Jennifer Mercer, CEO @ Metazoa
Startup Grad School Stage
Ascent Conference 2020
[00:00:01] Thank you, everyone, for joining me today and thank you for attending this session. My name is Jennifer Mercer. I’m CEO and co-founder of an enterprise B2B task company called Metazoa. And today, I want to talk about the benefits of bootstrapping and alternative VC funding options. Really, I want to talk about the combination of a two and how that can lead to better long term value for entrepreneurs who are building a business. So just really quickly, a little bit about me and my background. As I mentioned, I’m CEO of Metazoa. We are a Salesforce.com partner, and our core product enables Salesforce administrators and developers to manage and maintain very large, complex enterprise databases. And we sell to Salesforce its largest customers. So that’s Fortune. One hundred fortune. Five hundred in health care finance, manufacturing government. Prior to Metazoa, I co-founded another SaaS company, Enterprise SAS, called Dream Factory, and after bootstrapping for about a year and a half, we took a much more traditional fundraising route. Back in 2006, we didn’t have all the options of angel and seed and starting out that way, so our first round was our series. We took that with a Tier one venture firm and went on to raise another round. We pivoted in twenty nine. We raised an additional round then to support that new product and culminating into just over twenty three million by the time we exited in December. Twenty seventeen. I do want to state a disclaimer. I am not a venture capitalist. I’m not an investor yet. I am a two time entrepreneur and founder. And this is all based on my personal experience, what has worked for me, what hasn’t worked and what I’m doing this time around. That’s very different. I also want to say that this is not about not taking a around, because I’m sure that many who are attending this session have either taken one or in the process of taking one or will do so at some future date. This is about really ensuring a longer runway for the founder so that when it is time for them to take that round and meet with that venture capitalists, it’s it’s the best option for them and. Giving them a little bit more time to build up their valuation. So what are the benefits of bootstrapping? Why continue to bootstrap and why continue to look for an alternative D.C. funding method? One of the biggest benefits, I would say, is it depends really on. Where your company is right now, but I can tell you from experience, no matter what, fundraising is a long game. So let’s talk about where you are. Are you in the idea stage product development, go to market. Are you generating revenue? Do you have customers? It’s really, really difficult to understand and especially determine your valuation when you don’t have a proven market fit. You haven’t sold to any customers, you don’t have any feedback and and you’re not generating revenue. I think we could all agree that the preference is to pitch that pitch deck to a venture capitalist when you can show that you have a viable growing business with real customers using a real product. That’s only going to increase your valuation and that’s going to also give you a sense of what it could be. And you know that when you go in now to negotiate those terms and that valuation with the venture capitalist. It’s also it gives you time to stay scrappy within your company and be creative and strategic with your marketing dollars. It’s too easy to get six million dollars, be told to go grow, go scale. And now you’re going to throw those dollars into Google AdWords with the hope that this many dollars equals this many leads, which equals this many conversions, which equals this many sales. But as we all know, it’s not a straight line and that’s not always the case. Especially in early startup days, you really need to real time look at your messaging, look at what works with Matsuzawa, we were able to create our our messaging and our branding so much faster because we were out there and we were talking to customers and we were talking to users. We really implemented customer success almost immediately.
[00:05:35] Versus taking those dollars, having that department and then looking back at the previous quarter, maybe what worked or what didn’t work, we were tweaking our messaging daily and it’s an experiment.
[00:05:49] So marketing in general is an experiment, right? Especially in the beginning, especially when you’re trying to find your voice and find your messaging and find your cohesive branding. It also allowed us to grow organically. And let me tell you, word of mouth, you can’t buy that kind of price. You can’t buy that kind of advertising. So with the customer success and organic growth and really understanding what our messaging was, what events to attend, who are ideal customer was, it wasn’t just vital for marketing. It was vital for our product development.
[00:06:26] Bootstrapping also.
[00:06:29] Allows you to build out your leadership team because investors don’t invest in products, they invest in companies, and you and your leadership team, you are that company, you want a very strong leadership team surrounding you. You definitely want that before you’re going in for a pitch. And in the early days, you definitely want leaders in each department who can perform all the duties of the roles that they will be then hiring for. For example, you don’t want a VP of sales to come in and say, OK, in order to sell your product, I need to go hire a big sales team. I need to hire a bunch of outsiders. Eventually that’s going to happen. But in beginning, your VP of sales needs to be out there selling. They need to be out there sourcing leads, understanding their messaging, what email sequences are working. Versus just hiring a big team, it needs to be from the ground up. Same with marketing. Your VP of marketing will be in there building out your social media, following your brand, your CEO, reviewing your analytics. And, of course, we’re doing all of that. We have been doing all of that. I’m just saying that on a smaller scale, it allows you to be much more strategic, which allows you to just move more quickly. And.
