The best Series A story ever: How one company landed a great valuation on a 24-hour deadline
Garrett Gee and his co-founders are newbs to the whole Silicon Valley thing. They're first-time founders, young Mormons from Utah who studied Design and Computer Science at Brigham Young University. But you wouldn't guess they were inexperienced from the way they raised their Series A. The trio had investment interest from all sides, and played firms off each other to get the terms they wanted.
They built the world's most boring product: Scan, a QR code generator and accompanying app. Companies can download their own QR code and give them to customers for coupon deals or quick social media follows.
Scan wasn't the first QR generator to market, but it's an easy to use product that gained traction. There's an accompanying mobile app for customers with linked social accounts, which makes the QR scan.
What the company does is pretty useful and boring. What's more interesting is the story of what they didn't do: which was raise a Series A from Silicon Valley. The Scan co-founders decided to bypass Bay Area institutional investors, even though they had the option, and take money from an international firm instead. Today they announced their $7 million Series A from London-based Entree Capital.
The story of how their Series A transpired is a wild and crazy ride, the sort of roller coaster that happens only once in an entrepreneur's life. But within the narrative arc are nuggets of gold -- lessons that are useful for the broader startup population.
Scan decided to raise their Series A, not because they needed it, but because their app had taken off. It got 6 million downloads in four days when it launched on Android. When that happened, investors started reaching out, so it decided to take advantage of the momentum and raise for reserves.
Garrett Gee, the face of the company, was challenged by one of his co-founders to raise $3 million in seven days. Gee accepted the challenge, and took 48 meetings with investors in the span of two weeks. After making the rounds, he struck a deal, negotiating a terms sheet for $3 million from a respected VC firm. Gee wouldn't say which one, because he eventually ended up dumping them. Scan had a month to consider the terms and sign it before the deal expired.
But then Gee received an email through AngelList from a VC firm in London -- Entree Capital. Entree saw Scan's profile on AngelList, and it was looking for QR scan investments. (Side note: Who the hell specializes in QR scan investments?) Gee hopped on a call with them. After a brief back and forth -- we're talking within the hour -- the investor offered him $5 million, contingent on him flying out to London for an in-person meeting.
This is the modern AngelList: facilitating matches from across the world in the span of an hour, as if Silicon Valley investment competition wasn't already stiff enough. AngelList may expedite mainly seed rounds, but it's creeping into later and later stage financing. With its new Syndicates program, that will only increase.
Gee liked the idea of a trip to London, so he made a fatal mistake. He told the SV investors that he was heading there to meet with another firm. He swore he just wanted a free visit abroad and planned to turn down the investment offer, but the SV firm got worried. They didn't want to lose the deal, so they bumped up the expiration date on their offer to 24 hours later.
What transpired next was like a scene out of the TV show "24." Not the bombs, terrorists or torturing, but the clock ticking steadily down. Gee and one of his co-founders jumped on a plane -- the third co-founder couldn't come because he didn't have a passport (oh, America). At the London airport, they found a car company fellow holding a sign with their name.
He took them to a giant mansion with sports cars parked all over the front. "We're like, 'What is this place?'" Gee remembers. Then a woman walked out in her lingerie, followed by a big dude covered in tattoos. "[He] comes out and we're like, 'Is this Entree Capital?' and he's like, 'Does this look like Entree Capital?'" Gee says.
"Our phones don't work. We're in London, and we think we just got hosed." Not a fun moment for fresh-faced founders. They managed to find an Internet cafe and email Entree Capital. After a nail-biting wait, they received a response: There were two identical addresses in the city, and the car company took them to the wrong one. Phew.
They made their way to the real Entree Capital ("There's no sports cars, and it's nice") and met the partners. They hit it off. The personalities clicked, and Gee liked that they were different from the typical Silicon Valley investors.
"We realized, yeah, if we're in the US and want to get in touch with Tumblr or Facebook, one of our investors from our seed round will have that connection. But if we want to go overseas…" Gee trails off. "45 percent of our usage is in the US, but half the company is outside the US. So it opened our eyes to the rest of the world."
As entrepreneurs rely on investors less and less for their money -- because good founders can get money anywhere -- and more for their connections and expertise, the international investment angle heats up. Firms abroad, not the first place Bay Area founders think of for financing, can provide global outreach and access to other markets.
Gee and his co-founder Ben Turley looked at each other, and leveled up with the Entree investors. They admitted they had a term sheet at home from a well known firm. They liked Entree, but it would need to beat the SV terms for Scan to accept it.
Oh, and one other catch: Scan had an NDA with the SV firm, so Gee couldn't tell Entree what the terms were. If the firm really wanted Scan, Entree would just have to blindly lowball the deal.
After a day of wining and dining around London, the group prepared to part ways. "We said, 'The term sheet back home has a short expiration date, so we'll have to hear from you very soon,' and they said, 'We'll get back to you in the morning,'" Gee remembers. "And I said, 'You don't understand. We need to know in eight hours.'"
Entree investors called them in their hotel room 40 minutes later, and for the next three hours they haggled over terms. Gee and his co-founder Ben Turley didn't know what they were, doing since they were first time entrepreneurs. Gee was balancing two computers on his lap, one with their third co-founder on Skype, the other showing gchats with their lawyer and Naval Ravikant, founder of AngelList and a Scan seed investor. In a spare hand Gee held the phone, talking to Entree Capital.
"He would tell me a term I didn't understand, and I would cover the phone and tell my co-founder, 'He said 'employee option pool' what does that mean?'" Gee says. "I don't even think they know to date that was the situation." The other co-founder Turley was on the bed rocking back and forth, saying, "Is it over yet? Is it over yet?"
There wasn't much opportunity for Entree to do due diligence, and any time they would push back on the terms, Gee would threaten to walk. After all, he had nothing to lose. He liked the other Silicon Valley firm too, so Scan could have gone with either.
And that, ladies and gentlemen, is the way to negotiate a deal. If you're a founder, it helps if you know you can pass an offer, because you have something equally good in your back pocket. You will always have the upper hand in negotiations if you can walk away from them.
Although the situation was stressful, Scan was able to get a higher valuation -- $2 million more -- on better terms than they would have otherwise. They played the two firms off each other to land what they needed.
Granted, this type of firm-on-firm warfare is also a way to burn bridges in Silicon Valley. VCs don't take well to being played. But at the end of the day, they also pull similar tricks to get the deals they want on terms they like. Power is crucial, and Scan didn't shy away from using their position to their advantage.
They hung up the phone at 3 am, with the deal signed, sealed, and delivered and did a little victory dance in the hotel room. The SV firm didn't take the news well. "They were bitter, which maybe I should take as a compliment," Gee says. "Because that's how you can tell if someone really liked you or wanted to work with you: They're mean when you break up with them."
"Three small town Utah boys could come up with an idea, build a product, distribute and market it to the world, and through AngelList receive $7 million in funding from a London based investor," Gee says. "It's like the ultimate online dating story."
Or the ultimate startup story.