If you've been following OnStartups.com for any period of time, you likely know that I'm not a big advocate of startup founders going out and trying to raise venture funding in the early stages.
My argument boils down to two things:
1) Most folks don't need venture funding in the early stages
2) the odds of first-time entrepreneurs actually raising VC is pretty low.
Oh, and 3) it's one of the least fun activities an entrepreneur can take. Raising funding is often harder than building a product/business -- and much less fun!
So, given my general disposition, it will come as a surprise to many that know me that my startup, HubSpot, announced today that it has closed a Series B round of funding of $12 million. This is in addition to the $5 million Series A funding we raised less than a year ago. So, the total capital raised is now over $17 million. The news was big enough that TechCrunch wrote about HubSpot today.
So, back to the question. Why would a seemingly reasonable and modestly successful bootstrap entrepreneur raise venture funding of this magnitude?
Insanity? Maybe...
How A Bootstrap Entrepreneur Winds Up Raising $17 Million In Venture Funding
1. I seed funded HubSpot with $500,000. To do this, I used some of the proceeds from the sale of my prior startup (which I had bootstrapped with $10,000). The seed funding was an easy decision, because I mostly had to convince myself, and I'm pretty convincing when I talk to myself.
2. The seed funding was enough to build our SaaS product for internet marketing and get it out into the market (i.e. start charging real companies real money to use to it). People bought it. Sure, the product was "pre-alpha" and crappy, but it was useful. We also improved it every day (literally) so it got less and less crappy over time. More and more people bought. This gave us some evidence that there was actually some sort of market demand out there. Interesting.
3. The fact that things were headed in the right direction led us to raise another $1 million in angel funding. For us, that was a fair amount of money (we're capital efficient). Raising the angel funding was reasonably efficient because we had the inside track. The fact we had paying customers was helpful. So, no we're up to $1.5 million in capital raised. Cash in the bank. Life is good.
4. Then, the VC community starts to get interested in HubSpot (this is weeks after we have our angel funding finalized). "Not really interested," we say. We've got a $1 million of fresh cash in the bank. We don't need VC money. As it turns out, one of the best times to raise venture funding is when you don't need the money.
5. My co-founder, Brian Halligan and I have lots of interesting discussion and debate. We'd both debated the whole VC thing while grad students at MIT (where we met). For HubSpot, we had confidence that the market opportunity was big enough to warrant venture-funding, we just didn't think we needed it quite yet. (This is June-ish of 2007). But, we knew we were on to a potentially really big idea. We'd both made some money and weren't really looking for a "modest outcome". We wanted a big, significaint, immodest outcome. So, on the VC front, we figured with the right set of terms and the right partner, we'd consider raising it sooner rather than later. We got the right set of terms and the right partner. So, we raised another $4 million in VC bringing our "Series A" to $5 million. We're off to the races.
6. We did what I think is the best possible thing a startup can do with lots of cash: Not spend it too quickly. No advertising, no marketing, no high-flying salaries for high-flying executives. We hired the smartest, most passionate people we could find. People we knew and respected immensely. People fanatically focused on building a real business and who were constitutionally incapable of spending money willy-nilly. We behaved a lot like we were spending our own money. Because, we were. [Note to self: Write a future article about why VC money is as much yours, once you've given up the equity to get it].
7. Life is good. Sales are ramping steadily. Every month is a record month. Not in terms of visitors, eyeballs or some other proxy for future revenues, but in terms of actual revenues. The business is growing fast. By the time we officially launch the product in November, 2007, we have 100+ paying customers.
8. As it turns out, success attracts more capital. We started getting some "pre-emptive" interest in the company from VCs. "We don't need more money right now," we say. We hadn't even spent half of the last round and lots of cash in the bank. But, we're practical guys and willing to listen. As it turns out, one of the best times to raise venture funding is when you don't need the cash... (see point #4 above).
Fast-forward to today: We've closed a $12 million Series B round.
But, seriously, why did I raise VC funding? Did I change my mind?
The simple answer is no, I have not changed my mind on VC. I still don't think most early-stage entrepreneurs should go out on the venture fund-raising circuit. They should maintain the option of a modest exit. Focus on solving the customer's problem (not the VC's problem). My situation with HubSpot was special. I had already done the bootstrap thing (multiple times) and made money. I had above average odds of raising money for HubSpot.
So, why did I raise funding? Because, this time around I wanted to take a shot at the big leagues. Sure, any success (even a modest one) is nice. But a modest success is not going to change my life much at this point. I want to swing hard. It's not about the money. It's about the fun and excitement of pursuing a really big idea, working with really smart people and doing what I love. [And, of course, the money won't hurt either]
And that, my friends, is why I raised $17 million in venture funding.
If you have questions, feel free to ask them. I'll do my best (within reason) to answer them. Otherwise, I'll keep you posted with future articles as things progress.