[00:08:01] It builds a foundation and a basis for your company moving forward.
[00:08:06] So. Finally, I think it’s also a throw at your own pace, because being told to go, go, go, go, go, go. Things fall through the cracks.
[00:08:19] It’s OK to have steady, strong growth. You don’t always need the hockey stick. Now, maybe your Betsie company with a monthly subscription and it’s about to take off and it’s a billion dollar company.
[00:08:30] You probably don’t need this. Go raise your hands and your subsequent rounds, but for the majority, especially for both of my companies, which were enterprize I’m selling to Pfizer and Merck and Prudential, it’s not going to be the hockey stick. I know this I’m not going to go promised something that I can’t deliver. Instead, I’d rather have that steady, strong growth that is increasing over time. And when I’m ready, I know it’ll be our time and our valuation will be what I need it to be. So here are just a few logos from companies who have bootstrapped their way to success.
[00:09:17] And again, it’s not about not raising around, it’s about the timing of it. So what are the pitfalls of raising around too early? I think a lot of start ups, especially here in the Valley. There’s in there raising that round, it’s there’s a lot of hype around it, so. It gives their company credibility. I think that’s what they’re thinking. I’ve got the press release so and so’s backing us. Now we have the credibility, but you’re also giving up a lot of equity. Twenty five percent for the first round, I’m sure. And that really doesn’t sound like a lot out of 100. It’s a lot because you’re going to be giving up more and more and more for each round. And it also promotes. Scaling too quickly. Venture capitalists have to adopt a bust or boom type of mentality, boom or bust, I should say, and it’s not it’s not on them. It’s their business model. They have investors as well. So you have to look at their business model, their investors and what their return on investment is. So they have 20 portfolio companies. One is probably going to go boom and the others are going to go bust. But they need to know that very quickly so that then they can focus their resources and their funding on the one company. So VCs don’t have the luxury of demand driven growth. They have to push growth in anticipation of demand. And this can lead to scaling too fast. Failing dilution of founder equity actually just read a startling stat the other day that 74 percent of startups fail due to scaling too fast. And of those that did. They all took two to three times more capital than what was actually needed, so that’s the other thing is you’re probably going to take more money than you need and you’re going to take that money so that you can go scale fast and you can go spend it all and you can get yourself into a loop. And the loop is raise money, give up equity, spend money. Now you need to raise more money, give up more equity, spend more money. And it just continues. So you need to think about are you at the are you at the time where you are potentially profitable? You don’t need that money right now. The best time to raise money is when you don’t need that money right now. Oh, sorry, I meant to have my flight up. So dilution of founder equity, premature scaling. Taking more capital than required and point number four is also the time you spend on fundraising, if it’s too early in the early days, you’re building your business. Fundraising is distracting. It is. It’s a full time job. So every minute that you’re spent fundraising, it’s taken away from actually building your business. And also, if it’s too early, you’ve got to understand that this is your partner and they have bought seats and they have a vested interest in your company. Obviously, they have those. Are they the partner that is going to share your direction of your company, because if not, you risk the.
[00:13:05] You risk losing control over your company and risk not being in the driver’s seat. So why take any outside funding at all?
[00:13:25] In two thousand six, I knew about private equity, venture funding, bank loans, a line of credit that was about it in twenty eighteen, I knew there had to be more alternatives out there. I researched. I called every founder CEO. I knew I went disaster. I asked everyone there. I actually reached out to VCs and I learned a lot. I learned that there are options and one of the options that we adopted or took on is revenue based financing. And typically it lies in between bootstrapping and raising your first round again, giving you that runway. It doesn’t have to. There are many companies who raise several rounds, take a round of debt financing, raise around, take a round of debt financing. It’s an excellent option, though, for early stage companies who are generating revenue, but they need that extra capital for growth, marketing and sales and other initiatives. And it’s there’s a reason it’s called founder friendly capital, because you’re able to push those initiatives without giving up any equity, without giving up a board seat, without getting a warrant. It’s also a very fast and fair option for founders. It’s difficult managing the bank loans and working with the banks, it can be tedious, it can take a long time working with pieces. You are haggling over terms and valuation. With a debt financing firm like Tamaya, which is our partner, we’re one of their portfolio companies, and we didn’t haggle over any of that. Now they’re looking at companies that are generating revenue and that are growing. But if you have the right metrics, it’s simply a multiplier of your IRR. So you’re not haggling over that. At the same time, they’re still your partners. So you have the.
