How did you raise your very first round of financing?
April 16, 2008
Greg Galant at Venture Voice just started a new series where he asks former show guests a question. You can find my answer to his first question below and on Venture Voice.
The first time I had to raise money was for Aucland, a copy of eBay for Southern Europe which was my first Internet startup. I was lucky not to have to raise seed money. While in college at Princeton, I built a company exporting high end computer equipment to Europe (motherboards, memory, CPUs, hard drives, etc.). Given its profits, I left Princeton in June 1996 with $50,000 in cash.
When I joined the McKinsey New York office as a consultant in September 1996, I ran a sophisticated real estate rent versus buy model. The model and my rule of thumb analysis (see Rent … unless you want to buy) were screaming BUY! I bought a large 1 bedroom apartment on 54th and 2nd for $115,000, putting $25,000 down.
With the other $25,000, I bought 4 stocks: Yahoo, Microsoft, Amazon and Intel. When I decided to create Aucland in July 1998, I sold the 1 bedroom apartment for $185,000. I sold all the stock I owned. After taxes, I was left with around $300,000 in cash. I invested 100% of it in Aucland.
The seed money was used to assemble the core team, build the product, launch the site and start marketing the product. During that entire process, I was aware that given our ambitions and the competitive market we were in we would need a lot more capital. The problem was that I knew nothing of raising money. I knew what VCs were – I had read about them in Forbes and Fortune, but that was about it. I searched online and most sites suggested writing a business plan and provided a few samples. Being an over-achieving former consultant, I promptly put together an 80 page business plan with an extremely sophisticated financial model. I dug out the phone number and email addresses of numerous VCs and started emailing them the business plan and calling to get meetings.
I did not get a single reply to my emails. Finally, a French VC took my call. We had a great rapport. He loved the idea and seemed to love the team, but was distraught by the size of our ambitions. He had never heard of a French entrepreneur wanting to raise $9 million. I knew American VCs did $5-15 million series A rounds. This VC (and the French VCs I met afterwards) did not want to invest more than $1 million. They wanted us to focus on the French market and the valuation they offered was ridiculously low.
As I had met all the major French VCs at that point and was getting nowhere, I decided to focus on execution. Our competitors were mostly run by tech people who did not have a clear sales and marketing strategy. I duplicated eBay’s organization structure creating category managers for the main categories who convinced stamp dealers, wine collectors, etc. to list their items on Aucland. As a result we launched with more items on auction than all of our competitors.
Simultaneously, we started promoting Aucland in the press. Our press launch was poorly attended. No one wanted to hear an inexperienced 24 year old speak about an Internet company. Many doubted the Internet would ever take off in France given the prevalence of the Minitel. However, I was convinced we had a great story to tell. I called dozens of journalists, none of whom wanted to meet me. I told them I just wanted 5 minutes of their time and that I would go to their office. This was relatively unheard of in France where journalists were usually not treated well by companies. As I suspected, the story of a young Frenchman going to the US to pursue his education and learn the ropes of business only to come back to France to bring entrepreneurship and the Internet was extremely compelling. Each 5 minute interview became a 1 hour interview which in turn led to a glowing article in the press. Each time a journalist sent me a question about the auction market, I would send them an entire article back within minutes. Because of the word of mouth effect in the journalistic markets, I rapidly became the go to entrepreneur for questions on the Internet auction market at first and then for the Internet market as a whole.
As we started getting traction on the site and attracting amazing buzz and PR, the Internet bubble suddenly inflated in the French market. In the spring of 1999, we started being approached by American VCs and newly created French venture funds. I had a fantastic rapport with one of the American VCs. I liked them, they understood our business and I was leaning towards closing a deal with them. At that point, in June 1999, I received a call from Bernard Arnault, the richest man in France, on my cell phone who invited visit him at the LVHM office.
As I sat down in his office he told me: “Mr. Grinda: You have a unique opportunity to create the eBay of the rest of the world. We will give you the human, financial and industrial resources to guarantee your success. In order to show you our commitment to your project, we will offer you twice the valuation and twice the investment that you have received to date. However, to show to the world that this is a strategic project for us we want 51% of your company.”
I had already met his team from Europ@Web, the venture fund he had created, and I had hated them. I actually really liked Arnault, but hated his minions. They struck me as petty and jealous with no fundamental understanding of the Web or of the business we were in. For a few days, I thought long and hard whether to choose the American VC or Arnault. My instinct told me to go with the Americans. Logic seemed to dictate to go with Arnault given that he offered much more money and that had resources in Europe to help us.
In the end, I chose to raise $18 million from Europ@Web, a decision that was eventually our undoing, especially when combined with all the mistakes we made as first time entrepreneurs. At the time, it was the largest raise in the history of French venture capital.
The times were very different from the way they are today. Things had become so crazy that around the time of the closing we started receiving unsolicited term sheets by fax from VCs I had never even talked to! Today, I know that VCs don’t read 80 page business plans, they just don’t have the time, and that a 10-15 page Powerpoint is the norm. I also realize that the Europ@Web model of taking 51% of the companies they invested in makes no sense. It creates too many conflicts of interests between the investors and the entrepreneurs. Today, if anyone wants the majority of my company, I have the good sense of cashing out a part of my shares and making sure there are clearly defined scenarios for an exit.
Despite the eventual outcome, all in all, it was a fantastic experience. I am extremely grateful to have been at the right time, at the place with the right skills to have been able to live through it all – the ups, the downs and all their lessons!