Awkward Zoom Meetings, Lower Valuations, and Ghosting: What It's Like Fundraising in a Pandemic
When Jessica Toh, co-founder and CEO of Huckleberry Labs, was pitching a venture capital investor recently – via Zoom video naturally – Toh glanced at her computer screen and worried something seemed off.
"The other person looked so still," she said. "I thought she was frozen."
Toh was forced to make a split second decision. Should she pause and see if something was wrong or keep going as if nothing was amiss? She opted to plow ahead with the presentation she had delivered hundreds of times for her app that helps monitor the sleep patterns of babies, but it was hard to concentrate when she thought she might be speaking to herself.
"What I didn't realize is how that was coming across in the way I was talking," she said. "It turned out the investor wasn't frozen but just was really still."
Toh did not receive the check. And, when she asked for feedback, was told she did not come across as passionate about what she was building. "That was a shock because everyone else can see how passionate I am," said Toh. "I realized when it's over Zoom it's so hard to have that personal engagement and things come across in a different way."
Toh's experience illustrates the pitfalls of fundraising in the COVID-19 era. After a decade of ever rising valuations put founders in the driver's seat, everything suddenly changed in March when investors literally locked their doors and retreated to triaging their existing portfolio.
U.S. venture capital investment fell by 46% from March to April, according to Pitchbook data. During the global financial crisis, fundraising fell by nearly 60% from 2008 to 2009. "Fasten your seatbelts," warned the National Venture Capital Association in a report last month. "It's going to be a bumpy ride."
The start of a once-in-a-100-year global pandemic certainly is not an ideal time to be raising money for your exciting new startup idea.
"If you don't need to fundraise, I wouldn't go out right now," said Franky Bernstein, founder and CEO of Markett, a word-of-mouth marketing company. "It's definitely hard out there."
But what if you have no other choice than to raise cash? dot.LA talked to a half dozen founders about their experience. Admittedly the sample size suffers from self-selection; most of those willing to share their stories have still managed to raise funds because their companies are not adversely affected by coronavirus, or in some cases have benefited from it. But it has not been easy, with lower valuations, mixed feelings about trying to proceed as normal during such un-normal times, and an increase in ghosting. More than one founder compared fundraising right now to online dating.
"It's not a great time to go out and meet people," said Bernstein. "I feel bad for single people and for people who have really good ideas right now."
Another L.A. founder, who did not want to be identified because she was afraid of alienating potential investors, says she started to raise an $800,000 seed round in February and by early March had secured commitments from a group of angel investors for half a million dollars. But by mid-March, she suddenly stopped getting replies to her emails and phone calls.
"Everyone just started ghosting," said the founder. "I was like 'oh my god, the angels are gone.'"
The founder realized investors who had committed to help build her business were now facing their own financial and personal problems, and the last thing they wanted to do was to write a $25,000 check for a risky startup.
"That was tough to take," said the founder. "They gave us a verbal commitment and they wouldn't even respond to my email. But you also don't know what they're going through. I thought it might be insensitive to follow up because you don't know what's going on. I thought maybe I should wait until next year and try this again."
Markett's Franky Bernstein, in more social times.
Founders say that in retrospect they wish they would have started fundraising just a few months earlier when they no doubt would have received more favorable terms.
"We would have been able to raise significantly more money significantly faster if we would have started in December and closed in February," said Bernstein, who says he's still happy with his valuation and thankful to have a network of VC's he can draw upon. But adds: "The investors definitely have more sway now more than ever."
Even though both sides had already agreed to terms, Steven Dietz, founder and CEO of United Dwelling, said he decided to voluntarily lower the valuation of his company's $10 million series B round once the pandemic hit to avoid what he described as "ongoing awkward conversations" with investors."I think valuation has to adjust," Dietz said. "We took it down 10 percent and moved forward."
Dietz, Toh, and Bernstein had the fortune to start companies well-suited to the coronavirus era and they have been able to raise their rounds though it has taken longer than they expected.
"People are definitely still writing checks but things are moving much slower than they used to, from first meeting to check," said Bernstein. "But we're in a lucky position because I decided a couple years ago I want to run a profitable business."
Normally founders are not shy about touting their accomplishments – investors generally do not want to back a failing company –but in this environment no one wants to be seen as gloating.
