Raising VC money: advice from both sides of the table

If you get to the stage where you need VC funding, you should be proud of yourself: this is something not many companies achieve, and it’s a proof that you did things right. However, raising VC money may come in as a challenge, particularly for inexperienced startup founders, and it’s no easy task to find the right VC fund, close the deal and successfully manage the relationship afterwards.

When is the right moment to start looking for VC funding? What are VCs actually searching for? What’s the process and how should you tackle the negotiations? How can you further work together with the VC to develop and support a common vision for your company? Florin Cornianu & Tudor Bastea, the Co-Founders of 123ContactForm, found the answer to these questions and many others while closing a deal with 3TS Capital. Last November they took the stage at How to Web Conference together with Daniel Lynch, Managing Partner, 3TS Capital, to share the lessons learnt from both sides of the table.

A brief history of 123ContactForm

123ContactForm is a Timisoara-based form creator launched back in 2008. They are building an online platform that helps people with no technical skills to build any types of forms and surveys and easily integrate them. They are a B2B SaaS product having as clients both small businesses, as well as a fair share of enterprise customers.

Tudor and Florin, its Co-Founders, started working together on various projects since college. Back in 2008, they founded 123ContactForm, with the vision of making form building as easy as 1–2–3. Shortly after, they decided to abandon all their side projects to focus exclusively on 123ContactForm. Together, they participated in every piece of the puzzle in building the company, from marketing to financials, from planning to support and recruiting people.

The product was gaining traction, but at a quite slow pace, and it was in 2010 that they realized they did not have the business expertise required to take the business forward. Up to that point, they learnt everything the hard way, by doing and learning from their mistakes. They attended How to Web Conference 2010 at the recommendation of one of their mentors, and its there that they met Adrian Gheara, who further joined them as a hands-on angel investor, acting as a third Co-Founder.

“In 2010 we had a good product generating 5000 USD in monthly revenue. We were alone and we understood that we couldn’t reach the next level just the two of us. This is why we took Adrian on board to help us with his know-how”, Florin remembers.

They negotiated for two weeks and then reached an agreement involving not only money and shares, but also the thing they needed the most: expert guidance for the following years. 6 years later, Adrian is still working jointly with the 123ContactForm team, helping them establish the company strategy. If you’re interested to read more on this, check out how they met and what changed after Adrian joined them.

“I’m a very hands-on partner when working with a company, I get involved from an executive point of view. In the first year, I helped 123ContactForm with the things they were missing: UX, the design of the app, resources from my network and former collaborators whenever needed. Further along, I got involved every time there was something lacking and I could help. But, at some point, my skills were no longer enough”, Adrian explains.

The right moment to consider VC funding

That was the moment they considered raising VC money to help them scale. In order to make things happen faster from that point on, they needed both the expertise and the financial resources a VC fund could offer.

“It took us 7 years to get there. Year after year, we doubled our revenue and we experienced organic growth. After we passed the 1 million threshold, we understood the road ahead is much more challenging and it’s no longer that easy to keep growing at that pace. And this is where 3TS Capital came into play”, Florin explains.

3TS Capital manages a couple of different funds from the region and has closed 7 deals to date, including Avangate and the recently announced Vector Watch. Their early stage VC fund invests 0.5 to 1.5 million EUR in tech companies in areas such as digital media, SaaS, or ecommerce with the main goal of helping them scale.

“Our mission is to find local leaders & global challengers and help them amplify and globalize their businesses both with our capital, and with our network”, Daniel Lynch, Managing Partner of 3TS Capital, explains.

Daniel has joined 3TS in September 2000 and he is primarily responsible for originating, executing and managing direct technology investments, as well as for the overall investment management strategy of the fund. Previously, he was the Investment Director in charge of Telecoms and Technology for the AIG New Europe Fund based in Warsaw. He has continuously lived in Central Europe for over 25 years, working in the CEE Venture Capital and Private Equity industry the entire time.

Starting the discussions

“2 years ago we met 123ContactForm at How to Web Conference and we were impressed with their management team and their global vision: they were thinking about approaching the US market and launching a Spanish version. We then spent a lot of time educating them to understand what it takes to bring a VC on board as a partner”, Daniel remembers.

VCs come in many different flavors, and it’s important to understand that closing a deal with a particular VC fund means that you take on a valuable partner for your business. You don’t want to marry the wrong person, so it’s advisable to find out what type of experience did other companies have with the VC fund you’re considering. This helps startups understand whether the VC is a good fit for their development needs.

Choosing the right VC fund

“Over the past 2 years, we’ve been considering an investment and we’ve been pitched by several VC funds, both from Europe and the US. We considered a good thing to work with someone close to us. Besides, they were endorsed by companies we trusted a lot, such as Avangate, and we knew that they took companies to the US, one of our long-time goals”, Florin explained some of the reasons they chose to close a deal with 3TS Capital.

“It was difficult for us to accept the investment at first, particularly because we don’t have successful local examples of collaborations between startups and VCs in Timisoara. After talking with Avangate, MavenHut, and others, we understood what it takes and we then decided it will be a good idea to go forward, so we accepted the dance invitation”, adds Tudor.

What is a VC actually looking for?

