MBA Mondays - Business 101 for startups by Fred Wilson

M & A Case Studies - Whatcounts

We continue with our M&A case studies on. Last week we saw the impact VCs can have on your exit. This week we are going to look at the opposite situation: what happens if you've entirely bootstrapped your company. AVC community member @daryn introduced me to David Geller who, over ten years, bootstrapped, built, and sold an email company called WhatCounts. It's a great story, but a bit long for one blog post. So we've cut it in two. This week, the events leading up to the sale. Next week, the sale itself.

As always, the comments will be the most interesting part of this discussion. Make a point to stop by, check them out, ask a question, or answer one.

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Daryn Nakhuda, a friend, Fred Wilson groupie, former colleague and my co-founder at Eyejot before he left to become CTO at TeachStreet.com, suggested to Fred that I write about my company WhatCounts. WhatCounts was bootstrapped several years ago and was recently acquired. I agreed to accept the invitation knowing that bootstrapping is a sometimes under-appreciated funding path that startups often dismiss too quickly. Why is that? What's the attraction for new businesses, particularly technology-focused ones, to seek VC funding?

Iʼm a believer in self-funded companies. When I started WhatCounts it was seeded with $50K of my own money. It grew organically to be successful and was acquired in late 2010. With my co-founder, Brian Ratzliff, we were able to operate the company autonomously. Initially, I did all the product development and Brian orchestrated our sales and marketing programs. We jointly pursued new clients. Brian had more formal business training, including an MBA, but we both shared the same pragmatic approach to operating and growing a business. We liked the independence that came with self-funding and knew that the success, or failure, of our venture would hinge entirely upon our ability to win and keep business. Instead of VC funding we used customer funding. Our exit event was successful and the transaction benefitted the companyʼs original shareholders without any dilutive effect.

Is bootstrapping your business and funding it without outside capital a good idea? It was for us, but I have to admit that we arrived at that position more out of necessity than prescient planning. We actually tried to attract outside funding, without success, when we founded WhatCounts in 2000.

A brief introduction to WhatCounts may be useful.

WhatCounts developed a SaaS platform for creating, managing, deploying and analyzing mass email campaigns for transactional and marketing applications. It grew from the two of us to 50 employees and attracted clients like Costco, Alaska Airlines, Virgin America, MSNBC, FOXNews, Ziff-Davis, Pandora, REI and many other, well-known consumer-facing brands and media organizations. Many of you received emails over the years that were generated by our platform. WhatCounts became known as a technology innovator (later releasing an on-premise appliance solution to compliment the SaaS offering) and a company that did a surprisingly good job (for its size) attracting prestigious clients and providing them with exemplary service.

Thus far, so good.

We decided to do some informal investigating to see if WhatCounts could get VC funding. Using contacts Brian and I had established during our time working at Paul Allen's Starwave (me running an engineering team and Brian a marketing team) and later at other startups, we setup informational interviews with a few Seattle VC firms. Not surprisingly, our few meetings failed to generate a lot of excitement. Weʼre both good communicators and present strong messages, but I suspect the VCs we visited knew that we didnʼt believe in the hockey stick growth story - for us or anyone else in our space.

As cool as we thought what we were doing was (or was going to be), we also came to realize that the email industry, in the 2000-2001 time-frame, was not an overly attractive investment space for VCs. This was certainly true for pure email service providers, of which we were one. Other businesses involved in email were still garnering excitement from investors. Fred mentioned the 2002 merger between Return Path and Veripost in his Dec 6, 2010 post. He highlighted the fact that both of those firms had received VC funding. When we started we were confident weʼd be successful operating a small business but didnʼt believe we were going to turn the company into a $100 million juggernaut. We became convinced that we would not be able to grow to that level in the time horizon we believed VCs were typically interested. We also looked suspiciously at some of our competitors that were making VC-friendly (and overly optimistic) growth projections.