"I would never want to capitalize on a global tragedy but I'm so grateful to be in the online learning sector." said Christine Outram, founder and CEO of the virtual tutoring app Everydae, which has seen an uptick in users during stay-at-home orders that helped her close a $1.2 million round.
The startup community is close-knit and competitive and now there is sensitivity about touting your latest fundraise or valuation at a time when many of your friends may have been recently laid off or are struggling.
"It's this weird thing because we got positively affected by this," said Ryan Chan, founder and CEO of Upkeep, which announced May 12th it has raised $36 million in Series B funding. Chan says the pandemic has only made UpKeep more appealing because it is a mobile platform that helps companies streamline maintenance and cleaning requests, which are crucial as workers return to the workplace.
"I feel weird talking about it because I know a lot of companies aren't doing well," said Chan.
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- Omaze Raised $30M to Expand its Celebrity-Driven Charity Fundraising Platform
- MuckerLab Accelerator Application is Live
MuckerLab Accelerator Application is Live
Santa Monica's Mucker Capital, which focuses on investing in high-growth startups based outside of Silicon Valley, is looking for startups to join its MuckerLab accelerator.
The program partners with 12 to 15 companies each year, working one-on-one with founders on a weekly basis providing hands-on support. Mucker invests between $100k to $200k with follow-on capital available. Founders do not have to be in Los Angeles and can work remotely.
Since its inception a decade ago, MuckerLab portfolio companies have gone on to raise more than $5 billion in outside funding since graduating. Standouts include Honey (raised $39M and later acquired by PayPal for $4B), ServiceTitan (raised a total $400M to date), and Emailage (raised $15M and later acquired by LexisNexis for $500M).
Applications are reviewed year-round, but the next set of applications is due September 25 and applicants are encouraged to apply early.
Omaze Sells Celebrity Meet-and-Greets for Charity. It Raised $30MOmaze Logo
Omaze, the online platform selling celebrity meet-and-greets, trips and prizes for charity, closed a $30 million Series B round by FirstMark Capital.
Founded in 2012, Omaze allows users to enter to win experiences with celebrities like Michelle Obama and Oprah, and prizes like a custom tiny home or a Lamborghini blessed and signed by Pope Francis.
The Culver City-based company works with the Charities Aid Foundation America to distribute funds and says it's raised over $130 million for over 350 charities. In two years, the company says, it has grown its revenue by 500%.
"We're grateful to close this round during a challenging year and fundraising environment," co-founder and CEO Matt Pohlson said in announcing the news Thursday. "These funds come at a critical inflection point for the company."
The raise follows a $12 million Series A round in 2018. With the funding, Omaze will continue to invest and scale its home and car categories. It'll also accelerate plans to expand internationally, beginning in Western Europe and Asia.
The announcement also includes two new board members, Celtics lead owner and co-founder of Causeway Media Partners Wyc Grousbeck and Penni Thow, former executive VP at SB Projects and the founder and CEO of Copper.
Additional investors of the funding round include Causeway Media Partners, BDMI, Tusk Ventures, Inherent Group, Gaingels, Penni Thow's Copper and talent manager Guy Oseary.
Watertower Ventures, led by Los Angeles startup veterans Derek Norton and Jeremy Milken, has closed its second fund — a larger and more ambitious sequel to the one they launched three years ago. With $50 million in dry power, they are aiming to be the first institutional money in 35 companies over the next three years, with check sizes ranging from $250,000 to $1 million.
"We have a lot of work to do and it's an aggressive pace," Norton told dot.LA.
The new fund is a significant step up from their $5 million Fund I that focused on the connected consumer with portfolio companies such as the podcasting network Wondery and AllVoices, a service that allows employees to anonymously send feedback to top management. (Watertower also invested in dot.LA.)
Fund II will continue the digital consumer focus while adding something the firm calls "evolving enterprise," a category that includes companies like Slack and Salesforce.
Norton and Milken first met two decades ago when Norton invested in Milken's first gaming startup. The two have been friends and professional acquaintances since. Milken went on to start five more companies while Norton spent most of the last 20 years on the advising side at his boutique investment bank, Watertower Group, which also had an early stage venture capital fund called Watertower Early Opportunity Fund.
"We've been at this for awhile," Norton said. "We bring a 20 year lens."
Norton says they started raising money in late February but it was made more difficult by the pandemic. "I'm not sure I would want to revisit those two months," he said.
