Small Town, Big Ideas

When is the Right Time to Raise Money?

I am flattered to be able to say that entrepreneurs and business executives are contacting me these days seeking business advice. I am always happy to help and frankly, I really enjoy working with ambitious, motivated people.

One question that I constantly get is, "when is the right time to raise money for my business or startup?"

There are tons of resources on this topic. But I'm just going to give you my opinion which is based on my personal experiences and what I have seen others experience as well.

I will start with a disclaimer: every business is different; I realize that. If you want to start a restaurant, you will probably need some startup capital before you even get started. But if you're building an Internet startup, you really don't need money to start unless you just want to draw a salary right out of the gate. And if you're building an Internet startup, chances are you're going to do something that isn't as proven as something brick and mortar, like a restaurant.

Let me first outline what I think is wrong with the mentality most entrepreneurs have, especially when they're building their first startup.

Most entrepreneurs seem to think that you should go out and raise money before you prove that your idea is any good. And don't get me wrong, this is exactly what Bill and I tried to do back in 1999-2000. That was the advice we got (remember that a lot of people giving advice have a vested interest in seeing you raise money, or at least try to - lawyers, bankers, potential investors, consultants, future employees, etc.). That was what we thought all businesses were doing (which at the time, they were). It was the thing to do... or so we thought. How cool would it have been to be able to call my friends and family and tell them someone just wrote me a check for a million dollars? Very cool. But when reality set in, we realized that raising money was not the first thing we needed to do. We needed to prove that our strategy was going to work, that customers were actually going to buy stuff from us, and that we really could run a business. We also needed to understand why we should raise outside funding and what we were going to provide investors with in return. This is not easy stuff.

So in a nutshell, here is my advice:

1. Don't even think about raising money until you build your product or service and prove that people will pay for it, or at least use it. At most, I would start talking to investors so that once you prove your concept works, you will have a network to tap into.

2. If you need to raise money in order to prove your concept, raise as little as possible. Find $20,000 from an angel investor or borrow the money from a bank.

3. Once you prove that your concept works, then you need to decide if money will indeed help you grow - many times throwing money at something simply isn't the answer and can hurt more than help. A lot of people I meet with want to raise money to hire a salesperson, yet they've never sold any of their products or services themselves. Bad move, in my opinion.

4. If you decide that money will help you grow, figure out exactly where you're going to spend the money and how it's going to provide your business with a return on investment. That will help you decide how much money you need to raise and will help potential investors envision where their money is going to go.

I think there is a lot of perceived glamor that comes with raising money. And it's easy to get caught up in all that stuff, I know. But I would advise you not to let yourself get caught up. Be smarter than that. Do what's right. Not to mention, capital raising takes a long time and if you do it prematurely you will give up too much stock and regret it later. Likewise, investors can be a pain in the ass (thankfully we have awesome investors but most of my friends cannot say the same thing), venture capitalists are scary people, and stock issues are complex and expensive to deal with.

If you have other questions about raising money or venture capital, here is a great blog dedicated to answering all of our questions.

Thanks to Dick Costolo for inspiring me to write this post. He wrote a similar one called, Starting the Company - When to Raise Money - I would read his post, too. He's probably a lot smarter than me.

The Business Journal on Entrepreneurship and Small Business Education

The Blue Ridge Business Journal just published an article on what colleges and universities in the region are doing to promote entrepreneurship and opportunities within small businesses. I'm a big advocate of exposing students to more than working for large corporations when they get out of school—not because big companies are bad, or I dislike them, but because I think its right to expose students to ALL of the choices they have when they graduate (or even if they don't).

Podcast Interviews

Below are links to two Podcast interviews I did last week with Becky McCray from the Great Big Small Business Show and author of the blog, Small Biz Survival.

Podcast #1: Growing a Technology Company in a Small Town

Podcast #2: Startup, Survival, and Growth

Life is Fast-Paced Right Now

It seems like every week I ask myself, "can this life I'm living get any faster-paced?" Sure enough, every week it seems to. Here are the highlights from each day in the last week, including today (which for the first time in a week, I can actually take a breath).

Wednesday: We were TechCrunched

Thursday: We announced Harbinger to our customers

Friday: I flew to Silicon Valley for TechCrunch 7

Saturday: My computer died while I was in San Francisco

Sunday: I flew back to Blacksburg in the middle of a manhunt

Monday: I had a board meeting in the middle of that manhunt

Tuesday: I spent most of the day trying to catch up after being out of the office for so long as well as talking to people on the phone who saw our TechCrunch article

Today: We announced Search to our customers

It might not seem like much, but these are all things that fall outside of my "everyday" duties. But don't get me wrong... I love every minute of these fast paced days. The only pain in the ass was my computer dying, but there is even some good news that came out of that. You see, when computers die, the software running on those computers (Outlook in my case) dies too. This gave me just the motivation I needed to ditch Outlook and move to webmail on a full-time basis. Now I’ll never need to worry about that happening again. ;-o

Knock-Knock!

