Be forewarned, this post is long. You can tl;dr it by reading the section titles.
It’s long because I compressed four months money into one post. I don’t normally do that, but I didn’t want to influence my funding by blogging about it in the middle of it. And historically I’ve been bad at doing serial posts, so here you go…
I’m new at this.
I’ve raised venture capital only once. I’m going to relate what happened below and highlight my mistakes/takeaways in the bold section titles. However, please bear in mind my lack of experience in these matters and that this post is written from the company/entrepreneur perspective.
DuckDuckGo raised a series A round from Union Square Ventures and a handful of awesome angel investors. While we did talk to over 30 VC firms, I realize our path both ended successfully and was relatively quick and painless. So first off, I want to say I sympathize with everyone who struggles with the funding process.
The funding process is not to be taken lightly.
Even though our round went relatively smoothly, it was still a massive time sink. It was the top idea in my mind, and it pretty much consumed my life for four months. In other words, it seems like you should commit to being all-in, all-consumed for a while, or you might as well not do it.
This reality is especially troublesome for two inter-connected reasons. First, you’re distracted and so your business suffers. Second, every VC expects you to keep making forward progress (as if you’re just talking to just them and have the rest of the time to work on the business — yeah right).
Save up good news for the middle of the process.
We did not do this, but it ended up working out that way anyway and so I saw the value in it first hand. I started raising right after releasing dontbubble.us, which sparked some growth. Then in the middle of the process, we got picked as one of TIME’s top 50 web sites for 2011. It was nice recognition (and traffic growth) at just the right time.
A similar (also unplanned thing) happened when selling my last business. In the middle of that process, we had released a feature that really exploded our user growth. I don’t think it was completely random these things happened at the right time, however. I generally try to operate in such a way as to maximize my luck surface area.
People would talk to me because of traction and track record.
I waited three and half years before seeking funding, much longer than most people would. I basically waited until we had significant (not huge, but significant) traction in a large market. As I’ve said before, traction trumps everything.
I’m not suggesting it’s great to wait, and I realize most people cannot wait for a variety of reasons. I’m just highlighting that we did and it clearly helped to get VCs talking to us.
We probably could have raised earlier.
If you checked out our graph, it’s nice, but looking back it is unclear to me how much things would have been different if I had tried to raise after reaching 1,000,000 direct searches a month instead of 7,000,000. When talking to people, for most, it didn’t really seem that it would have made a huge difference, though there is of course no control group.
However, the business difference is those two numbers is large. Granted they’re both still very small numbers when considering the search market as whole, but moving orders of magnitude is really de-risking the business a great deal.
If you try to raise between significant milestones, unless you can show other reasons why you’re killing it (the nice graph in our case), you’re risking getting hit on valuation (or lack of funding) because your momentum is unclear and/or people can’t perceive the real progress your making. On the other hand, after just reaching a milestone people care about, your momentum is large and people generally extrapolate what you’re doing in your favor.
The sub-text here is that it has to be a milestone people care about and not just one that you care about, even if you have great reasons to care.
There are a lot of VCs.
Let’s get to some numbers. I talked to 31 VC firms, 5 seed funds, and about 14 angels. These numbers do not include firms or people that I never actually connected with on the phone, on Skype video or in person. There were countless more I didn’t get to or weren’t on my radar though are probably great.
In the end we got funded by a big name, but I met plenty of lesser names I would gladly be funded by. In a second I’d choose someone I like/respect/trust/think is a good fit at a no-name firm vs someone I don’t at a big name firm.
Your VC is essentially buying in as a co-founder.
Would you chose a co-founder that sucks? Of course not willingly. It is a major reason startups die.
I treated the VC decision in a similar way. They’re going to be with me long-term. They have a significant equity stake and other significant terms.
But I’m not just thinking negative here. Like a great co-founder, they can also help me in strategic ways at the right time.
I realize a lot of people don’t think they have choices, but that’s a bit of a fallacy because you are making choices by deciding who to talk to in the first place.
It’s good to know people ahead of time.
I only knew a handful of VCs coming into the process, but I wish I had known more. I just never made a concerted effort to meet them.
