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Bootstrapping First from Colorado, Then Scaling with VC Funds: Faction CEO Luke Norris (Part 4)

Posted on Thursday, Sep 19th 2019

Sramana Mitra: Do you have a sense of where your pricing model is settling into based on these early interactions? When you were starting to get bombarded by VCs, did you know where your price point was settling into?

Luke Norris: I had an idea where my price point is settling into. Still to this day, we don’t have a lot of comparables. A lot of it involves having a high MSRP and then working back the partner discounts and further discounts to close the customer.

Sramana Mitra: When VCs start calling you, what do you tell them? If you can go out there and bootstrap to a million for a product that you’re going to scale, VCs love that scenario.

Luke Norris: I could show that we were producing EBITDA from that product. I could isolate that on the P&L, and the VCs saw that there was a margin base that, at scale, would be very attractive. I was selling the story.

Sramana Mitra: You’re also selling some evidence of pretty good early customer traction, which is more than a lot of entrepreneurs go out to VCs with.

Luke Norris: The neat part was a lot of the VCs went from not taking my phone calls to pretty much calling me. My phone was just blowing up for a good two to three weeks afterwards.

Sramana Mitra: How much money did you take?

Luke Norris: I went through an interesting process where I wasn’t interested in one venture capital company. I wanted at least two to come on board. At that time, I was still scared.

I had cultivated a relationship with Meritage over the years, but they were real busy closing another transaction. They were telling me that they were interested in doing this, but they wanted me to hold off. I was trying to capitalize on all the recent success so holding off was not on my cards.

I found a company called Sweetwater Capital that they had worked with as well. That company had been calling me. That company is a private equity group in New York that co-invest with VCs. I was able to run the transaction, but the closing condition said that Meritage had to come in as well.

At the very last minute, Meritage dropped what they were doing because of the fact that I had three other letters of intent from other VCs. I was able to get both Sweetwater and Meritage at $9 million. I was able to get secondary capital to pay off all my personal debts from bootstrapping the company and all my tax liabilities.

Sramana Mitra: Fantastic. What year was this?

Luke Norris: This would have been 2012. 

Sramana Mitra: In 2012, you had $9 million in capital. All your debts are cleared. You have a validated product. What happens next?

Luke Norris: We then expanded very rapidly to six locations. We expanded the sales force. We went from about eight employees to about 45 employees.

All metrics are good and we’re still in the white-label program where we’re effectively selling to service providers and those service providers are either co-labeling or white-labeling to their customers. 

This segment is part 4 in the series : Bootstrapping First from Colorado, Then Scaling with VC Funds: Faction CEO Luke Norris
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