Last month, Q4 announced the closing of $22 million in our Series B financing round. I’ve learned a lot over the last 9 months and I hope that some of my learnings will be helpful to others starting, growing and raising funds to execute their dreams.
The crazy thing about raising money is how different it is to be inside the tent of the round than on the outside. For those that are raising money, you know what I’m talking about. Closing any type of investment, whether it’s $100k, $1m or $10m requires the same level of commitment and effort. It’s a war of attrition to finally close it and once you do, the reality sets in that you have successfully sold a vision that you now need to execute on.
It’s clear to me that closing a round of funding is not winning, it’s not even close. It’s executing on your dream and building a successful company that’s winning. Closing a round is always an incredible step to growth. But it’s important to understand that closing a round doesn’t mean anything if you’re not able to use that money to execute.
I’ve led a total of $30m in funding for Q4, to date. The first round was for $100k back in 2006. It was from a close friend. And once his money was invested, the snowball effect started with additional friends and family looking to invest in Q4. This is what I call ‘love money’.
Series B is quite different, obviously, because with institutional investors the transaction is all business. When you get to the point of raising Series B, you have gone through all the early days of figuring out the business and you’re focused on scaling. Your annual recurring revenue (in today’s SaaS world) is typically over $10m and you’re likely growing at a minimum of 50% annually.
When it became clear that Q4 was ready to scale, we began planning for Series B. We had already successfully closed seed, angel, series A rounds and were looking for the capital to expand our product portfolio and geographic markets. We started the process of building out all of our data and investor materials and got into the market around the end of Sept 2015.
Lesson One: No One Knows Your Market Like You Do
The first thing I learned when Q4 started talking to larger VCs and growth equity investors is how little they knew about our market, competitors and growth opportunities. It took time to explain the industry’s market consolidation, the influence of stock exchanges and many other critical nuances before we started to see our investors nod their heads – like they were understanding our story.
The challenge here is that many investors will say the classic “got it” very early in discussions, when in fact they don’t actually understand yet. You need to go back to 101 on your company, the vision, the market, etc. Because the reality is… if you lose an investor while trying to explain what you do and the market you compete in, you’ve likely lost them forever.
Lesson Two: There are Always More Metrics
Once the investors understood our business and market, they started to dissect us, quickly.
We spent a considerable amount of time preparing for the round before talking to investors. We established a comprehensive data room, which we thought explained the business from every perspective and included every metric needed to evaluate Q4.
We were wrong!
Within the first week of discussions we noticed that investors use different metrics to evaluate a company such as contracted ARR (cARR), segmented gross margin, pipeline adds and pipeline coverage. We, internally, needed to understand these new metrics and forecast out for a number of years so that investors would have the data they needed to evaluate and understand the business. These metrics have helped us understand our business to a level we previously didn’t, which has turned out to be quite helpful in running the business.
As a side note, the difficulty in raising money from series B type investors is that they are working with and looking at literally hundreds of companies. They have a perspective on metrics that are rivaled by no one. Where they were weak on our market, position, strategy, etc. they dominated in data… at least in the beginning of our discussions. After we got up to speed, we became experts but trust me, I have the scars to prove that some of the early discussions did not go well.
Lesson Three: Start Conversations Early
Don’t come into the market sprinting; rather have conversations early in the process — understand the data drivers, key metrics and what matters to investors now. Do this directly with investors, don’t rely on your advisors, bankers, etc. The reality is they likely don’t know all the key metrics either. After you’ve done this pre-raise work, go back and fine tune your data and then return to the table in a formal way.
As Mike Tyson famously said “everyone has a plan, until they get hit in the face.” Meeting with professional investors is very much like this — and when you get hit in the face it’s always best to respond with something like “we don’t currently track that metric; can you explain it to me more? why is it useful?”. Learn from the gap in your data and grow stronger.
Lesson Four: Believe in Your Vision
I learned during this round of funding how important it is to understand your vision and fully commit to it. Investors at this level are not short of ideas as to what you should do with the business, the direction you should go, and what cracks exist in your strategy; however, what is really happening during these discussions is:
- Investors are testing you to see how solid your vision is. Is it clear and do you operate with purpose?
- You are indirectly testing yourself. Is it just words I’m saying, or is my vision solid and something I’m committed to make happen?
The right investors are the ones that back your vision. I have never partnered with an investor that doesn’t believe in the direction of Q4. If you have the opportunity to partner with an investor that is the right fit, vs. one that will give you a higher valuation, take the fit. The difference in valuation is likely quite small when you look at it long term; however, having an investor that is the wrong fit could destroy your business. The entrepreneurial landscape is littered with founders who were fired from their company because they weren’t aligned with their investors.
So stick to your guns and find investors that will back you.
Lesson Five: Trust Your Team
During fundraising the CEO is taken offline. This means that things like sales, marketing, customer service, cash management, product development, etc. will need to be managed by your team. If you’re still the rain maker in sales, you risk sales slowing down during fundraising, etc. You have to assume that you are going to not be involved in the day-to-day business, until the deal is done.
If your business slows during fundraising, investors are going to drive down your value or simply walk away. You need to make sure your team is strong and can handle, not only running the business, but growing it significantly during the process. For our Series B, my management team was incredible and drove incredible growth, which was instrumental in getting the round completed.
If you’re raising money or thinking about it, I hope this has been helpful in someway. I’m always open to helping other entrepreneurs. If you have a question please feel free to comment, or message me.
Happy fundraising. Go get it!