Fundraising then and now: Selling B2B sales to VCs
Handshake closed a $1.5 million round lead by Softtech VC (Jeff Clavier), with MHS Capital, High Peaks Venture Partners, BOLDStart Ventures, PointNine Capital, and Chris Dixon (as an angel, not through a16z).
Handshake was founded in early 2010 and ran as a bootstrapped startup for longer than most. In early 2012, we decided to look at raising a seed round based on the fact that we had a revenue-generating product, healthy traction for an early-stage B2B SaaS company, and a big vision for what Handshake would become.
It didn't go well.
Less than a year later, we went out again and successfully closed a $1.5 million round from a dream team of investors, but with considerably less difficulty and gnashing of teeth. We had more time to put a few more "runs on the board," but the fundamentals of the company were much the same.
To pin it all on a single event is hard, but it felt like the tipping point came when Facebook IPO'ed, the share price promptly fell through the floor, and as one VC described it, the companies in the "shadow of Facebook" (e.g. any social / consumer play depending on mass adoption and eyeballs for juicy ad revenue) and their investors got a sudden reality check. The Series-A Crunch stories started rolling in and everyone was talking about how hard raising was about to become.
… everyone except B2B & enterprise startups.
Early 2012 taught us the hard lesson that other startups with no revenue (or revenue model) but with an enormous addressable user base could easily sell the story of "we'll be crushing when we network-effect our way to millions of users." By contrast, steadily growing a business through sales, marketing, and product execution sounded a lot more like (gasp) hard work.
Paradoxically, having revenue actually made it harder to sell our vision to some VCs because it brought the conversation out of the clouds (where anything is possible) and back into the real world (where balance sheets and P&L exist). It forced the conversation away from “How big could this be?” into “The road from your current revenue to $100 million seems pretty long."
Another problem with playing in a B2B segment is that your addressable market is usually a smaller but higher-per-capita-value group of customers than a consumer play and this forces all sorts of difficult market-sizing questions. The numbers are hard to get (publicly available data on private market segments is often scant), and the VC is typically sizing it for the first time, which naturally causes hesitation.
Most often, VCs would pass by saying something like “Your traction with no funding is great, but this space isn’t something we’ve done before." In other words, a variation on “It’s not you, it’s me." Like most jilted lovers, we walked away from the process feeling battered, muttering lots of four-letter words, and a “We’ll show them” attitude that made us want to execute like crazy.
After $FB happened and Chris Dixon's "10 million is the new 1 million" post landed, however, things changed. Having thousands of people willing to pay for your product became a good thing.
Our first time out, we had a great product and real traction but were too ignorant of the diversity of the VC community and naively assumed that revenue would be our trump card. Who wouldn't back a money-making business? Oops.
Our second time out, we knew that sentiment was moving back towards the fundamentals of B2B and SaaS. Where previously we had started conversations by trying to explain our product and our space, we’d start with our revenue numbers knowing that it would it would raise an eyebrow instead of causing an awkward silence.
Doubling down on the growth we’d achieved in the meantime, we sought out investors with a track record in understanding and betting on revenue-generating companies with a big vision, and found the right partners who believe in our long-term ability to build something big.
Trying twice and succeeding once, we learned:
1. Timing and investment cycles matter. Pitching a B2B startup in a consumer-bullish cycle isn’t impossible, but you’re pushing shit uphill and fundraising is hard enough without turning the difficulty up to nightmare mode for yourself. Read the news and understand the prevailing climate before you spend time banging on doors that are hesitant to open.
2. Every bit of revenue growth matters. We had probably grown four times by our second attempt but we were surprised at the difference it made. Growing fast is supposed to be easy for early-stage companies (see the scorn heaped on YC companies talking about 100 percent week-on-week growth), but we learned that stretching yourself to the limit of your possible bootstrapped growth before you ask for VC dollars makes a huge difference. Now more than ever, revenue growth talks and investors are listening.
3. Target only the investors who know and understand B2B and ignore the rest. Thinking that all VCs would be interested in any cash-generating business was a mistake and wasted time on both sides. We have a spreadsheet of roughly 50 VCs we spoke to, and in hindsight probably only 25 percent of them were a real chance at a fit.
Handshake is focused on B2B sales order management, but for any startup serving the B2B space and generating real recurring revenue, we have thankfully turned the corner into a funding environment that is much more friendly to what we do. VCs are now more willing to back products and teams that are adding real value for a thriving subscriber base, even if their user numbers aren't necessarily going to "hockey stick" into the stratosphere overnight.
I, for one, am glad that the fairy-tale is over.
[Image Credit: borman818 on Flickr]