Entrepreneurs often have to make difficult decisions about how to fund their business. If you plan on building a long-term independent company, at some point, you can no longer rely on the friends and family who invested in your angel round. You need to attract the attention of professional investors, who themselves get money from large limited partners. Those investors are in the home run game–they only bet on grand slam ideas.
Some founders choose (and aim to) raise capital continuously, while others are continually asking, “Should I raise more money?” In this week’s episode of Zero to IPO, we spoke with four entrepreneurs about what it’s like to be hooked on capital and why sometimes, more money can actually lead to less innovation (and why turning it down can bring success to the company).
Here are the questions we asked the founders of Workday, Domo, Eventbrite, and ServiceNow, and what we learned from their experiences.
What do investors look for?
Aneel Bhusri, CEO and cofounder of Workday and advisory partner at Greylock Partners, has seen it all when it comes to venture capital–he has raised money as a founder and written checks as a VC. He has a unique perspective into how both sides work together, what investors look for, and what founders can do to convince VCs they’re worth betting on.
According to Bhusri, the biggest misconception entrepreneurs hold when raising money is that their solution only has to be 10% better than what’s on the market. In reality, it takes a disruptive idea to pique investors’ interest. And being that innovative is only half the battle. You also have to create entirely new metrics and educate investors on how to analyze and judge your business in this new market.
When should you lean on investors?
For Josh James, the founder of Domo and cofounder of Omniture, VC funding was the lifeblood of building Domo from the ground up. Domo’s product is complex, and James leaned on funding to ensure he could grow fast enough to stay ahead of the competition.
He raised round after round and saw signs that he was making the right decision to continue accelerating. One customer, a CEO of a Fortune 50 company, said he used James’ product up to 17 times a day and it changed the way he ran his business. This encouraging review gave him the confidence to continue raising capital to develop the product and fund more significant growth.
An investment from a VC will not only enable businesses to scale but can also provide entrepreneurs with valuable mentorship and support. Although James admits that VCs can sometimes “bug the heck out of you,” they usually harp on the right things and have unique perspectives into your industry.
Can too much capital be a bad thing?
For many entrepreneurs, outside capital is not the path to prosperity. Julia and Kevin Hartz, cofounders of Eventbrite, saw the value in being incredibly scrappy with cash from the get-go.
Staying frugal enabled the Hartzes to build a durable business model–they created a ticketing platform that allows event creators to sign up for the service on their own. By offering this service at an affordable price, they could amass an enormous number of creators and events. While they could have built a sales-driven model with extra money, the unique model they created instead led to a significant competitive advantage.
Bootstrapping helped Eventbrite maintain focus–Julia compares that discipline to the strong “power core” of a Pilates-goer during the first few years. While funding later enabled them to reach the next inflection point, they also experienced a decrease in efficiency every quarter following each raise. If she had to do it all over again, she said that she would have raised even less. Eventbrite was able to do more, (with greater innovation and efficiency) because they learned to operate on limited funds.
How do you decide when to say no to money?
Sometimes, saying no to a tempting offer can turn out to be the best decision you’ll ever make. In December of 2010, Fred Luddy, founder of ServiceNow, received an acquisition offer of $1.5 billion. He could’ve taken the cash right then and walked away with a nice Christmas bonus. But, while going on a walk with his son, he received a significant, life-altering phone call from Doug Leone of Sequoia Capital, ServiceNow’s largest VC backer. Leone told Luddy that ServiceNow was worth far more than the current offer and taking it would be a huge mistake. He urged him not to sell.
Although Luddy at first resented his decision to listen to Leone’s advice, he soon understood the importance of waiting. Doing so enabled him to run and grow an impactful, independent business with happy customers and enduring value, and he successfully took the company public in June of 2012 at a $2.2 billion valuation. Today, ServiceNow’s market cap is over $40 billion.
When it comes to raising money, there are no clear-cut, right or wrong answers. Raising capital can build the foundation for a sustainable, long-term business, but sometimes building a cash flow business or raising a small amount of money with the goal of selling is the best course of action for the company. The key is staying true to your original vision. You’ll be less likely to regret your decision that way.
Frederic Kerrest is the COO and cofounder of Okta. You can listen to the full episode, “Hooked,” wherever you get your podcasts. Tune into Zero to IPO every Tuesday and check back here each week to read about the discussion on each episode.