How ‘Couch In a Box’ Company Burrow Leveraged Big and Small Investors for a $4.3 Million Seed Round

Direct-to-consumer furniture company Burrow is built to short-circuit furniture frustration. Anyone who’s ever strapped an IKEA couch to their car or waited 12 weeks for West Elm to deliver can relate, says Stephen Kuhl, its co-founder and CEO.

“We took a page out of the mattress company books and figured out a way to reverse-engineer a high quality couch that ships in compact boxes,” he says, referring to the recent successes of Casper, Nectar, Leesa, and the like.

“It allows us to cut out a lot of money that’s traditionally baked into shipping the product from a factory to warehouses and local retail stores,” says Stephen. “Also, it’s infinitely more convenient for people to get it into their homes.”

Stephen and his classmate Kabeer Chopra conceived of Burrow in an MBA entrepreneurship class at Wharton. Before they even graduated, they raised an initial round of funding and joined the 2016 class of Y Combinator.

That’s when it gets interesting. Here are some highlights from my chat with Stephen on Burrow’s journey from grad school to your living room.

How much money have you raised and what’s the breakdown?

When we first started, we raised about $330K from friends and former bosses and one small seed firm. Then we got into Y Combinator. They invested some money [$120K]. We raised the other $3.9 million from seed and angel investors.

Tell us the story of raising that first chunk.

That initial amount was pretty easy, and it gave us a false sense of how it would go. We raised money from people we knew who assumed we wouldn’t be asking for money unless we were really serious about something.

Then we got one firm, Red and Blue Ventures, that invests in Penn-related startups. They put a $100,000 check in, on a $7 million cap, 20 percent discount and safe note.

This is before product, right?

Yeah, we just had a pitch deck. We didn’t have a manufacturer yet.

There are a lot of comparisons to mattress companies, but the idea of rolling up and boxing a foam mattress wasn’t new. They just recently started marketing it as a differentiator.

But we wanted to figure out how to ship a high-end luxury couch in boxes. We thought, ‘it’s not rocket science.’ We can figure it out. It turned out to be a lot harder than we anticipated.

Talk about your experience at Y Combinator and what happened from there.

YC did its standard $120K for 7 percent equity. The experience was amazing. We didn’t expect to get in. I don’t think anybody really does.

We’re not a tech company, so it was interesting being around other startups that would ask us what we do. We’d say, ‘we sell sofas,’ and they’d be like, ‘software?’

We also got a $20,000 check from Highland Capital Partners, which hosts Summer at Highland. They choose student-founded startups and give them funding as well as office space. In the summer of 2016, we worked out of their office in Palo Alto and then commuted to Mountain View for YC.

What did you learn at YC?

They have an interesting take on the fundraising process. They push founders to raise on SAFE notes, because it allows you to push off the conversation about valuation to a much later date, when you actually have traction.

This strategy also allows you to get money faster. By the time we got to Demo Day in August 2016, we had a bunch of preorder traction, but we hadn’t delivered any products yet. We were still tinkering with the design and a bunch of manufacturing challenges.

Raising a proper seed round would have taken quite a lot of time and effort. We were still in business school, so we couldn’t afford to take two months off and raise full-time. So we just raised on SAFE notes from people who were interested.

How did you go about that?

Our strategy was: let’s set a more aggressive valuation cap to start and not change it throughout the valuation process. I didn’t want to have conversations about why the valuation changed in the last month.

We started with a $7 million cap before YC. After, it was a $12 million cap, 10 percent discount.

How did you find and get in touch with these investors? Was it all YC, or were there other ways you met them?

There were a bunch that came from Demo Day. It’s totally random, the people that remotely watch Demo Day presentations. Matt Bellamy, the lead singer of Muse, saw my presentation, reached out and said, ‘Hey, I want to invest.’ I was like, ‘that’s really cool. I had no idea you were watching this.’

We met a bunch of people like that, including a lot of former founders. We raised about $1 million within a month of Demo Day, just from people that had watched our presentation. We also found people through investors we already knew who introduced us to people in their networks.

