For those of you rushing to raise venture capital with a deck of slides or a minimum viable product, let me offer you a challenge: How can you get to a $20 million pre-money valuation in Series A, raise $5 million, and keep control of 80% of the equity?
That’s what Christian
Chabot, founder of Tableau Software, can teach you from his real-life
experience. Chabot, needless to say, did so by bootstrapping the early stages
of his company, validating the customer need, building a great product in the
domain of analytics and visualization, and generating serious revenue and OEM
partnerships before going
out to raise any venture financing at all.
Where did he get the
money to bootstrap Tableau? Well, he started a prior company, BEE-Line
Software, also bootstrapped, and sold it to Vicinity for a nice upside. He then
used that capital to launch Tableau. Chabot says he started BEE-Line with the
plan to flip the company for a quick return, but then started Tableau with the
intention of building a large company. And for that, he has raised a $5 million
Series A and a $10 million Series B from Silicon Valley venture firm New
Enterprise Associates (NEA). You can read
more about Chabot’s valuation-building strategy here.
Greg Gianforte, CEO of RightNow Technologies,
can also teach you a thing or two about the topic of valuation and ownership.
Gianforte is a huge proponent of bootstrapping and a master at cold-calling to
find customers even before writing a line of code. Gianforte is also a serial
entrepreneur who bootstrapped a smaller company earlier, sold it, and then used
the cash to bootstrap his second, a much larger CRM company that went public
and has since been bought by Oracle for $1.3 billion.
“I had no trouble finding companies that did a
lousy job of serving customers over the internet. Most had a website with a
button that said, ‘Click here for customer service,’” Gianforte recalls. “Back
in 1998, I could click on that and find a phone number. Who goes to a webpage
hoping to dial a phone? Nobody – but companies did not know any other way to
work! All I had to do was convince those employees that there was a better way
of doing business.”
And convince he did. “We let companies try it
for a while to see if they liked it, because in order for us to do business
they had to recognize the value,” Gianforte says. “Typically we eliminated 50%
to 70% of the emails coming into the business. When we came a month later to
shut down the trial application, the companies would say, ‘No! Where do we
sign?’ That is how the business was built.”
In 1999, RightNow did about $440,000 of
business the first quarter. The second quarter they did $697,000. By the third
quarter things had really picked up: The company did $1.5 million in that
quarter and $3.3 million in the fourth.
“What I like to
emphasize is that we doubled revenue and the number of employees every 90 days
for three years without outside funding,” Gianforte emphasizes. “This is
because of our sales process. I hired six salespeople before I hired the first
engineer. I had 30 salespeople before I hired someone for marketing. Sales are
the lifeblood of a business, period.” And what about financing? “We raised
about $27 million in 1999 and 2000. We had a $6 million-a-year business and the
VCs gave us a $130 million valuation. On those terms, I would probably raise
money again today,” Gianforte recalls. Read more of
Gianforte’s wisdom here.
Contrast that with my early experience. In a
talk I gave at the Indian Institute of Management (IIM) Ahmedabad, I shared
that I once drank the venture capital Kool-Aid, but you shouldn’t. You see, I
came of age as an entrepreneur in the 1990s, a time when venture capital was
flowing freely. Quite mistakenly, I bought into the conventional wisdom of that
time that venture capital is a mark of success for entrepreneurs. In the Valley
of 1998, it was the prevalent philosophy among entrepreneurs.
I raised money early on and allowed the
investors to bring on board an incompetent CEO. Then I got fired from my own
company and was totally screwed on my equity share. I can tell you, it was not
a pleasant experience. I certainly don’t recommend it.
Today, with the benefit of hindsight, let me emphasize a simple lesson: ownership matters.