There is conflicted advice in the blogosphere about whether to take VC “informational interviews” or not. But from my perspective the reality is people take you much more seriously if you are known quantity. You see firms backing the same entrepreneur again and again. And more generally I think people do invest (at least more easily) in lines, not dots.
To blast or not to blast.
I also got conflicting advice on how to seek VC intros. You can either a) get intros in concentric circles based on who you think is best (first tier, second, etc.) or can b) try to get introduced all at once to everyone you want.
The idea behind the former is that you give the best people a sense you’re coming to them somewhat exclusively because of fit, which they like and will be more inclined to listen/fund, while the idea behind the latter is you get people moving along faster because you try to make yourself a “hot” deal.
Don’t pitch ideal VCs first because you’ll mess them up.
Ultimately, I decided to blast, but not after messing up some early pitches with people I really wanted to work with.
Quite frankly, I didn’t have my pitch down and I’m not sure you can get it down without giving it to some real VCs and seeing what resonates and what falls flat.
Get your story straight.
Another reason I messed up my early pitches is I was a bit wishy-washy on how much I wanted to raise and what I would do with the funds. Bad idea. People like confidence. Perhaps it is a good idea to have those exploratory meetings ahead of time, but I learned they should not be combined with a pitch because it is just communicating either you’re not serious or you’re not ready.
It’s awkward to pitch people you know, but give them the real pitch.
Yet another reason I messed up my early pitches is I treated people I knew too casually. I should have given them the real pitch. You can still ask them (because you know them) to intro you to others that may be good fits after the fact, which is one of the reasons I wanted to talk to them about it as well.
But by changing the pitch into a friendly conversation, I was again sending a signal that they shouldn’t take me seriously. And they didn’t.
I got significant value out of AngelList. Most importantly, I got high quality inbound requests from people I would have never gotten to otherwise.
I also think we were perceived as somewhat hot by the VCs who hang out on AngelList because our startup was getting a lot of followers/introductions, and so was going out on a lot of the associated emails.
Intro channel breakdown.
Of the connections made, I broke them down into categories of how I got the initial introduction:
- I knew them and reached out: 4 VCs, 2 seed funds, 4 angels.
- Suggested intro from someone: 14 VCs, 2 seed funds, 5 angels
- AngelList inbound: 9 VCs, 1 seed fund, 5 angels
- AngelList outbound: 2 VCs
- Cold inbound: 2 VCs
Of the VCs, I broke them down into categories of how far I got with them:
- Talked with non-partners: 9
- Talked with a partner: 12
- Talked with multiple partners: 7
- Got a terms sheet: 3
Of the VCs I got to the multiple partners (MP) / terms sheet (TS) level, the original categories broke down like:
- I knew them and reached out: 2 MP, 1TS.
- Suggested intro from someone: 3MP, 1TS
- AngelList inbound: 1MP, 1TS
- AngelList outbound: 0
- Cold inbound: 1MP
Getting to the right partner initially really really matters.
Pretty soon after that first meeting, you need a partner to convince their other partners this is a deal the partnership should move forward with. Not one of the partners I talked to handed the deal off to another partner to manage, which says to me you have to figure out ahead of time which partner at a given firm would be most likely to get excited about your deal, or otherwise it is likely to be dead on arrival.
Often times the right partner is unclear without talking to someone else.
Like I said, when I started raising this round, I only knew a few VCs personally, and I also thought that they may not want to fund or be a right fit for DuckDuckGo. Sure, I had heard of a bunch of VC firms, but when I went to their Web sites and looked at their team pages, I may have heard of one of their 2–10 partners. For all I knew, this guy I’ve never heard of would be the best fit for us.
So what I did was try to find the right partners by:
- Asking the VCs I knew.
- Asking the angels I knew.
- Researching related investments.
Having a good network to get intros really matters.
As you can see from the intro categories, #s 1 and 2 yielded most of my intros. If I didn’t know these people, my job would have been much, much harder. Not only would it be harder to get to people, but I wouldn’t have known (as easily) the right people to target.
A warm intro >> cold intro.
Principal intro is OK if not right partner intro.
Less obvious, and I think there is conflicting advice here too. Some say don’t bother if you can’t get a partner intro and partner intros always trump non-partner intros.
First of all, my funding stands as a counter-example because I was introed to Christina at USV, and that led to my funding.
