.  They have been taking some flack online lately, and I don’t think that’s warranted.  It’s a great channel, but like all channels, it works for some and not for others.  In our case, I think we were unlucky.  

Jan 2011: $0 from the Founder Institute or Open Angel Forum  

For the second time around, we had no luck with the Founder Institute as a channel for investors.  Adeo selected us as 1 of 4 startups nationally for a blast email that returned literally 0 introductions, let alone investment.  Worse, by this point investors I found through other channels began objecting strongly to the 3.5% (post-money on the Series A!) earmarked for a resource of which most investors either hadn’t heard or had a negative view.  In our case (and others may have had a different experience), FI became a major scarlet letter to be overcome during funding, and that’s regrettable.  It was my decision and I own it.  Again, they were helpful with early-stage advice, but ultimately much more of a liability than an asset during fundraising.   

We also pitched at the Open Angel Forum in NY, which has a great reputation and rightly.  Unfortunately, we found OAF in NY to be a bit VC-heavy for our immediate needs.  2 of the 3 angel investors in the room were already invested in Profitably, and the rest of the room was all VC, so despite opening up a beer per custom and staying demo-driven as requested, there wasn’t really anyone in the room we were targeting.  No hard feelings at all—we had fun—but it wasn’t a viable channel for funding for us.  

By mid-January, morale was eroding and it began to seem like all our channels were exhausted, and we weren’t sure if we were going to make it to our $500k minimum for the round.  If you’re exhausted/discouraged by this point in this blog post, imagine how I felt!  

[…breathe…]  

Jan - Feb 2011: $750k from introductions through General Assembly  

Aaron Sorkin—through his character Jed Bartlett—said that “Decisions are made by those who show up.”  Or maybe it was Harry S. Truman, or Woody Allen.  Either way, it’s just as true in entrepreneurship, that “showing up” is what makes the difference.  

Recently, we moved to a newly launched space in Manhattan called General Assembly, as one of their inaugural companies.  Since the move, we have been surrounding by killer teams, incredible energy, and inspiring aesthetics.    

Talk about lucky. The difference for the team has been night and day, but it also means we’re “there” when investors are walking around, talking to different teams.  We’re there when potential partners are looking to collaborate.  We’re there when Dave McClure rolls into town and wants to have dinner or when the NY Times is talking tech.

Add to that, the GA team is well-connected.  We were introduced to a ton of investors during our search, and they proved to be orders of magnitude more credible than the introductions we were fielding from other sources.  These investors were walking around the space, talking with the other startups (many of whom were already portfolio companies in many cases).  No matter how bleak the raise looked out in the cold January streets, things were moving—and quickly—at the office, and it felt like we were “showing up.”  

One of these investors was a gentleman named David Mars, who ended up offering a competing (and compelling) term sheet that ended up being the foundation of the round we just closed.  I will leave an introduction to David for another post, but for the sake of this one, it was the community that the GA team put together that ended up making all the difference for us.  

Bottom line

So what’s the lesson after all this?  Get good office space?!  

No.  Droves of entrepreneurs (including me 6 months ago) scour the blogs for advice on how to avoid pitfalls in raising money, and they’re asking “how do you do it?”  They want to know what matters most.  

I am quite comfortable saying that luck and perseverance were two of the top factors for us. It wasn’t really the team, the product, the almighty traction, or the social proof.  It’s a crazy crap shoot out there, and people are raising money and people are failing all around us.  Teams with no traction are raising at huge valuations, and teams with tons of traction are crashing.  It’s relationships.  It’s community.  It’s showing up every day, working your product as hard as you can, listening to customers and solving real pain points, being there when the right people are around…and getting a little lucky.