The Funding Road Less Traveled: Why YouMail CrowdFunded Its Series B
- Seed money from angels.
- VC money in a follow-up series A.
- A follow-up Series B with a new VC lead.
This approach sounds simple. But it is easy to forget that it has a key assumption: namely, increasing momentum at each round, which is what brings in the new VC to lead the Series B.
That’s great when everything goes right. But what about when for some reason a company just can’t bring in the new VC? Maybe because a company’s market has taken longer to develop? Or the company had to pivot and needs more time to show progress? Or is an unloved sector? Or any number of other reasons?
At this point, entrepreneurs who need funding to grow quickly usually see three options: Get the existing investors to pony up, fire sale the company, or fold.
Each of these options suck.
Existing investors will be reluctant, since they now see higher perceived risk (“other VCs didn’t come in”) and less perceived ROI (“taking too long”). So even if they do come in, they’re going to dole out small amounts of money, which leads to all sorts of issues.
Fire sales aren’t always an option, depending on the stage of the company and its burn rate. Plus being an acqui-hire isn’t always a good outcome.
And folding not only kills the dream and has no payoff for the team, but importantly, it leaves the company’s users out in the cold, negatively impacting millions of people.
There’s a road less traveled worth considering in this situation — and that’s crowdfunding.
Most people seem to think crowdfunding only works for seed stage companies.
But think about this: individual investors, family offices, hedge funds, and other investment groups often have different risk/reward profiles than VCs. VCs tend to like a portfolio of high-risk/high-reward companies — they make their money of the huge home runs, knowing many of their other investments will wind up worthless. However, other investors actually are perfectly happy with a reasonable shot at 5–10x or higher on their money and very limited downside risk, especially compared to “back of napkin ideas” .
In our case, we did three things to make crowdfunding work for us.
- Got to profitability. We stripped expenses to the bone, while still growing revenue at 30–40% year for several years. That dramatically lowered risk and made it so every dollar invested in YouMail now is a bet on growth and not just survival. No one likes a melting ice cube.
- Showed a path to solid growth. We acheived very solid metrics — having grown organically to over 6.5 million registered users, with a substantial and growing premium base. As a result, we could show that funding marketing and improving the service gives us a good shot at growing our revenue 7–10x over 2–3 years from a new investment. That’s more than enough growth for the type of investor we were seeking.
- Didn’t try to do it by ourselves. We worked with an intermediary, Digital Offering, to effectively do “curated crowd funding”, getting our deal in front of just the investors in the Digital Offering network who fit our desired investor profile. This was a critical step, since it let us keep our metrics and strategy relatively confidential while getting in front of serious and qualified investors of many different types.
This worked, and over a 6 month period, we pulled together the round we were looking for. It also didn’t hurt that we had a service that potential investors could simply start using and immediately see the value.
This approach and its success has not only benefited the team and our users, but also benefited our earlier investors, who now have a real shot at meaningful returns.
So the net is this. If you’re struggling with financing your company post-seed or even post-series A, take a hard look at whether crowd funding is the gap-bridger you need, and whether you can appeal to a wider range of investors than VCs. As for us, we are excited to take the company its next level of growth. Others will have to show if we’re a one-off or if they can go down this road less traveled to move their companies forward.