Did you seek out big fish or cast a wide net?

Our strategy was to go after big checks, but not ignore smaller ones. We raised our minimum to $25,000, which wasn’t that challenging, especially as we made progress.

An investor can be anyone — your dentist, maybe. People like investing in companies they can talk about. Startups are cool — send them monthly investor updates and they get excited.

People are always chasing seed firms, but if you go after a number of smaller, $25K investors, they add up. Often, they end up writing even bigger checks.

What happened next?

Once we started delivering products in spring of 2017, a few YC partners personally invested and introduced us to people in their network who wrote $50–100K checks.

Red and Blue ventures came back with $200K more in a series of tronches as we made progress. We met Interplay Ventures last summer, which invested $500K.

Over time, as you’re making progress, you present an easier case.

What did you learn along the way?

At first, we didn’t know how much money we needed. We ran into a lot of hiccups on the manufacturing and supply chain side that required a lot more money than we anticipated.

We never would’ve known that $4 million was actually the number we needed. Raising over time is good, but in the beginning, if I told people we were raising $4 million and we had $1 million in the bank, they’d say it sounds like nobody’s interested in us.

What worked was saying that the amount we had raised to date was the amount we intended to raise, but that it wasn’t a hard cap — we’d like a little bit more cushion.

Then, everyone feels like they’re the last check in the door.

You could say that’s a little bit dishonest, but I know they’re not going to invest unless they believe we’re doing something worthwhile. It’s an exercise in human psychology.

What are the metrics you’re aiming for before it’s time to raise a Series A? You’re a physical products, so you’ve got inventory and all kinds of other things to contend with that other firms don’t.

VCs will tell you, ‘whatever your numbers are now, let’s see what you do next quarter.’ You can fall into the trap of always having a carrot dangled in front of you.

We had our own internal benchmarks. First, we switched manufacturing from Mexico to the US, so we wanted to have that fully transitioned over to show that operationally, we’re ready to scale.

Second, we kind of arbitrarily picked a revenue number to hit — which VCs validated — $500K per month in revenue. We did cross that threshold in Q4 last year.

Third was getting really efficient with our customer acquisition and making sure we’re profitable. Our average order value for a three-seater couch is a little over $1,200. On a unit economics basis, we’re profitable on every sale. But we have to hit the volume required to cover all our operating costs.

We could get break even in Q2 if we wanted to, but the question is: do we want to optimize for scaling or do we want to optimize for not being reliant on outside capital?

Which did you choose?

We’ve struggled with that a bit. It would be great to be at break even or slightly profitable because it gives us the ultimate bargaining chip — you can walk away from a deal. If you can do that, VCs are at your mercy.

But our existing investors, based on the traction we already have, are really excited. They’ve been pushing us recently to take more money from them, which is a sign it’s time to go raise.

We want to create a sense of urgency. If you feel confident you can get some term sheets, use that to your advantage. Tell VCs, ‘look, of course you’d love to see me prove this out for another year and de-risk it, but we feel that now is the time to invest in in growth. You’ve got to give people a deadline. It proves whether people are interested or not.

If you could rewind back to 2016 when you first started, any piece of advice you would give your slightly younger self?

Don’t over-promise. If I tell you we’re going to do $2 million our first month out of the gate, but we do $1 million, it would be equivalent to what Casper did — the most successful consumer launch in history.

But if you’re an investor, you’d be like “they didn’t do that great — they said they’d do $2 million.”

You’re better off sandbagging your projections and making sure you beat them because then you look really good.

Under promise and over deliver — always sage advice! Thanks so much.

Nathan Beckord is the CEO of Foundersuite.com, a software platform that has helped users raise over $1 billion in seed and venture capital since 2016. This Q&A is based on episode of Foundersuite’s How I Raised It podcast, a behind-the-scenes look at how startup founders have raised capital.

This story is published in The Startup, Medium’s largest entrepreneurship publication followed by +435,678 people.

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