AGILEVC My idle thoughts on tech startups

May 26, 2011

This also appears as a guest post at Fortune’s Term Sheet.

LinkedIn went public last week.  As a shareholder I’m obviously pleased with the investor reception LinkedIn has received, but more importantly it’s a great milestone for the company we started nearly 9 years ago.

A lot of people ask me what it was like raising the Series A round for LinkedIn back in 2003.  Many assume it was a cakewalk, based on the success LinkedIn has enjoyed over time and the current stature of our founder/CEO Reid Hoffman (now Chairman).  We ultimately had a good outcome with our Series A but I assure you it required some hard work and we faced plenty of skepticism.  I thought I’d revisit it and share the story…

First, you have to rewind mentally to early 2003.  Google is still a private company (their IPO was Aug 2004).  Yahoo! is the leading consumer internet company with Terry Semel as CEO.  Silicon Valley is still emerging from the tech bubble and massive downturn of late 2000-2002.  The market size for online advertising, e-commerce, and web premium services are 1/10th to 1/3rd the size they are today.  To give you a sense, for 2002 the entire US online ad market was $6B and had shrunk year over year (it was $25B+ for 2010). Salesforce.com is a startup with 76,000 subscribers (over 2.1M today).  Apple is gearing up to launch a revolutionary iPod with a touch sensitive wheel instead of a mechanically rotating one, and the thought of them entering the cell phone business is mildly preposterous.

Online social networking is a concept still being evangelized even in Silicon Valley… Friendster is in private beta (wasn’t until Oct 2003 they received Google acquisition offer which they turned down for Kleiner/Benchmark round). Facebook doesn’t exist, even as a walled-garden college social network (Mark Zuckerberg was part way through his freshman year at Harvard).  There are no social platforms to build on top of… if a social graph is important to what you’re doing, you better create one from scratch.  It’ll be nearly two years before the concept of “Web 2.0″ is popularized by Tim O’Reilly (the first Web 2.0 conference happened at the end of 2004).

I also joke with Reid Hoffman that this was back in the days before he was “Reid”.  Reid’s an incredible entrepreneur, startup investor, and human being.  It’s truly a privilege to have known him for more than a decade as my mentor, boss, and friend going back to the early PayPal days.  But keep in mind at this point Reid’s a first-time CEO.  Yes… he was a very successful PayPal exec and previously co-founder & VP Product of SocialNet.  The latter was backed by Accel in late 90s, but in many ways it was too early for its time and ultimately wasn’t a success.  Reid’s investing activities are just beginning, i.e. he was an angel in Friendster and one or two other companies at this point but this is long before Facebook, Zynga, etc.  If Reid were to start a company today he’d probably have every VC in America offering to back him, but this wasn’t necessarily the case when we started LinkedIn out of his apartment in Mountain View at the end of 2002.

Ok, now you have the context for early 2003.  Reid assembled the founding team drawing largely from his prior startups, with a few other folks he\’d known for a long time.  He provided our initial seed funding to launch the website publicly on May 5, 2003.  Not long after the product launch we began the initial conversations with VCs for a Series A round.

Reid & I ran around Sand Hill Road for the next several months meeting with literally dozens of firms. Many of these firms you’d recognize well, though a few you might not and a couple we pitched are essentially out of the VC business today.  Some groups were intimately familiar with the PayPal story and others were only casual observers.

In total I think we spoke with at least 25 firms of various types.  We pitched the full partnership of 6 firms that I can recall, though it’s possible I’m missing somebody.  It was an interesting mix of reactions… a couple quickly grasped the opportunity we were pursuing and liked our team and concept.  One partnership was clearly very divided and a vocal minority of GPs thought consumer internet companies were a massive waste of time and money.  In another we decended into a debate about our 5 year forecasts (I built the models so fielded most of these questions), and it became clear they probably weren’t the best fit for our Series A round (this group is no longer in the early-stage VC business).  And a third firm “pressure tested” (i.e. grilled) Reid to see if he still had entrepreneurial zeal, after already having some success at PayPal.  That one didn’t end terribly well.

I certainly bear no ill will to the various firms that ultimately passed on our fundraise… as a seed stage VC myself now I can appreciate how hard it is evaluating companies at the earliest stages of development.  Lots of VCs had been burned in the bubble and enthusiasm about consumer internet companies was very much a contrarian view at the time.  LinkedIn’s product had only been live for a couple months, we only had tens of thousands of registered users, and wouldn’t start generating revenue for more than a year after this point.  But I can similarly appreciate the enthusaism of the small handful of firms that did express interest in our round.  As I’m fond of saying, startup fundraising isn’t about convincing skeptics but rather finding true believers.

At the end of the process, which ran into the fall of 2003, we received term sheets from two firms and had a third which expressed interest in participating though not leading the round.  The terms and valuation for both offers were comparable and when the team debated which path to choose, we all agreed both firms would have made good partners.  For a variety of reasons we ultimately chose Sequoia Capital’s term sheet, ironically they first showed interest pretty late in the deal process but to their credit moved quickly from there.  It was a $4.7M round which closed in November 2003, and the pre-money valuation between $10 million and $15 million.  So from start to finish our fundraise took roughly four to five months.

The rest, as they say, is history.  Or more accurately many years of hard work and innovation by a lot of great folks.