The thing about raising money…

I’ll never forget the day that I raised my first outside round…

$1,290,000 as seed money for a wild idea. My co-founders and I hadn’t even formed the company yet. All we had was a few charts about the market size, some X/Y graphs about the non-existent competition, some graphs predicting hockey stick like growth, and a small team of people who had committed to joining us if we actually raised the money. We wanted to disrupt the funeral industry. It’s pretty easy to make jokes about the funeral industry, I will spare you those jokes.

I’m pretty sure nobody thought we would actually get the money. I didn’t think we’d get the money. The craziest thing about that raise is that I got it from a total stranger on my first pitch. Seriously, I had a warm intro from a friend who had a daughter the same age as my daughter, but that was it. We only pitched one guy and his advisor. It took 3 months to close, but it was the one and only pitch. I’m either really good at pitching or really lucky. Probably the latter.

In retrospect I think I raised the money partly to prove that I actually could raise the money. I mean, every day I opened Tech Crunch and read an article about some wet behind the ears Stanford college grad with millions of investment for what seemed (to me at least) obviously to be some of the worst business plans ever created. It would be fun to make a list of every terrible startup idea that shouldn’t have been funded. That’s another post.

See, my first company was a bootstrap. I had no money, no family money, no connections, nothing. I had studied political science at the then $3000 per semester University of Texas at Austin and had no experience running companies. I worked at Dell part time to pay my bills.

Also I had a few thousand dollars in student loan money, a few thousand dollars for building a sales demo for a local startup named iChat, and a few thousand dollars from selling a laptop on uBid. Remember uBid? Apparently it’s still around, but it was the pre-eBay.

Over 10 years I struggled, fought, and clawed my way into building that self funded startup into a company that had annual recurring revenue at it’s peak in 2007 of just under $50,000,000 with fat margins. I was really rich, young, and adjusted my lifestyle accordingly, this was the American dream I guess. I made more that year than Tom Cruise did. I remember that because I was talking to my tax attorney (probably yelling at him) and E TV showed how much Tom Cruise made at the same time. It’s funny the things you remember. I don’t think it was Tom Cruise’s best year though.

I was rich but miserable because I was the only owner. I had lots of employees but nobody to share the joy of success with. As it turns out, I was actually miserable because I didn’t like my boss, but that’s another post.

So I built another company, it did ok. It was making a few million dollars a year after just 2 years. I funded that myself too. Never had an investor, never had a person help me or give me a hand up. Well, there was actually one older guy who gave me a lot of time but he died of a drug overdose, he was my mentor and one of my only real friends. I didn’t know he had a drug problem. I’m sad thinking about it now.

Then I built another company. I invested just under $3,000,000 of my own money. I tried raising capital from VC’s to do a big rollup of telcos (CLECs were all struggling), it was an awesome idea. I am still sure it would have worked. The company did ok. We had just under 5 million users. The VCs wouldn’t fund me because they couldn’t understand why I would want their capital if I had my own.

One old bow-tie wearing east coast VC met me 5 times over a few months and at our last meeting when I was expecting a term sheet said in a very old money voice “Arlo, it begs credulity that you want our capital.” So that was it, I couldn’t raise money because I had money?

Challenge accepted.

I sold that company a few years later, and I sold the patents to the bad guys, it wasn’t really a big win. I got most of my money back and learned some expensive lessons about fixed costs. That’s another post.

No, actually the thing about fixed costs can be answered in one sentence: Keep your fixed costs down or you’ll either go out of business or be forced to sell your company for less than it’s worth. Done.

Never once did I appreciate that at a moments notice I could hop a jet and fly to my house in the Caribbean for a few weeks. Owning a house on an island is a fast way to lose a lot of money. Apparently I was on a mission to become a cautionary tale. That’s another post.

So back to the topic at hand, raising money.

I remember when the wire transfer hit the bank account.

Suddenly I realized something… I had succeeded in talking this guy out of more than a million dollars, but now I had a boss. Sure I was the CEO and I got to set strategy and I owned a big chunk of the company and I got to make all the rules at the company, but I served at the leisure of the board.

The board was now my boss. My stomach sank. I suddenly had a fiduciary duty to another person and that meant I had to be responsible. I couldn’t disappear for weeks on end to go play. That wouldn’t be cool with the boss. So I quit drinking and started putting in 60 hour weeks.

That’s the thing about raising money. You’re walking around hat in hand and begging in order to get yourself a boss. You’re giving up control. You’re making yourself responsible for somebody else’s wealth. It’s a lot of pressure. If there is any way to build a business without raising capital, you should probably do that. I did.

Sometimes raising capital can be the right decision but more often than not I see companies raising capital for what seems like the wrong reasons. I did.

A good friend of mine who has raised money and sold companies has a good line that I’d like to share with you.

Q: When should I raise money?
A: When you can be a good fiduciary.

If you’re wondering, the funeral business did not do well. As it turns out, it’s an immensely hard industry to crack with a lot of protectionist regulations and a lot of entrenched players who like the way things are even if they are inefficient and bad for the consumer. We gave about half of the money back to the investors and they say they would invest in me again if that says anything.