As I’m sitting around having a lazy day on the 4th of July, I can’t help but to think about how much my life has improved in the last five years. Here was the state of my life in a few different areas on July 4th, 2001:

Business
The summer of 2001 was an absolute low point for our business. We were more than a year past the beginning of the dot-com bust and reality had set in that we weren’t going to be as successful (rich) as we had hoped—anytime soon at least.

Personal
Personally, I was dead broke in the summer of 2001. In fact, I wasn’t just dead broke—I was in over my head in credit card debt. I had enough high interest debt (and virtually no income) to make most people’s head spin.

School
While business was in the dumps and I was dead broke, I also had to deal with the fact that I was still a college drop out. I’ve never regretted my decision to drop out of school, but nonetheless, it was another psychological downer when things weren’t going very well.

Other
So with all that said, what exactly was I doing on July 4th, 2001? While all of my friends were partying in Dewey Beach or somewhere else fun, I spent my day in the “book field.” I had picked up a part-time job selling books door-to-door in Southwest Virginia at night, on weekends, and on holidays. I will always remember knocking doors on the 4th of July—probably because I was selling books door-to-door in Southwest Virginia on the 4th of July! I only sold one book that day but I remember the entire day (like many of those gut-wrenching days) very well.

What a difference five years makes. Business is booming, I’m making better than average money, I’m a graduate of Virginia Tech, I have an awesome girlfriend, AND selling books door-to-door in Southwest Virginia is something I can now blog about—and stay tuned, because I will! :-)

Happy 4th of July everyone!

Magnum Multimedia

John Kim, a good buddy of mine from high school, recently launched Magnum Multimedia, a multimedia and creative design firm. They’ve actually been in business for a while now but have been so busy they just now got around to launching their own website (here is a list of who has been keeping them so busy). I’ve never worked with John in a client / vendor relationship but I’ve been paying attention to what he’s done over the years and put simply, he does great work.

Magnum is a Northern Virginia based firm—check them out.

Paul Graham on Startup Hubs

Paul Graham, a blogger and early stage VC, has two great essays out on why startups form where they do. In How to Be Silicon Valley, he talks about what he thinks it takes for a city to become a startup hub. It’s a long essay, but here are my favorite excerpts:

I think you only need two kinds of people to create a technology hub: rich people and nerds.

Do you really need the rich people? Wouldn't it work to have the government invest in the nerds? No, it would not. Startup investors are a distinct type of rich people. They tend to have a lot of experience themselves in the technology business. This (a) helps them pick the right startups, and (b) means they can supply advice and connections as well as money. And the fact that they have a personal stake in the outcome makes them really pay attention.

Building office buildings for technology companies won't get you a silicon valley, because the key stage in the life of a startup happens before they want that kind of space. The key stage is when they're three guys operating out of an apartment. Wherever the startup is when it gets funded, it will stay. The defining quality of Silicon Valley is not that Intel or Apple or Google have offices there, but that they were started there.

So if you want to reproduce Silicon Valley, what you need to reproduce is those two or three founders sitting around a kitchen table deciding to start a company. And to reproduce that you need those people.

What nerds like is other nerds. Smart people will go wherever other smart people are. And in particular, to great universities. In theory there could be other ways to attract them, but so far universities seem to be indispensable. Within the US, there are no technology hubs without first-rate universities-- or at least, first-rate computer science departments.

One of Silicon Valley's biggest advantages is its venture capital firms. Venture investors, however, prefer to fund startups within an hour's drive.

In Why Startups Condense in America, he talks about why America is the best place for startups to form. Again, a long essay, and here are my favorite excerpts:

For example, many startups in America begin in places where it's not really legal to run a business. Hewlett-Packard, Apple, and Google were all run out of garages. Many more startups, including ours, were initially run out of apartments. If the laws against such things were actually enforced, most startups wouldn't happen.

Startups are marginal. They're started by the poor and the timid; they begin in marginal space and spare time; they're started by people who are supposed to be doing something else; and though businesses, their founders often know nothing about business. Young startups are fragile. A society that trims its margins sharply will kill them all.

Startups are easier to start in America because funding is easier to get. There are now a few VC firms outside the US, but startup funding doesn't only come from VC firms. A more important source, because it's more personal and comes earlier in the process, is money from individual angel investors. Google might never have got to the point where they could raise millions from VC funds if they hadn't first raised a hundred thousand from Andy Bechtolsheim. And he could help them because he was one of the founders of Sun. This pattern is repeated constantly in startup hubs. It's this pattern that makes them startup hubs.

Incidentally, America's private universities are one reason there's so much venture capital. A lot of the money in VC funds comes from their endowments. So another advantage of private universities is that a good chunk of the country's wealth is managed by enlightened investors.

All in all, these are two great essays with a lot of good points. As many of you know, I think that Blacksburg has a lot of potential as a startup hub. We’ve got a lot of the characteristics Paul talks about—a major university, lots of smart people, and lots of rich people. But we’re still lacking a lot too. One of my longer term goals is to help cultivate the startup culture in Blacksburg. My first goal is to build an awesome company here at Webmail. Blacksburg needs as many success stories as we can get to shine a light on the great things going on in our region. And ultimately, I want to help fund and support other startups in our region. I’ve got the gumption and the experience—all I need now is the money!

