

Misadventures in VC Funding: The $24 Million Moz Almost Raised - dshah
http://randfishkin.com/blog/128/misadventures-venture-capital-funding

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nikcub
This happens all too often. A firm would rush to a term sheet knowing that
they haven't done all the work required and knowing that there is a chance
they will pull out of the deal, only so that they can kill off the interest
from the competition.

I think it is very likely that they hadn't done any real DD (on you, or the
market) until after you signed, and during that DD found that the
business/market was not as hot as they thought it would be.

I have been through a similar process twice. The first VC gave us a term sheet
3 days after the first meeting, only for them to drag through the DD.

and all VC's say that they have an interest in the market you are in. The only
way to substantiate it is to see if they have made investments in similar
industries. ie. has this firm previously invested in an enterprise SaaS
company related to marketing or aimed at marketing departments? If this firm
or partner had only invested in server software, or consumer, etc. then it
should have been warning.

You should also look at how many deals that partner has done and what their
decision making process is. There is no mention of this in the post, but it
could be that he took the deal to his partners and they decided to turn it
down. There is no mention of the other partners at the firm nor how they make
decisions.

The solution is to go through DD with 4-5 firms at the same time before
signing anything or before finalizing terms. Tell them straight up that you
want to do DD with all these firms between date x and date y, and that by date
z you want final committals, from where you can go over terms with those who
are still interested.

Things were done in the wrong order in this case, and you said you didn't want
to shop the deal -- the VC took advantage of that.

~~~
suking
I think this is it as well. They probably felt the market for SEO SaaS is
relatively small and wouldn't get to $100m+ within the next 5-7 years.

~~~
webwright
$100m in value? With $12m in revenue (double from the previous year!), they
are pretty close to being a $100m company NOW.

~~~
suking
Revenue - if their post is around $85 they need to get to $500mm+ to be a home
run the VCs want. That will require a HUGE amount of revenue, most likely
$100+.

~~~
randfish
This is a good point. One interesting thing we found with the more growth-
focused funds (and the growth-focused parts of traditional VCs) is that at
high valuations and high dollar amounts in, they tend to look for 3-5X
returns, rather than 10X. This was a big difference from the 2009 raise we
attempted, when everyone was asking that question "how do you get us 10X our
money?" vs. 2011, when it was "does this have a 95% chance of getting us 3X+
our money?"

~~~
suking
You don't have to name names, but I'd put $ on this being RRE :-).

~~~
rumpelstiltskin
And RRE is an abbreviation of?

~~~
suking
It's a VC firm.

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lancewiggs
What a great article - thank you. But please, that's it with the fund raising,
please stop now.

You've demonstrated that SEOmoz can get through tough times and grow
organically. You've even grown SEOMoz to a reasonable size and are now able to
layer on team members almost as fast as you can hire them. Next year you'll be
much bigger, and it's going to be even easier.

As you say the fund raising process distracted you from the main customer
cause, and I suspect that having those funds would most likely have done
serious damage.

So it's good to see you are sticking to your guns and moving away from fund
raising to keep building the business. There seems to be no reason to give any
of it away for the sake of a few bucks a year or two earlier than otherwise
expected.

Perhaps you could also slow growth just a fraction and take some more cash out
to ensure that the shareholders are comfortable along the way. While it might
take a year longer to get to $100 million, you'll be a lot happier along the
way.

The contrarian VCs of old would be writing checks, but by the time SEO is cool
with many of the current crop you'll be starting your own fund.

Great stuff.

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patio11
Only tangentially related to the post: you know that bit about firms
ridiculously underinvesting on SEO? This has been true over and over and over
again in my experience. If you somehow manage to avoid that pathology, you
will eat your competitors' lunches.

~~~
tomjen3
Say the SEO consultant.

But seriously it would be better if you spend the time optimizing for humans,
rather than playing with Googles algorithms.

~~~
joshuacc
In cases where the two are different, perhaps. But optimizing for humans is
actually a core part of SEO.

Step 1. Find what people are searching for.

Step 2. Provide content that meets their search criteria.

Result: You have optimized for humans.

Obviously there are _other_ ways of optimizing for humans. Some of those ways
might even bring greater returns. But you don't necessarily have to choose
between SEO and those other ways. The optimum strategy is usually to pursue
both when possible.

