I’ve been on the fence about raising money for my second startup.
By Erica Douglass (Co-Founder & CEO, Whoosh Traffic)
As the owner of a startup, should you raise money for your business?
There are arguments both ways. In the software industry, developers are expensive, and it may take 12-24 months to come up with a viable product. Also, software companies are typically popular with acquirers, as the perception is that there is less work involved and they are more “scalable” than a service-oriented business. (Instagram had just 13 employees and was acquired for $1 billion.)
The flip side is that you can give up a lot of your company (and, perhaps more importantly, control of your company) to investors, and it may take you some months or years to find the right combination of code that customers will actually pay for. (At least in our market–business-to-business, we actually want people to pay for our software. I know, novel concept!)
To Raise or Not to Raise?
I’ve been on the fence about raising money for Whoosh Traffic. On the one hand, we are doing well – we have a Fortune 500 company using our rank tracker, as well as many other customers. Our business isn’t currently immensely profitable, but it is making enough to pay the bills.
If we don’t need the money, should we raise anyway while the climate for funding is exceptionally good (as it is now)? Or should we focus on product development and grow our way into strong profitability?
With these questions still unanswered in my mind, I decided to set a meeting with an investor. I started with Josh Baer – a well-known angel investor here in Austin, and one I have pretty close ties with, since I recently came out of a 3-month part-time consulting stint with WP Engine, which his close friend Jason Cohen owns.
Josh does “office hours” for entrepreneurs here in Austin, so I signed up. I had 20 minutes of his time, and I was completely honest with where we were. I told him the whole story – Whoosh Traffic builds SEO tools. We’re not insanely profitable, but we’re paying the bills. We can probably grow our way into profitability. But should we take on investment?
What About New Business Ideas?
We also have a business idea and some customers who have already expressed interest in paying for it, but it’s a service business. By our projections, we could grow our way into profitability with that business in 90 days or less.
“Service businesses aren’t ‘scalable’, because you have to hire people every time you get more customers,” Josh pointed out. “They are great for cash flow, but most investors don’t want to invest in them because they are less likely to get sold at a higher multiple.” Fair advice.
Josh pointed out that our software side had more valuable customers, since software customers would be acquired at a much higher multiple when/if we decided to sell the business. A software customer paying $1000/year might be worth as much as 8x more than a service business customer paying the same amount in an acquisition. That was a side of things I hadn’t thought of.
Josh said, “I hope I’m not being too harsh here.” To me, though, that’s the brilliance of getting an outside opinion even though we aren’t raising money. I had to make a decision – did we really want to have a service side of the business? It would help our cash flow, but it wouldn’t be as great in an acquisition.
I left the meeting with Josh with my head spinning with ideas. Ultimately, I realized, I had to do what would make me (and our team of 4 people) the happiest.
I know Parnell, my co-founder, is happiest when he’s building software tools. Brian Bigelow, our other employee/shareholder, loves to build software, too, and also enjoys doing financial models and learning the business side of the business. And finally, Brian Fryer, our UI designer and my fiance, is happiest when he’s just able to focus on design 100% of the time.
Knowing both what my team wanted (since we’re all close friends) and what I personally wanted really helped solidify the decision. I decided I wanted to go ahead with our service business and give it a shot – while realizing that I didn’t want the service business to take up too much of our developers’ time. Since our service business is also SEO-focused, I think it’s a good fit – it will attract a similar customer segment to our SEO tools (or at least that’s my current thinking!) And, thanks to Brian Bigelow’s amazing models, we also know that it will be greatly profitable.
The key takeaway from my meeting with Josh was to not focus too much of our developers’ time on the service side of things, and to use the service business as a “cash cow” to feed ourselves while we iterated on our software tools.
Mark Suster Makes A Surprise Entrance
That was Sunday. Yesterday was Monday, and Mark Suster made a surprise entrance to our office here in Austin, TX! I bailed on my personal training appointment to give him a demo of our SEO tools. I started out, again, with 100% honesty: “We’re not pitching you. I just want your opinion on our software.”
Mark’s a well-known blogger as well as venture capitalist, and I know he’s seen thousands of software product demos. I also really respect his opinion, having read his blog for a while. I was surprised to find out that not only did he read erica.biz, but he knew who I was. (Okay, I really don’t know why that surprises me any more, given the number of celebrities and other famous folks I’ve met through this blog. But it still does give me a little jolt of surprise when someone says “I feel like I know you already!”)