Are We Built to Flip?

There is a lot happening on the Internet these days. As I’ve mentioned before, it feels like 1999 again with all of the startups launching, all of the M&A activity taking place, and all of the big boys launching something new and cool every other day.

With all of this type of stuff going on combined with the successes and growth we’ve been experiencing here at Webmail, we often get the question:

Are you all looking to sell the company?

We’re getting it more and more from these days from prospective employees, customers, prospective customers, friends, family, investors, and potential buyers. So I figured I would take the opportunity to answer the question as clearly and concisely as possible.

The answer is NO—we’re not looking to sell the company. If that is all you wanted to know, you can stop reading now. If you’re interested in hearing the details, please keep reading.

I first heard the term “Build to Flip” in the summer of 2004 in a Business 2.0 article by Om Malik (sorry, I can’t find the article). I especially paid attention to the article because he referenced Oddpost, an email software company that had just been acquired by Yahoo for $29M. To my knowledge, Oddpost had fewer than ten employees and less than $500K in revenue—with them being a player in the email space, you can imagine that it caught my attention. In the article, Om pondered whether or not there was a new breed of startup companies—those that set out with the goal of being acquired quickly, hence, “Built to Flip.”

Fast forward to the present and you can’t help but to notice that tons of companies are launching these days with the sole hope of being acquired by what VCs call GAMEY (Google, Amazon, Microsoft, eBay, Yahoo). There are a lot of others out there that do big-time acquisitions, but these are the ones that get all of the hype. While I think it’s great that some of these companies find a big pay day early, it’s the exception, not the rule.

As far as we go, we’re much different than any company that’s built to flip. We’ve got a long term vision here and we’re putting the pieces in place to help us realize that vision. Here are some of the things we’re doing or have done at Webmail that should hopefully get people to realize that we’re in this for the long haul:

1. We’re privately funded. Although most of our growth has been funded the old fashioned way (blood, sweat, tears, and customers), we did raise $500K in early 2005. However, all of that money is from private individuals. In other words, we don’t have any venture capitalists sitting on our board pushing for liquidity. In fact, Bill, Kevin, and I still own most of the company and all three of us are very bought into our long term vision. That is a good thing. Now I'm by no means saying we'll never look at institutional money. But right now, I think it's important to know that we've never taken any.

2. We’re hiring. To my knowledge, any company looking to sell wouldn’t be hiring. Regardless of what others companies do though, I know that I personally would not look someone in the eye and convince them to come work with us knowing we were just looking to sell. Anyone that knows me should already know that.

3. We continue to allocate some of our top resources to our next generation billing system. I highly doubt any acquiring company would care about our billing system. I guarantee any company that is built to flip doesn’t spend a minute even thinking about billing systems. Big companies that acquire little companies already have those, right? ;-)

4. We continue to invest heavily on the customer service and support side of the business. Service is one of our core differentiators and one of the reasons I believe we’ll continue to thrive in the face of heavy competition (more on this in an upcoming post). But again, nobody is going to buy us because we have a great customer service team (at least I don't think). In other words, we care much more about serving our customers than we do about being acquired.

5. We’re preparing big time for continued and increased growth. We’re investing both financial and personnel resources on the infrastructure and operations side of the business. More servers, more bandwidth, long term leasing agreements, better processes, etc. I could go on, but I think you get the point. We’re focused on growth, not exit.

6. Our overhead is getting bigger. We’ve recently hired two senior managers in sales and finance as well as a human resources coordinator. I mean, how blah is that unless you’re trying to build a real company?

Another thing to keep in mind: GAMEY isn’t going to buy us. In fact, most of the really big boys already have an email hosting offering that they've spent a lot of money building and buying.

There is a lot more I could talk about. But at the end of the day, we’re a very entrepreneurial spirited group. We’ve been in the real trenches. We’ve worked excruciatingly hard to get to where we are today. We’re not going away anytime soon.

Java Stuff

Kevin gives a little hint as to what kind of test we have software development interviewees take during the first interview.

It sounds intimidating, I know. But just wait until you get to Pat and Ben. ;o)

Forbes on Doing Business in College Towns

In a new Forbes article, author Rich Karlgaard says:

College towns are the best bargain in U.S. real estate--the ideal mix of low prices, culture, fun and high-tech growth.

If I were an entrepreneur hoping to rub technology and talent together to start a company, I'd do it in a college town.

He specifically mentions Blacksburg:

Blacksburg, Va., tucked in a hilly, forested southwestern corner of the state, is home to Virginia Tech. It's not surprising that one of America's top tech incubators, Luna Technologies, chose to locate in Blacksburg. Luna does contract research and development, plumbing the possibilities in fields such as bomb detection and satellite oil exploration. Including Luna, Virginia Tech Corporate Research Center houses 121 high-tech startups.

I had the opportunity to meet Rich a few weeks back when he was here in Blacksburg, speaking to us at the NCTC Capital Access Forum. I'm glad we made enough of an impression to get a mention in his article.

Via Stuart Mease