~~~
tomjen3
Sure, but SEO has little to do with that anymore (heck I could be a SEO
consultant if that was the case. All I had to do was to say "use accurate and
descriptive titles containing the words the user searches for, ban flash,
provide descriptions of all your images) these days most of what they do is
find and abuse slight flaws so they get to rank just a little higher, for just
a little while.

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ericboggs
Most surprising takeaway from the post: Gillian is Rand's mother. (Mentioned
in passing in the deck.)

~~~
imjk
Thanks. I was wondering who this anonymous other partner was that got to cash
out 4X that amount of liquidity that rand would get ($4.75MM v. $1.25MM).

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jkahn
Rand, thank you for the detailed and revealing post. Especially the parts that
you didn't need to share that made the story much more concrete - such as
revenue and gross margins.

I am curious - how do you think the funding would have changed your current
trajectory? From all appearances your business is growing well.

~~~
randfish
Yeah - the growth has been quite good. I think this would have let us work
faster and more directly on "next big things" - projects that wouldn't have
fast ROI, but might be very exciting from a customer value and technology
perspective. We also could have focused a bit less on cost savings with our
current data sources and more on raw size/reach/quality.

All that said, I think there's still a great opportunity for us to do 50-60%
of the things we wanted, even without funding, albeit more slowly.

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Uchikoma
What I found interesting: They pay nearly 200k/month for 200+ Amazon servers
(though it's not clear what other costs, like ops, are factored in).

~~~
alecco
I wonder if they're making good use of the mapreduce service to offload work.

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andrewcross
This has to be the most transparent article I've ever read. Very refreshing.

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michael_dorfman
A great inside view.

I'm particularly impressed by Rand's ability to keep his spirits up; as one
who has been through similar, I know how soul-crushing it can be, if you let
it. Kudos.

~~~
nknight
Nothing against Rand or SEOmoz, and to be sure I'm sorry they had to go
through the mess he describes, but if I were running a company with nearly $12
million in annual revenue and an 83% gross margin, it'd take a pretty serious
cataclysm to crush my soul.

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lawrence
Rand, I wouldn't be surprised if this post gets you that round, and at better
terms.

Neil will be kicking himself at some point.

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marcomonteiro
I loved this post. Well written, personal and insightful. I'm starting a SaaS
company and I truly appreciate being able to learn from others experience.
Thanks for sharing Rand and best of luck for you and the rest of SEOmoz.

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vaksel
frankly I'm surprised they even had to raise funding with their current
revenue levels and profit margins.

And an investor might think that the company has peaked already. Everyone
knows who they are. And SEO is something that doesn't have a lot of growth for
company adoption. It's been around so long, that most people already know
about it. So your hope for customer acquisition is to find that one marketing
professional that doesn't know about SEO.

~~~
webwright
"frankly I'm surprised they even had to raise funding with their current
revenue levels and profit margins."

You're probably used to reading about early stage funding, where people NEED
to raise money. A lot of growth capital isn't about need. It's about scaling
the business... Essentially pumping gasoline thru a working engine faster.

"So your hope for customer acquisition is to find that one marketing
professional that doesn't know about SEO."

SEOmoz's business has very little to do with people who don't know about SEO.
Have you looked at their tool? What you said is like saying that Google
Analytics is for the few marketing professionals who don't know about web
traffic.

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ttpva
83% gross margin and only $1m in net profit per year? Isn't that a bit low for
a tech company? (no mean to be harsh, just questioning)

~~~
kondro
I guess it all depends on if they are reinvesting for growth. Also, it depends
on how much man-power it actually takes to run their business.

Gross margin is revenue minus expenses directly relating to providing those
good/services and usually scales with revenue.

If they are trying to grow really fast, then they might be spending a lot on
other expenses to increase this growth. These expenses aren't directly related
to the sales.

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scottkrager
This sucks.

Rand and SEOMoz have been the biggest leaders for the SEO space for years.
They've been able to successful communicate the value of SEO in a way no other
firm has. And their tools are killer in the hands of a good SEO.