“The chemistry is very important. The conversation is not about how much money they need, but about what else a VC fund can bring in the relationship, beyond money. This is the approach inside 3TS.”, Daniel explains.

And a VC can bring along several things to help founders grow their business: their network of contacts, industry experts to join the board, introductions in Silicon Valley or other areas of interest, advice on partnerships and acquisitions they should take a closer look at. A company that’s growing fast in a fast-growing market faces lots of challenges, and the role of the VC is to help its founders better tackle these challenges and work with them for the construction of the business.

“Companies have to reach a certain critical mass for us to invest in and, most of the time, they can’t get there just by bootstrapping. It would take too long. Usually, they start with their own money, then their family & friends, followed by angels. Later on, they go to early-stage VC funds, later-stage VC funds and, later on, private equity. We come in at a strata where companies have already raised a few hundred thousands, build their organizations, have some revenues and customers. This helps us better evaluate our business prospects”, Daniel explains.

“It’s important to understand that we allocate capital, as a VC fund, but we are not at the top of this relationship. With this approach we understand that if we can work with our companies and provide them both capital and know-how, we’ll both achieve a better exit later”, Lynch continues.

Closing the deal. The negotiation process

“The negotiation process, on both sides, is a character revealing experience — you learn a lot about each-other from the negotiation, how you go forward, and you understand how the marriage is going to work”, Daniel Lynch points out.

After finding the match between the startup and the VC fund, what follows is actually discussing the terms of the deal. And things are not easy here either.

“It’s a negotiation: you have to get something and give something else in return, and both parties want the best deals for themselves. Closing the deal with 3TS wasn’t easy and we got close to breaking it several times along the way. Eventually we reached a point where everyone was comfortable with the terms”, Florin remembers.

As Daniel Lynch explains, there are 3 pieces of a deal with a VC fund:

1. The price and share structure;
2. How you are going to govern the relationship (board structure, sharing control);
3. How do you intend to exit together (a part that’s very important for the VCs: the exit is the primary reason they make the investment and the entrepreneurs have to realize this and be ready to include it in the deal).

“It’s important for both parties to have the same goals, agenda, and time horizon over the following 3 to 4 years. Besides, we are also interested in locking up the partners over the course of our investment. This is because we look at the business, but we invest in management”, Lynch explains.

Having Adrian on board was extremely valuable during the negotiation process as well. Adrian worked together with 123ContactForm and helped them understand the terms of the deal and lead the negotiations process. His involvement was not only helping the founders of 123ContactForm, but was also instrumental for 3TS Capital.

“We perceived Adrian as a hands-on angel investor. His presence gave us validation: 123ContactForm already had somebody giving guidance and getting involved from the outside. It was comfortable for us to know that they went through the process before, at a different scale, and this provided us a very useful bridge to come in”, Daniel Lynch explains.

After the deal: managing the relationship

Choosing the right VC as a partner will save you troubles that may arise in the future. This is because, besides money, the VC is a partner that gets involved to help you scale your business faster. Seeing eye to eye is instrumental here, and many misunderstandings are avoided when the VC and the founders share a common vision for the future of the company. This is one thing 123ContactForm did right from the beginning, and the reason they did not encounter significant challenges later on.

“Our experience so far with 3TS Capital is way above expectations. Everybody expects relationships to be ok when things go well. However, the true face of one person appears when you face difficulties, and it’s here that 3TS Capital exceeded out expectations and showed us they are on our side and we are real partners”, Tudor explains.

Key advice for startups looking to raise VC money

Daniel Lynch advises startups that consider VC funding to:

• Do thorough research on the VC and find the one that’s the best fit;
• Understand the language & terms: educate yourself on everything you need to know about VCs;
• Set expectations straight: it’s important to know what do you want to get out of the collaboration, what’s in it for you, and what you have to offer in return.

After learning important lessons from their experience, the Co-Founders of 123ContactForm have some valuable pieces of advice for startups that choose this path:

• It’s very important to have a sound financial education!

“When we looked at the term sheet for the very first time, we were shocked. Entrepreneurs should educate themselves in these matters early on and understand all the terms of the deal (liquidation terms, warranties). And remember that when you negotiate the deal, you not only take into account the good parts, but also the worst that can happen”, Florin advises.

• The founders should have a common vision!

“The fact that we were aligned on our vision for the company’s future made things easier and we only focused on reaching a common ground with 3TS. It’s dangerous for things not to be like this: if any of the founders does not sign the deal, it just fails”, Tudor explains

• Be friendly: the VC is your future partner, not your foe!

This one of the few things that the guys from 123ContactForm would change in their approach: looking back now, they remember being more aggressive then they should have been.

“Closing a deal with a VC is an endorsement and a big step you make towards your future. The main purpose of the deal is to help you grow, scale. It’s a new beginning and you have to be ready to accept the new rhythm”, Florin concludes.

Interested to discover more on the topic? Explore the ins and outs of raising VC money, from both sides of the table, by taking a look at the video of the panel from How to Web Conference 2015 with Florin Cornianu & Tudor Bastea (Co-Founders of 123ContactForm), Daniel Lynch (Managing Partner, 3TS Capital), and Adrian Gheara (angel investor).