I demo’ed our product, showing Mark in real-time where his site ranked for popular terms like “venture capitalist” and “venture capital”. (Our software goes out and actually crawls the Google index in real-time to help you find out where your site ranks for popular key terms, then keeps track of those key terms and where you rank for them over time.) Fortunately, everything went smoothly, and in a couple minutes, our crawler had finished, and had dug up a couple blog posts of his ranking for those terms.
“Wow,” Mark commented, and he was visibly impressed. “I love it.”
He continued: “SEO is like a black box to me. I don’t know how it works, and when I see my stats, the terms people are typing in to find me are mostly my name, or my blog’s name.”
The Other 95%
It hit me like a bolt of lightning: Mark is just like 95% of website owners out there. (And as a side note, that’s why the whole argument of “Just build great content and Google will send people your way” is complete bullshit. Mark is walking proof that great content isn’t enough – unless you understand how Google works.)
I mentioned I’m now getting over 73,000 visitors a month to erica.biz directly from people clicking on my blog in Google’s search results. (Nearly 90% of those people have never heard of erica.biz before.) It’s a whopper number, but most people really have no idea how SEO works, and so they wouldn’t have any idea how to achieve what I’ve achieved.
Then something snapped together in my head like puzzle pieces finally fitting together: A frustration I’d been having since we first launched our rank tracker was finally solved!
Appealing to a Wider Audience
The question I’d had stuck in my mind since we began this was: How do we make this appeal to a wider audience?
Sure, there’s a great niche out there of SEO professionals and agencies who need tools. And that’s a damn lucrative niche – I should know; we’re in it. You could spend the rest of your life building tools and never satisfy that niche; they’re insatiable. And they love trying every tool that comes out.
That’s a great niche to start out in and validate your product–but that’s the 5%, not the 95%. (It’s probably even less than 5% of website owners, since a lot of the customers are agencies who manage hundreds or thousands of websites each.) How do we get to the 95%? The Mark Susters of the world, to whom SEO is a “black box”?
As soon as Mark left, I tore through the office. I grabbed my cell phone and had Brian shoot a video of me while I had the whole concept in my head. I’m posting it here completely unedited so you can see a real brain dump – what really happens when I’m in the office and have an idea. (I’m not even wearing any makeup! Yikes!)
I scrapped most of the content we had in development for our next iteration of the Whoosh Traffic website. I’m completely rewriting it. I heart you, agencies and SEO professionals. And we’ll have awesome reports that you can generate so you will love us. But we’re taking this to the next level. To the 95%. We’re going after the market for whom SEO is a “black box.”
Now, that market requires more training and hand-holding. They require more friendly tools that are easier to use. But that’s what I want to build: A mass-market product. One that I can show to any doctor, massage therapist, or business owner – and instead of their eyes glazing over, they instantly get it. “Oh, I need to go after these keywords, because that’s what people are typing in. And this is what I need to do to do that. And here’s a checklist I can send to my web developer to help me do this.” Yes. That’s the product!
That’s the harder part of the market, but that’s what I want to take on. And honestly, I think we were headed there anyway. But I wouldn’t have put those puzzle pieces together so quickly without my meeting with Mark.
They Can Change Your Life
That’s why investor meetings – and I don’t think I’m overstating this here – can change your life. They can help you quickly clarify what’s working and what’s not. They help you get valuable feedback.
For them to really work, you have to swallow your pride and listen to what they’re saying. If Simon Cowell tells you you can’t sing, your immediate response can’t be a derisive, ego-based “Yes I can – you don’t know what you’re talking about.” It has to be a form of “Why do you say that?” or “Tell me more.” That’s where the most valuable insights come in.
Fortunately for us, the insights have mostly been positive. I will say, these two meetings have moved us along faster than anything I’ve seen yet – including meeting with customers and potential customers. (Both of which are also important!)
In fact, I’m going to go out on a limb here and say: If you are the CEO of a small company, it’s probably wise to spend 50% or more of your time “getting out of the building” and talking to current customers, potential customers, and yes – investors. Even if you’re not raising money.
This post was originally posted at Erica.biz.
About the guest blogger: Erica Douglass is the Co-Founder and CEO of Whoosh Traffic. Erica sold her first tech company for $1.1M at the young age of 26, and is now growing another successful tech company in Austin, TX. She blogs at erica.biz about business. Follow her on Twitter at @ericabiz.