As they start deploying the fund, Norton says he is surprised that valuations have barely budged from their frothy pre-pandemic highs. "I would have thought we would have been seeing a reset on valuations that through 2019 got a little ahead of where they should be for seed stage deals," he said. "But we are seeing valuations increasing beyond that."
Norton says the pandemic has expanded the geographic reach of the firm. Previously it focused only on Los Angeles, the Bay Area, New York, and Utah. Watertower recently invested in two companies in Texas out of Fund I. Like every other VC, he has been forced to get used to writing checks to people he has never shaken hands with.
"We used to say we wouldn't invest in a founder without meeting them in person and at least doing a lunch or dinner, but now we've become comfortable on Zoom," Norton said.
James Segil and Alex Kazerani are two of L.A.'s most successful tech entrepreneurs, but you've probably never heard of them because for the last 20 years they've been making bets on backend tech infrastructure. Most recently they scored a $36 million fundraise for their latest venture. And now as they look back at their careers, they've opened up their playbook to dot.LA.
Segil and Kazerani are, respectively, the president and chief executive officer of Openpath, a property-tech firm that recently announced a $36 million raise to accelerate its disruption of keycards and bring its touchless-entry technology to more doors, gates, elevators and lobby check-ins — a value proposition made all the more useful in the post-pandemic era. They co-founded Openpath in 2016 along with Chief Technology Officer Rob Peters, Chief Security Officer Samy Kamkar, and Chief Revenue Officer Phil Goldsmith.
Collectively, these five have sold five L.A.-based tech companies since 1998, employed thousands of Angelenos and watched the city's industry transform from Hollywood afterthought to spotlight stealer.
"When we started in tech in 1996," said Kazerani, who moved to L.A. after graduating from Tufts University the year prior, "we were excited if once a week there was a mention of something-dot-com." Then came Silicon Beach, followed by several behemoths like Facebook, Google and Apple setting up shop.
In the years since, Segil and Kazerani have been ahead of the curve on several gigantic tech trends. And they've attracted an inner circle of tech entrepreneurs that have helped build one big idea after another. By the time they started Openpath, the founders were able to call on people they trusted from their previous companies for the first 50 hires.
Segil envisions a future where he and his fellow executives are "going to be investors, advisors, and co-founders" for the next generation of L.A. doers and entrepreneurs. Successful tech startups, after all, often beget more successful tech startups, as employees learn on the frontlines before going on to start their own ventures. Segil likens this motley ecosystem to the "mafia" of tech stars that stemmed from PayPal and other Silicon Valley companies.
When Kazerani moved to L.A. from Boston in 1996, back in the early days of the internet, he founded a web-hosting company, HostPro. This was long before cloud services like AWS and plug-and-play web design software like Squarespace made starting a website a simple, common undertaking. One of HostPro's web-hosting competitors, Geocities – also located in Southern California – would go on to be acquired by Yahoo! in 1999 for $3 billion, right around the peak of the dot-com bubble.
In 1998, Kazerani and his co-founder Lior Elazary capitalized on the world wide web exuberance and sold HostPro to Micron Electronics, a subsidiary of Micron Technologies, which specializes in semiconductors and today has a market cap above $50 billion. The two joined Micron, where they were tasked with building out its web-hosting division. One appealing target they found, conveniently located in L.A., was called Virtualis. Segil, a recent Harvard Business School graduate who had moved to L.A. when he was three, was its chief operating officer, working alongside CEO Chris Lyman.
But with the dot-com bubble expanding with no pop in sight, Micron wasn't the only buyer in town.
"They got a better offer from Allegiance Telecom (for $30M); they didn't sell to us," Kazerani recounted. But "as a result, James and I became friends."
By 2000, Segil left Allegiance, and Kazerani and Elazary left Micron, along with one of their first HostPro hires, Phil Goldsmith, who'd been Kazerani's college roommate in Somerville. Having ridden the wave of internet fever to entrepreneurial prosperity, the four of them, along with two other founders, bootstrapped their next L.A. tech company,
KnowledgeBase capitalized on a trend of globalization. The company aimed to help businesses share knowledge with their outsourced call centers, so that, as Segil put it, "people in the Philippines could speak educatedly about the product in Cupertino."
Again their intuition proved prescient, as KnowledgeBase sold to Talisma in 2005 for an undisclosed amount. One key lesson the founders learned, however, was that for all the work it took to build a startup with a successful exit, the size of the market matters.
