Avoid the Series A Crunch by customerstrapping your company

By Walter Chen , written on July 26, 2013

From The News Desk

In January, our company was in a situation that many companies now find themselves in. The seed funding we'd raised in December 2011 was running out. We had decent traction, hitting $10,000 monthly recurring revenue with a respectable growth rate, but we were far short of Series A-ready and not yet profitable. Our seed investors decided not to put in more money.

We saddled up and went out to talk with investors anyway, but stirred little interest. "A second seed without support of your current investors? No thanks!" We had tough conversations with the team about the potential for layoffs. We emailed our investors and stakeholders and told them that either an acquihire or shutdown were likely.

Faced with this dire scenario, many companies have either sold or shut down, and we nearly did too. Before we did, however, we decided to get desperate, which is how we found our path to escaping the Series A crunch and lived to fight another day.

Our inspiration came from another company. In October 2008, before the billion-dollar valuation and public proclamations of becoming a 100-year company, Evernote was one night from shutting down. The company had three weeks of runway left, and founder/CEO Phil Libin had gone to bed resigned to wake up the next morning and let all twenty employees know that they were out of a job.

It was 3:10 am. In front of him was an email from a man in Sweden whose life had been changed by using Evernote. At the end of the email was the line, "If you are ever looking for any investments, just let me know."

Less than 40 minutes later, Libin was on a Skype call with the mysterious man and, just two weeks later, was on the receiving end of a $500,000 wire transfer.

The story of a user, so in love with Evernote that he put in $500,000 nearly sight unseen, drove me to reflect on whether any of our customers would do the same. That lead me to the question that's at the heart of the Series A crunch: Do we even deserve to exist? Does it matter if we die or is it better that we be culled from the startup herd for the greater good?

I found this question to be incredibly empowering because it turned fundraising on its head and made our company's survival more of an issue of customer development, à la Sean Ellis's preferred question, "How would you feel if you could no longer use the product?" For Ellis, if 40 percent of users reported that they would be "very disappointed," you have product-market fit. For us, we felt that if our customers loved the product enough — that they not only would pay for the product, they'd invest their own money in it — that we deserved to exist.

It's amazing to get validation from your customers, but it feels worse to get rejected by them than it does an ordinary investor for the same reason. That's because they actually know you. That's why the number one question I get from people I tell about customerstrapping is, "Aren't you afraid of ruining customer relationships?"

But we figured that if we shut down the product, if our customers cared, they would be disappointed that we didn't fight on their behalf for our own survival.

We started by emailing a few key customers who we knew had done some investing and who we'd gotten to know pretty well. Will Young, head of Zappos in San Francisco, had used iDoneThis with his team for over 6 months. He is also a partner in Tony Hsieh's Vegas Tech Fund. Luc Levesque, VP of SEO at TripAdvisor, was another longtime customerwho had done some angel investing. Jamie Lin, founder of appWorks Ventures, had used iDoneThis with a number of his investments and his most successful investment to date, EZTABLE, is one of our most engaged companies.

Right off the bat, I noticed that the questions that our customers asked were different. Unlike VCs' questions, our customers' questions were less focused on the size of the opportunity and they were more focused on the product and the soul behind it, and that's how we got to know each other better.

Ultimately, when these folks decided to invest, I actually felt tremendously moved because I felt like we had a deep alignment and shared obsession--that made me feel as if we were really finding our tribe--not an intellectual agreement on a market opportunity based on a detached scientific analysis.

When we decided to focus 100 percent on fundraising from our customers, our fortunes turned 360 degrees and we went from having nothing committed to filling out a $500,000 round from people we were proud to call customers like Tobi Lutke (co-founder/CEO of Shopify), Dan Pink (bestselling author), Teresa Amabile (Harvard Business School professor), and Kai Huang (co-creator of Guitar Hero) longtime customers of and investors.

As we began to work our customer network for fundraising, we not only found that our customers were our best prospects, they also gave us the best introductions. Founders like Chris Savage (co-founder/CEO of Wistia), Leo Widrich (co-founder/CMO of Buffer) and Julie Uhrman (founder/CEO of OUYA) went to bat for us and recommended us to their own investors with the message that they used iDoneThis in their own companies and found it invaluable.

That process actually helped us find investors who we turned into new customers and then into investors in iDoneThis. People like Eric Kim, founder/CEO of Twylah, and Dave Balter, founder/Chairman of BzzAgent (acquired by dunnhumby), were introduced to us as investors. They tried the product, became customers and believers, and then decided to invest.

AngelList and LinkedIn helped us with the grind of finding which of our customers also invested in startups and how to connect and backchannel with them via other customers. AngelList fortuitously launched a new feature during our fundraising which let us list our customers. This gave us an excuse to reach out to our customers for fundraising help that sometimes turned into a fundraising conversation. It let us build our network on AngelList in an area of strength, which resulted in serendipity like Roy Bahat, head of Bloomberg Beta, learning that we were fundraising and offering tremendous help.

While acknowledging the downside risk of a party round and the lack of inclusion of a VC who is ready to put in more money in case the company needs a capital infusion, this financing has played out well so far.

Customerstrapping bridges the divide between VC versus bootstrapped nicely by giving the entrepreneur a bit of capital as a cushion and to push growth at the same time as it helps bring people on board whose interests are aligned with customers and the company. We've deepened our relationships with people we admire, and we go to them for product feedback and for advice on how to build an early-stage company.

While raising this round, like all fundraising, was exhausting, it also grew in the company a wellspring of deeply personal inspiration and motivation. Successful tech entrepreneurs that we know and that believe in us put their own money into our company.

Now, we gotta make them proud.