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.

20 Responses to “LinkedIn: The Series A Fundraising Story”

  1. avatar May 26, 2011 at 7:07 AM

    Lee – Great post; thanks for sharing. I’m curious how you think about that pre-money in retrospect and in the context of “market” today.  I would have thought your story would have ended with a lower pre-money given the shell-shocked environment and consumer Internet skepticism, yet that sounds like a range (if not higher) you might expect to see for an experienced entrepreneur pre-launch today.

    • avatar May 26, 2011 at 7:52 AM

      It was a pretty good valuation for the time. We were post product and had viral growth, albeit at very small scale and still had to evangelize the concept of a vital coefficient w/ most investors. We had a participating liq pref which was pretty standard for the time though were able to negotiate a phase out above a certain exit value. It was a slightly funky formula, this was before caps became more widespread. And obviously all the liq prefs went away in the IPO when pref stock converted to common.

      In today’s mkt, assuming LinkedIn looked like it did in early-mid 2003, I suspect the company would get a higher valuation for a comparable round.

      Lee

  2. avatar May 26, 2011 at 10:14 AM

    Great post Lee. Thanks for sharing; and I appreciate the fact that you are open on how long it took to raise the $. Too many people don’t realize how long of a process it can be to raise venture funding, even for a great company. 

    • avatar May 26, 2011 at 12:29 PM

      Thanks Healy.  We got to term sheet a bit quicker, but from start to the close was basically June to Nov 2003.

  3. avatar
    Romain Gentil
    May 26, 2011 at 11:30 AM

    Enjoyable reading… thanks for sharing.
    Couldn’t agree more with the quote “startup fundraising isn’t about convincing skeptics but rather finding true believers”.

  4. avatar May 26, 2011 at 5:02 PM

    Such an insightful post Lee. Thanks a ton for sharing.

  5. avatar
    Derrith
    May 26, 2011 at 8:09 PM

    Wow, what an inspiring story.  Thank you for sharing this. 

    We’re just a little start-up with a big, big dream…We’ve just launched http://www.MarketingZone.com in December 2010.  We have a long way to go baby!  We’re a how-to site and community for small business on marketing. 

    I’m the founder, ex Hewlett-Packard Director of Advertising and former SVP at Millward Brown (global brand/ad research firm owned by WPP).  We three partners are working hard.  I feel like MarketingZone is like my third child, a newborn who doesn’t yet sleep through the night and smile yet. 

    I remember joining LinkedIn when you had to be invited by someone.  I think I was member 641,000.  Makes me look like an early adopter now that there are what 100 million members!  It’s a GREAT time and getting better all the time. 

    How to Market Yourself & Your Business on LinkedIn is one of our most popular how-to guides! 
    http://www.marketingzone.com/1878-linkedin-how-market-yourself-your-company

    BRAVO!  Congrats! 

  6. avatar May 27, 2011 at 3:06 AM

    Thanks for sharing a candid view of what went on; I’ve heard Reid discuss the process in 2005 at a conference in the UK. Great to see you had such a good partner to start with. Good luck with making your future investment decisions.

  7. avatar
    Sam
    May 28, 2011 at 9:03 AM

    Thanks from switzerland, Nice story!
    Ps check mypicasso.com

    Sam

  8. avatar May 28, 2011 at 2:41 PM

    great insight. Thanks Lee. Your quote “startup fundraising isn’t about convincing skeptics but rather finding true believers” is amazingly true and made it into my blog “Founder Hacks” @ http://www.thomascornelius.com

  9. avatar May 28, 2011 at 7:33 PM

    coming from Toronto, I find it remarkable how quickly you raised money – we’re launching a major wireless ad medium for instore marketing based on innovations we’ve built on Wifi, and have already paying customers, a pipeline of 250 major shopping malls waiting to be installed and tier one national retailers who’ve signed on to use it – basically, we mobilize the stores current marketing platform and provide consumers with free wifi while they shop in exchange for  launching the instore flyer on their phones. then we integrate loyalty programs, CRM, etc., to personalize and enrich the experience. We’ve invested $1.3MM, and the VC’s in town are still wondering if we’re viable. They take months to do their due diligence, and then wonder if investing in a start is the right thing to do…you’re lucky to be surrounded by VC”s who get it, as opposed to Canadian VC’s who twiddle their thumbs more often than not, unless you’ve developed some new server load balancing platform or a microchip. Consumer internet plays in Canada are rare, and finding a VC willing to give you the cash to scale is even more so.

    • avatar May 29, 2011 at 7:40 AM

      Yes, all things equal it is a bit more challenging to raise capital in markets where there’s a lower concentration of VCs & angels focused on your sector.  You can sometimes attract capital from farther away but typically harder to do at early stage.

  10. avatar May 29, 2011 at 10:47 PM

    Lee, thanks for sharing.  Do you recall how much seed funding Reid provided in the beginning (or how much total capital was invested before the VCs came in)?

    Btw, here’s our startup http://angel.co/dailygobble-1.  We are bringing yield management to the restaurant industry.  This is my 2nd time trying this, first time was in 1999.  A lot has changed.  Mostly smartphones + restaurateurs attitude towards viewing the internet as a customer acquisition tool.

    • avatar May 30, 2011 at 8:19 AM

      Reid provided approximately $750K in initial seed funding prior to our first VC round.

  11. avatar
    Anonymous
    May 31, 2011 at 4:29 AM

    At Main Street Connect (mainstreetconnect.us) we’re two months from wrapping our Series B @ $12MM. We’ve been lucky. We’ve had a supportive board and encouraging metrics and a helpful climate for our community news notion (now 51 sites in 3 states). Still, the job of simultaneously raising money and managing a fast-growing company strains every sinew. We’re on the hunt for a CEO — and I guess some day things will get easier — but man, starting a new kind of company is hellzapoppin. I have nothing but admiration for guys who got it done. If you know anyone who wants to join me building our little company (now 110 strong), send them my way. Cheers. 

  12. avatar June 1, 2011 at 1:27 PM

    Great reading, what is the safest way to approach people about funding without your idea getting stolen. Is it a case of just design it, code it, build it, deploy it, trademark it, copywright it and then go for funding? 

  13. avatar June 15, 2011 at 2:21 PM

    Man this is really great reading.  My dad was a fundraiser for a long time, and no one understood what he did for a living.  Things are a lot different today.  I have the pleasure of working for http://www.samaritanfundraising.com.  They help schools and churches raise money for mission trips, education, and various other causes. 

  14. avatar
    Jesals
    August 5, 2011 at 2:23 PM

    Lee,

    One quick question? What/how did you guys defined your industry and Market scope in 2003?

    Thanks,
    J

    • avatar August 6, 2011 at 7:43 AM

      First and foremost, we believed there would be a “professional” social network.  Again Friendster was the leader at the time on the “social” social network side with ~1m users.  Our growth started in Silicon Valley and our users were still predominantly from the tech world for the first year or two.  But we optimistically believed that LinkedIn could ultimately be applicable to any white collar professional.

      We also believed that the hub of the profesional social network would be what we called “Resume 2.0″ and that by enabling consumer to create these online professional profiles, we could disrupt the traditional job board businesses like Monster, HotJobs, et al.

  15. avatar
    Anand
    January 3, 2012 at 2:57 AM

    quite encouraging.

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