[00:15:33] You have the the security of having a partner who is also invested in you, but they’re not invested in taking control of your company, but they are there to support you.
[00:15:45] By the way, I completely endorse Tamaya, they’ve been an amazing partner to us. I highly recommend them. I will give you some more options and alternatives coming up. But I did want to say that.
[00:15:58] So what are your options?
[00:16:03] There there are a couple of options, and this is all debt financing, really, a lot of this is based on the size of your company or the size of your IRR. So shared earnings and put in there the the most well known firms. I will say this really quickly before I die then that Nathan Larkham, he has a blog that has a really deep dove on this. It’s condensed into one location. If you can’t get this URL, all you have to do is Google, Nathan, Lautoka debt financing. And you will you’ll find it. I highly recommend that everyone go do their own research and make make sure that you take a look at that blog.
[00:16:47] There’s a wealth of information out there. It can get overwhelming, which is why I referenced this blog. But you’ve got shared earnings and each firm has their own terms and conditions for what the shared earnings is.
[00:17:02] But it’s basically.
[00:17:07] Where the founders are generating profits and the investors are investing and they’re getting paid back around three to five times over a period of time, and they still have the option to invest or participate in equity. There’s revenue base financing or debt financing, and this is around two million are. So you’re generating revenue, you’re growing, and for example, and this is to my and by the way, I found to my on Nathans blog as well, and this is, for example, let’s say you have two million and ah, you can generate.
[00:17:52] A six million facility round with debt financing and then you draw down as needed. So what I mentioned earlier about taking on too much capital and scaling too fast, again, if you’re the hockey stick, this may not be for you, but for strong, healthy, steady growth. This is a great option.
[00:18:15] So there’s mezzanine debt that’s going to be more in the five million or five to seven million are companies. And that’s where the lenders take first lien on your business. They can offer up to six million or six times your error and finally, their senior debt. And these are companies that are low risk. They’ve been depressed. They are SACE companies who are generating over 10 million in. Are they typically taken multiple?
[00:18:47] B rounds and one example of that is top Dastan, I mentioned before that it doesn’t always sit in between bootstrapping and raising your first round. So talk to us have raised many rounds, I think. And then they occasionally they’ll raise around the debt financing and then they’ll go raise another round. And that’s because giving up equity is expensive. So if you can do it, it makes sense to do so.
[00:19:16] OK, so.
[00:19:19] Depending on where you’ve gotten to, if you’re ready to raise that first round.
[00:19:26] Let’s say you’ve been bootstrapping and then you’ve raised a round of debt financing and now you’re ready, you’re hitting that scaling mode, you’re really needing to grow and it’s time to raise some equity.
[00:19:38] And you felt really comfortable negotiating your terms and your valuations. I can tell you that debt financing is highly complimentary to equity finance or equity funding. Again, they’ve been your partner, they’ve been with you along the way, they have a bigger network, you’ve probably grown your network quite a bit and it’s only going to increase your valuation. So there’s no downside, in my opinion, to taking that time in between. And having strong, steady growth where you feel like you’re now ready to scale again, you’ve probably grown your own network out and now you’re able to utilize that network versus cold calling boxes. I want to mention finding the right partner again, I said this before, this this venture capitalist, this firm, they’re going to have board seats, they’re going to have board votes, and they are going to have a very, very vested interest in your company and the direction that it’s going in. So if you are still unclear on your messaging or what marketing tactics work or what your sales methodology and approach is, it’s going to get a little messy. If you can go in with a proven model that you are able to generate revenue growth, keep growing and what’s working and keep moving in that direction, I think it’s going to be a lot easier. And also, finding the right partner, finding a venture firm that shares your vision, shares the founder vision and the direction that the founder sees the company going into to have those conversations up front. It’s it’s definitely better to have them up front than for it to get messy. And again, I mentioned you could raise that financing again in future between your equity rounds. So that’s really all I’ve got. I hope there were some good takeaways for everyone. Please feel free to reach out to me. If you have any questions, you can reach me on LinkedIn and I will definitely try to answer any I can. And thank you all so much for attending the session today.