How much money should you raise, and why?
Last year, Canadian companies attracted $2.4 billion in venture capital, data from Thomson Reuters shows. This amount represents a 21% increase from a year earlier and is nearly double the $1.2 billion invested five years ago.
Granted, that’s a fraction of the $48 billion in venture capital invested in U.S. companies last year. Although capital in Canada is still spread too thin, funds are becoming available, in amounts not seen since before the dot-com bust of 2000.
With capital, however, comes responsibility. The startup graveyard is littered with promising companies that came undone after getting too much money too fast. Hootsuite went from seven employees to 700 in about six years and learned some important lessons along the way. Each startup’s circumstances are different, but I think these ideas on when, why and how much to raise may be worth bearing in mind.
Start lean In the tech space, it’s relatively easy and inexpensive to test-drive business ideas. You don’t need to invest a lot in infrastructure or capital costs to begin exploring a concept. The key is to get something out there, even if it’s not perfect, see what sticks among users and pivot accordingly. This is easier to do when you’re still in the napkin-sketch phase, before boards, investors and tons of overhead.
In 2008, for instance, we soft-launched Hootsuite with what was a minimum viable product — a basic, hastily assembled app for managing multiple social media accounts. When thousands of people signed up in the first weeks, we decided to dedicate a team of engineers to build out the new tool. We tweaked it based on customer input and ran data tests to see which features were in demand .Only when we knew we were on to something, did the question of outside financing enter the picture.
Raise funding based on context Once you’ve got a product with potential, whether you choose to bootstrap or look for financing will depend largely on context. If you’re working on a stealth project, with few or no real competitors and/or the idea isn’t especially capital intensive, then it may make sense to bootstrap and avoid outside interference. The job search site Indeed was bootstrapped for years before being acquired for nearly $1 billion.
But, if your industry is poised for growth, the competition is threatening to outpace you or you urgently need capital to grow and stay in the game, then
start looking into financing options.
Hootsuite bootstrapped for a year, but the clock was ticking and the company was moving in slow motion. Competing social media management products were hitting the market and Facebook and Twitter were going from dorm-room curiosities to mainstream tools. Meanwhile, it was becoming clear that scaling and monetizing our tool would be capital intensive. In 2009, we secured a $1.9-million Series A round.
Stay capital efficient Money changes lots of things. What’s important is making sure it doesn’t change everything. With that initial funding and subsequent rounds, we were able to hire the engineering team needed to develop a world-class product, acquire competitors, bring executive-level talent on board and lease office space. Businesses were just beginning to look for enterprisegrade social media tools, and the quick infusion of funds let Hootsuite be one of the first players in that space.
What we didn’t do was change our underlying philosophy on spending. Our new office space was actually used-furniture filled aging warehouses in an industrial area of Vancouver. We didn’t spend on gala launch parties, and our salespeople travelled on the cheap. And, because traditional advertising is so costly, we continually looked for alternative ways to boost our product’s exposure.
My favourite was a guerrilla marketing ploy at SXSW in 2012. We bought a used bus, pimped it out to look like our mascot owl and for less than the price of hosting an event at the conference got exposure in USA Today and dozens of other newspapers. Take equity off the table in later rounds With early funding rounds, sometimes every cent is funnelled back into the business. In subsequent, larger rounds, however, it’s necessary to reassess priorities, with an eye toward rewarding key contributors and building a business to last.
When Hootsuite secured its record $165-million financing in 2013, part went to what’s known as secondary financing. Essentially, the investors bought stock back from the founders and early employees. This was the first time many of us saw any substantial liquidity (read “cash”) from Hootsuite. The impact was huge.
We were able to buy homes, ensure the needs for our families were met and enjoy the fruits of our labour. Rather than desperately racing toward the payday that comes with an IPO or exit, we could turn our attention to a longer-term vision of building a multibilliondollar company in Canada.