"We'd worked our asses off chasing a small market," Segil said. "There are only so many call centers in the world."
Even before that realization crystallized, the KnowledgeBase founders were tempted by other potential ventures.
"Alex has ideas every five minutes," Segil said.
One such was a voice over internet protocol (VoIP) company, for which they built a prototype before deciding that it'd be best to focus on one idea at a time. This was around the time of Skype's 2003 launch, and well before the emergence of WhatsApp and FaceTime, all of which use VoIP technology.
Sensing they were onto something, they pitched it to Lyman, who bought it along with Samy Kamkar and named it Fonality. Kamkar stuck around until 2010, and by the time Lyman left in 2011, Fonality was worth nine figures.
Kamkar is a colorful character who's developed a following of his own and has helped to bolster Openpath's reputation. In 2005, the former high-school dropout-turned-security-guru designed a worm that infected over one million Myspace users. Although the impact was benign – infected users' profiles displayed the phrase "but most of all, Samy is my hero", and they unknowingly sent Kamkar a friend request – the early social networking site had to temporarily shut down to address the issue.
Openpath Chief Security Officer Samy Kamkar
The Openpath chief security officer has written about security vulnerabilities in the Wall Street Journal and commands a significant following.
"If he tweets about us we get more traffic than from TechCrunch," Kazerani said.
In 2006, as Kamkar and Lyman kept building Fonality, for which they raised over $20 million, Kazerani, Segil, Goldsmith and Elazary began brainstorming their next idea. They worked out of the Fonality office, which had lent them a conference room and three cubicles.
"We like changing industries," said Kazerani, reflecting on how he and his team have decided what to pursue next. "We think it's an incredible learning opportunity and exciting endeavor. We like disrupting. And we're trying to be meaningful, if not own the entire category."
"(When you're ideating) you have to let the river flow, (and) go with it," Segil added. "But there's a moment as an entrepreneur when you have to stop the flow and make a decision."
Back in the Fonality offices, captivated by the early popularity of YouTube, which had recently launched in 2005, they stopped the flow at the hypothesis that the world of entertainment was moving towards internet-enabled, on-demand viewing.
"We bet the entire entertainment infrastructure would switch to IP (internet protocol), so we deployed data centers in 70 locations and 40 countries," Kazerani said. These data centers became the backbone of EdgeCast, which helped to manage data traffic scurrying around between content distributors and the users who wanted to watch at the click of a mouse. Elazary could only work part-time while he pursued a graduate degree, so he brought in Rob Peters, who'd completed a triple-major at CalTech when he was 16, and was eventually made EdgeCast CTO.
Validating their vision that internet video was the next big thing, EdgeCast would go on to carry over 5% of all internet traffic, with clients like Disney, Pinterest, Tumblr and Twitter.
"When we started we had little clients; Pinterest, Tumblr and Twitter were small. As they grew, we grew," Kazerani said. EdgeCast eventually expanded to 400 engineers and was acquired by Verizon in 2013 for $400 million.
It was while working at Verizon, following that acquisition, that Kazerani, Segil and Peters confronted the problem they would ultimately aim to solve with Openpath: they were laden with keycards.
"When we look at what we want to do next," Kazerani said, "we look at industries that require disruption and we look at a pain point that we have felt...That's how we started Openpath: we actually suffered through it."
Looking back, Segil and Kazerani believe founders must put skin in the game to earn their keep and build an environment of equality. It's not enough to simply be there from the beginning; the effort and investment must be sustained. They also say building teams with complementary skills is a big help.
"When you divide and conquer, you can each excel as opposed to compete (with each other)", said Kazerani.
They also counsel building a culture of trust in which people are willing to share and listen to each other's constructive criticism – and where people have good reason to know that it is coming to them in good faith. One-third of Openpath's office space is meant for people to hang out and do things together, they said, and long tables allow the team to eat lunch together like a family.
"They take the business seriously, but they don't take themselves too seriously," said Kieran Hannon, Openpath's chief marketing officer.
Despite their repeated entrepreneurial success, Kazerani says startups aren't easy.
"Don't start a company," he advises, "unless you can't sleep well because you have to do the idea, and you're scared that somebody else will do it, and you're up for the grind."
It helps, of course, to have a team to grind alongside you.
"I don't think I'd want to do it solo," reflected Segil. "One reason I've enjoyed it is doing it with people you really like. It makes life a lot more fun."