How I returned my angels’ money
I was in Delhi yesterday to observe the first Shraaddha after my mother’s passing. This is a ceremony that commemorates and acknowledges one’s ancestors. A modernist would interpret the puja as simple-minded ancestor-worship. It IS that. But it also a reminder of the immensity of what you owe, and the value of gratitude.
My company’s name is Euler Systems. It had raised a normal-sized seed round in 2015 from friends for an e-commerce aggregator. We had about a million downloads + web users at peak. We built a product that could keep near-real-time track of prices for 10 million SKUs across 12 different sites, including in softline categories without product IDs. The product had excellent search, often better than the underlying sites we were crawling. We built bulk-buying partnerships. We developed growth hacks, some of which worked well and some incentivized ones worked too alarmingly well, but without helping business. We did go offline. We engaged cheap contractors to monitor the buying process in 40 retail stores. We learnt what it takes to build online-style memory into offline-buying, by tracking customer journey for the offline store. We monitored what customers wanted to buy on what terms and circling back when their conditions were met with tremendous success. What we did not do is make enough money to cover costs. By late 2016, it was clear this business would not succeed.
But we had a backup plan.
Euler had been working with a London hedge fund and the founder of an IPO’d AI unicorn to create a full-stack mortgage startup. We told our angels in Euler that the e-commerce effort was going nowhere, but that we would rollover their investment to the mortgage venture. Every single one was supportive — this indeed was a bigger and more exciting venture. However, because it was big, everything about it was gargantuan — even a PoC in full-stack format would have required hundreds of millions of $ of financing. The venture actually had a large majority of that in indicative (funding almost but not yet secured) commitments, conditional on getting several tens of millions of first-loss capital + opex funded by a suitable capital provider. “Suitable” was the constraint here, because LPs and AMs would not provide first-loss capital, and FOs, HFs and HNIs would not provide it in this size in seed at this point. The last great hope was VCs. They had reservations about the size and had questions about the regulatory response to our particular proposal to cheapen mortgages. After a few months of trying to satisfy all constraints, I tabled the problem mentally as something Euler was too small to tackle today.
We had spent all our seed funding and two years with nothing but a few thousand dollars per month of loss-making revenue to show for it. It was time to face facts.
We would move on, survive and grow into what Euler is today, an AI and data science consulting firm with seven clients including startups and unicorns in three countries, many successful implementations with tuned algos generating 5% lifts in hotel revenue, 8% in e-commerce revenue and work spanning sectors, areas and geographies. I would not call us successful yet, but we are on the path and accelerating. But this is not that story. This is the story of facing facts.
The facts were simply that we had failed and had spent all the money invested by friends on very good terms. We went back to them and told them the backup was not happening. We would pivot to a second backup, but I wanted to give them the opportunity to take their money back if they were losing patience… capital is capital, and before attempting a return on principal, the entrepreneur must aim for a return OF principal. My plan was to borrow from an investor friend (not a done deal then) and pay those angels that wanted an exit. I proposed this to my cofounder and feared (feared, not expected) objections from him. What he said instead was… “We can easily refinance our home and take out enough to repay everyone — you don’t have to borrow from the investor.”
I am grateful to have an investor friend that I can contemplate borrowing a seed-round sized amount from in short time, but it is an absolute gift to have a co-founder who thinks like me, only harder, about responsibilities after two years of both of us having poured personal money and time in and taken nothing out.
Thankfully, by this time, the pivot was starting to bear fruit and we were starting to see good revenue, which could conceivably, slowly, over time, be used to pay back angels who wanted their money back.
I wanted to find out how many of those there were and what the cash amount would be. We wrote to the angels and I visited the valley where most of them were.
The lead angel told us what he had told us a few months earlier, “Don’t waste your time worrying about returning the money. Pivot, fold, do whatever. Forget trying to return the money and move on to the next thing.”
The angel who had invested first said, “You came all the way to tell me this? Don’t waste time on communications. Keep building and selling.”
All the other angels said some combinations of
“The money was equity. Don’t bother.”,
“How can I help you in the pivot?”
“Who can I connect you to for sales?”
“Do you want to be acquihired by X?”
“Forget it. Now tell me what you think about my idea.”
Not one wanted their money back.
Ok, I lied… The data folks reading this know that real data is never clean or categorical. One angel of ours did want his money back. He is a professional investor and had a cash call from another investment, so he did ask for the money, which Euler paid. But as soon as he could, he came back and asked to put 1.5X the previous amount in, which will make him the largest angel.
So, basically, after failing with the first version, we also completely failed to return our angels’ money. For their response itself, I am grateful. And with Euler now doing well enough that we might actually be able to generate an interesting return on capital for them, I am even more grateful to them for sticking it out.