But more broadly, if you don’t know the right partner or don’t have a partner intro, and you get introed to a well-respected principal/associate/analyst and they get excited about what you’re doing, they can help a) determine the right partner; and b) rope them in to the next meeting with good framing.
I never walked through my 6 slides.
I have no idea how my demeanor or pitch varied from the countless ones VCs get. All I know is what I did. I had a six slide deck that I would send beforehand.
Then I would spend my time telling my story, starting well before DuckDuckGo (briefly), and then taking them through what had happened until now, why I was raising money now, and what my future plans were.
I got very few NOs.
Like people say, most people just stop emailing you. They don’t say no. I just kept moving forward, so beyond a thank you note after a meeting, I didn’t really press people. Ultimately I wanted to see who was excited about me, so I figure the least they could do is follow-up like they said they were going to do.
Some firms did follow-up promptly with nos and specific reasons, and I was really grateful for that.
Having multiple term sheets really matters.
I realize most companies can’t get multiple term sheets. But if you can, they can really be used as a forcing function to move people along, and that’s what happened in my case.
It’s a double-edged sword though. I’m confident it both moved people to yes more quickly, but also some to no more quickly. They may have always been nos, but sometimes people feel things are moving to fast for them and they couldn’t catch up.
Blasting matters to align time-lines.
The process takes time, but once you get the term sheet there is more pressure to move quickly. To get multiple term sheets, you need to get people somewhat aligned in process, and the best way to do that is to start them all off at the same time.
I did not do that very well for a couple of reasons.
- I didn’t blast right away.
- I tried this in July/August.
VCs really do take vacations in August.
Some of my initial meetings were delayed a month or more because of vacation schedules. Ultimately I have no regrets of course, but it should give you pause to raise in August IF you are trying to align everyone time-wise.
Some partners I really liked.
I met a lot of people I really liked in this process. Here are a few (besides everyone at USV of course).
I did not push for a bidding war.
I did have multiple term sheets at the same time, and that did work as a forcing function. But I did not try to actively use it to create some kind of bidding war. Instead, I went in with terms in mind that I thought was fair for everyone, and I tried to stick to those terms.
I focused on what value the VC would bring.
I really did try to get the right VC in the deal, and so I tried to focus on figuring out how individual firms and people could be particularly useful to DuckDuckGo over the life the company.
I did reference checks.
I talked to a bunch of portfolio companies that had various VCs on their board, and asked them all sorts of questions about that relationship and their experiences with the particular partner and firm in general. This information was very interesting. Entrepreneurs really do stick together, and I found people would speak freely — even if I didn’t know them very well (or at all) ahead of time.
I didn’t travel much.
I’m sure I could have gotten more interest and higher terms if I did a huge road show. But I hate travelling and so did most of this entire raise on Skype video and on the phone. I did make two trips to NY and one to DC. And a few VCs came down to Philly to meet me.
I’m really not sure how much that turned people off or not. I’m sure it seemed different ☺. I got a sense for most West-coast VCs it was a big turn off and that location does matter, even though they do invest in NYC now a decent amount.
Having a mentor really helped.
Someone who has been there, done that a lot is great. I actually talked to a bunch of people and picked their collective brains, but my uncle (again) proved very invaluable throughout the process. I was talking to him constantly. I suggest you get someone like that. If you’ve previously raised an angel round, it’s probably one of those angels.
I got more congratulations from this funding than any previous DuckDuckGo milestone. I understand why, and thank you to everyone!, but it still feels wrong somehow.
I realize that’s a lot to take in, and I don’t expect anyone to make it this far. I wanted to write all this up for people in the process. Feel free to ask me anything in the notes, and I’ll try to answer if it is not confidential and won’t impact anyone negatively.
Paul Graham (@paulg): This is good. As someone who’s watched this process many times, I can tell you he learned pretty much everything there is to learn about raising VC the first time through.
The only thing that could make his advice inaccurate is that he was raising money for such a good startup. And in particular, one with traction. As he points out, traction trumps everything. So this is essentially a report on what it was like to travel through VC land in the express lane. The scary thing is, even then it took 4 months. It might have gone faster if he’d been on the west coast, but it still would have been a big time suck.
Re-edited September 13, 2015. Originally published on October 24, 2011.