I'm looking forward to what they can do in the next 5 years even without the
extra $25 mil.

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akg_67
Thank for sharing your experiences openly. It offers great takeaways for
enterpreneurs looking to raise funds. Only comment I have is that instead of
quitting fund raising process now, use the DD work you already performed to
see if you can raise funds from someone else. There is no point delaying for
another year when you will need to redo DD work again. Just give yourself a
finite window like another 3 months for fundraising and 3 weeks between first
contact and closing for each VC whom you are considering before moving on. I
believe you initially controlled the fund raising process but then gave
control to Neil who just dragged it on.

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joemysterio
I don't know much about VC, but just in my "main street" experience people
always get shaky before stroking a big check. When it comes time to sit down
and send away a lot of money on a business, a piece of property, whatever,
that is when the doubt begins to creep in.

It could be that they loved seomoz but weren't that excited about the
industry. Or, like Rand mentioned, they were nervous about the market. The
July numbers probably wasn't the reason they pulled out, but it probably was
the excuse they used internally to rationalize the decision.

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ChaseB
Most of the story is unreadable for me.

<http://i.imgur.com/4R7EO.png>

*edit: working now.

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omegant
enlightening post and comments to say the least!

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zackattack
I gotta be honest, that was depressing to read. Why would he want to raise
$24mm when he could just build a profitable sales machine from day one, with a
_Scalable and repeatable sales process_? I think he should read the book _The
Lean Startup_ by Eric Ries.

~~~
robfitz
I think you are depressed by what you think you read, not what you actually
read.

He explains their motivations quite thoroughly (talent is currently available,
so for now, cash is their major bottleneck, not scouting).

They've also been in business for 30 years (founded 1981). Somehow I don't
think they are ignorant of how to run a business.

There isn't a moral "right" answer for VC. Taking it isn't a weakness, and
funding isn't a sign of giving up. It's a business tool like any other, and
it's ridiculous to be sitting spectator to a very healthy business and
condemning their choices.

~~~
nl
_They've also been in business for 30 years (founded 1981)_

SEOMoz has been in business since 1981? Wow.. what did they optimize for back
then - library catalogs?

~~~
_delirium
It's a bit of a stretch. Their website (<http://www.seomoz.org/about>) lists a
co-founder's traditional marketing company, founded in 1981, as an SEOmoz
precursor. But Rand Fishkin, who largely drove the SEO direction that's become
successful, didn't join until 1999, and SEOmoz itself was founded in 2004. So
it'd make more sense imo to say it's been in business for around 10 years,
though one of the co-founders had previously had 20 years' experience running
a different (non-SEO) marketing company.

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badclient
So...who's Neil?

~~~
earl
This is why we can't have nice things.

If Rand wanted the world to know he would have said so. And guess what -- if
we were to successfully guess, I'd imagine the next time someone like Rand
decides to share fundraising experiences with the world instead of just his
close friends, he or someone else in his position will think twice. So please,
since I think it's better for everyone instead of just those in entrepreneurs'
networks to hear stories like this, don't be a dick.

~~~
josefresco
I disagree. Rand was as transparent about the process as he possibly could be.
Why should the other party be held to a different standard by the community?
Would love to see a response by Neil to defend his position.

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rdl
Why would a Seattle company try to raise in NYC vs. Silicon Valley?

~~~
randfish
If you read the piece, you can see that we were actually approached by
investors in a bunch of geographies - SF, the Valley, Boston, NYC, even San
Diego. We ended up signing something with a firm in NY, but were not
geographically biased in accepting inbound interest.

~~~
rdl
I read the piece and was aware you were receiving inbound interest, but there
seemed to be a lot of time invested with the NY VC.

Outside of a few excellent firms (mainly seed), all the bad behavior I've ever
heard about from VCs has been from NYC and Boston ("east coast") VCs. This was
mainly in the 2001-2005 period, but they were at the forefront of really anti-
company terms like huge multiple participating pref, walking out on signed
term sheets, etc. (USV and Founder Collective are amazing, even more so
because they're starkly in contrast with this).

