Sherman Lee is the co-founder and CEO of Good Audience, a social media management company founded in 2013. He is based in San Francisco.
We had planned to move our startup from San Francisco to London. The financial partners were in place, we had $US600K “committed” and our families were excited to move.
Then all of a sudden, the dream was shattered. The round fell apart as we approached closing. This nearly killed us, and was the second time we’ve escaped death.
It was a dark, dark time both financially and emotionally. It’s tough for me to even talk about this publicly, but there are some lessons learned that I’ll never forget. I hope sharing my experience will be useful to you.
The Decision To Move
I know what you’re thinking. Why would you move out of the mecca for startups? We moved to London in March 2014 to join Techstars. We fell in love with the city and the startup community. The market we were going after was 1-2 years behind the US. Then our visas ran out and we had to move back to San Francisco in July.
We didn’t fundraise after demo day. Our product was early and we had a cash in the bank. For the next 4 months, we were heads down coding and talking to customers.
In October, a prolific UK angel was in town and we talked about raising a round in London. He committed to leading two days later. We booked flights and an Airbnb for all of January 2015 to raise money.
Meeting with Investors
The plan was to raise $US225K. The lead investor helped build momentum by making tons of intros and getting angels excited about us. By the time we landed in London, he asked us to save $US125K between him and a few friends.
Our story was simple:
- San Francisco startup wanting to move to London
- Ex Google, Yahoo and UC Berkeley engineers
- Techstars vetted
- Hockey sticking MRR graph
Meetings with investors were pretty straight forward. I filled up the calendar with 5 meetings a day for 3 weeks straight. Each meeting was simply shaking hands, showing them our metrics, and letting them know our allocation was almost full. In fact, we were completely full within 5 days.
The lead investor encouraged us to get it closed quickly and not try to do anything fancy. He warned us that investors were always looking for the next hot startup.
We were that hot startup. We felt unstoppable. Almost every investor we met wanted to be apart of the journey. FOMO was real and we leveraged that perfectly.
Getting Too Fancy
All the meetings were already set up and I figured it wouldn’t hurt to see what it would look like to raise more. This led us down a path that just wasn’t recoverable.
We had planned on taking money only from angels. We never even considered raising from institutional investors. However, a fund wanted to invest. The team seemed smart and was product focused. They wanted to match the amount the angels were investing. So we now had $US450K and the dynamics changed.
We were no longer going to raise a small amount of cash and stay lean. We were gonna slam on the gas pedal. We worked through the financial projections on the use of the money. So I turned around to the fund and explained where we could get with $US600K.
They were on board and I let everyone who committed know about this new plan. Everyone was excited about being part of something big. Like I said, we were unstoppable. Our last meeting was with all the partners of a top VC firm.
All Downhill from There
If the VC firm invested, we were looking at a $US1M seed round. They passed and that was ok. We never wanted to raise that much money and we never told anybody about the million dollar plan. However, it was time to get everything legally sorted out.
It didn’t occur to us at the time, but it would take 2-3 months of legals to get the round closed. Getting commitments from investors was the easy part.
The challenge now is doing an equity round as a US company with UK investors. UK angels wanted their tax break and to qualify for that, we needed to do a priced round. The tax break means they are only spending roughly $US0.10 to get $US1.00 worth of shares. So there was incentive to invest in only companies that qualify for the tax break.
Since we were doing an equity round, this was going to add some overhead we didn’t need at an early stage. These were board members, board observers, board meetings, and compensation. We were willing to do it, though.
Closing the Round
At the end of January, we hired a UK lawyer and accountant to collaborate with our US counsel. We whipped up a standard US-style term sheet and circulated it to the investors. The lead investor’s lawyer tore it apart as it looked nothing like the UK-style term sheets.
Since we looked nothing like deals they were used to, the lead’s UK counsel also wanted us to apply for advance assurance to prove we qualify for the tax breaks. This was going to delay the deal for at least 4 — 6 weeks. In fact, we still haven’t heard back from the UK government on that. So it’s certainly been longer than 6 weeks.
In the mean time, all parties agreed we should move toward final investment agreements. This took about 2 weeks on our side. Our US counsel was working with our UK counsel across the timezones to structure the deal in such a way to get the tax breaks for the UK investors. We finally circulated the investment agreements, but the lead investor’s UK counsel still wanted to make sure his client got all the protections he would normally get with UK-style documents. It was clear that the gap was going to be far.
Holy crap! We’re now in March and it’s been 2 months since our first meetings. Investors were getting bored waiting for all this paperwork to go down, but we’re super close to getting this all closed. Some people have signed and wired money in.
The Money Just Vanished
Uh oh, the fund who was going to put up half the round tells us they were no longer investing. Getting the legals together was too slow for them. They gave us a small window to get this closed and we missed it.
I had the fun task of telling all the other investors that we were going to raise only $US300K now. There was a group of people that were still happy to invest. Thank you for your support! Since we took so long and with the fund out, some other people dropped out of the round.
At this point, we were looking at less than $US200K. That hot startup was suddenly not looking so hot. The lead investor wanted us to lower our valuation, we racked up $US30K in legal fees trying to get the round done, we almost ran out of cash in the bank, the charges hit on our personal credit cards for the fundraising trip, and our growth slowed down.
A Million Things Raced Through Our Heads
Where do we go from here? Is this situation even salvageable? What do we tell our wives? We took a step back and tried to look realistically at our current predicament. We needed to find a way to give our company the best possible chance at succeeding. Moving to London no longer made sense, as we would need to pay for the relocation of our families, immigration fees, UK branch setup fees, desks, etc…
To be frank, we were pretty distraught, depressed, and frazzled at this point. Fundraising was the top idea in our mind for 3 months and it almost killed us. I have to say that Ryan and Kyle from Keen were super supportive during this time (a big thank you to the Techstars network.) They encouraged me to think about just starting over.
Once we stopped holding on to the London fundraise, we knew exactly how to give our company the best chance at succeeding.
That means staying put in San Francisco, keeping our burn low and returning to our exponential growth. I couldn’t be more excited. We’re cash-flow positive (we pay salaries), we just made a new hire, and we closed some cash using a safe in 4 days.
We’re now working on the next version of our product with interesting new insights into the problems our customers are having.
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