-Written by Brad Svrluga
After a several-year run of uninterrupted froth, 2016 brought a more challenging fundraising environment for startups. Q4 2016 marked the sixth straight quarterly decline in the number of companies receiving venture investment. Yet, as we’ve noted in our NYC Quarterly Seed Reports, despite declining deal volume, average deal size has continued to rise, indicating that investors are taking bigger swings at fewer companies and providing founders with enough cash to ride out potentially uncertain fundraising times ahead. Uncertainty is one thing we can be certain about, as a new political regime settles in and sets its agenda. We expect 2017 to be even more challenging for fundraising, and at Primary we’re advising our companies to plan for a tougher course.
But the most talented founders with the best ideas are able to secure funding in any environment. And, in fact, many of the most iconic tech companies - Facebook and YouTube, for instance - received their first financings during periods when the rivers of venture capital had dried to trickles. But it takes a combination of compelling vision and great salesmanship to make it happen at those times. Our friend Andrew Dreskin, co-founder and CEO of Ticketfly, has exactly those chops, which enabled him to successfully raise the seed round* that I led in 2009, during the depths of the Great Recession.
We first met Andrew in the summer of 2009, after he’d raised a convertible note to get things rolling. He still didn’t have a finished product, had just a couple of small customers preliminarily committed to working with him, and he was launching the business directly into the crosshairs of a monster competitor: Ticketmaster. At a time when capital was tight, there were a million reasons for us to say no. But Andrew drew us in, and he had executed so well in this space in a prior company that we couldn’t refuse. The result was one of the most satisfying rides of my career, culminating in Pandora’s $450 million acquisition of Ticketfly in October 2015.
Despite its considerable successes, fundraising never came easy for Ticketfly. I sat down with Andrew a few weeks ago to relive those experiences and to gather some advice for entrepreneurs starting down a similar path. In his own words, here are Andrew’s top-5 fundraising lessons:
1. One or two people can really make a difference. We started working on Ticketfly in the early days of the Great Recession - one of the most brutal fundraising environments in history. We started pitching right when we finished our deck - we didn’t even have the beginnings of a product yet. It was incredibly hard to get that first check. There were times where we literally had to run down to the bank and make a personal deposit to cover our employees’ salaries. We wound up doing a very small round with Howard Lindzon and Roger Ehrenberg, and I really don’t know what I would have done without those guys. Sometimes it just takes a few courageous individuals who really believe in your idea to take you to that next level. It was definitely a tough time, but we all know there’s money to be made in those situations if you do it right.
2. Sexy isn’t all it’s cracked up to be. In Summer 2009, things were loosening up and it was time to raise our first institutional round. We had a number of interested investors, and we got close to several brand-name firms. We were also in serious discussions with you guys [Primary] and Contour Venture Partners, who had already written a small check in that angel round. Late in this fundraising process, we were having lunch with the senior partner at a big, shiny Silicon Valley firm who wanted to do the deal. His feedback? “If Ticketfly isn’t a $100 million revenue business within four years, I will consider this a failure.” As attractive as that sounded, and as much as this Valley legend’s enthusiasm was validating and exciting, this was a real sign that he wasn’t a great match for us. We hadn’t yet generated a dollar of revenue, and the specter of disappointing him if we weren’t a $100M top-line business in four years was daunting. People thought we were crazy to say no to him, but the chemistry was just slightly off and that was an issue for us. We wanted to build in a more measured way without having a gun to our head.
That’s one benefit of raising money in a time when everything isn’t so hurried and overheated, as it has been more recently. We were able to take our time and really get to know our prospective partners. When these processes go down in just a couple weeks, there’s real danger of ending up on the wrong end of a shotgun wedding.
3. Prioritize fit over the highest bid. After raising the seed round that Primary led, we really launched the business and experienced three straight years of beating our numbers every quarter. Things were running smoothly, we raised a fantastic Series A financing with a great group of investors, and then came our dreaded Series B in 2012. In an effort to minimize dilution, we became overly focused on valuation. Rather than trusting our gut and prioritizing fit, we lunged at the highest bidder. Not surprisingly, that deal fell apart spectacularly, and we were left scrambling to pull a financing together.
The whole process took more than twice as long as it should have, and I was completely distracted from running the business for the better part of a year. Our operations slowed and we fell behind our quarterly targets for the first time. Raising capital is one of the top-three jobs of a CEO, but you can’t do it at the expense of operations. As a veteran entrepreneur, I thought I wouldn’t succumb to that trap, but I was wrong.
4. Find partners who share your outlook, objectives and values. By the time we were ready to sell the business, we knew how important cultural fit was for our team, and we made that one of our top priorities. From the beginning of the process, it just felt right with Pandora: They are music people at their core, it was a great outcome for our employees and stockholders, the cultural fit was there, and geographically it made sense, with our two companies flanking either side of the Bay Bridge. We got very excited at the prospect of connecting Pandora’s massive online music audience with our clients’ ticket inventory. Nothing like this had ever been done before. While we had other inbound interest at the time, we didn’t shop this deal at all. The lesson had been learned in that Series B, and we felt that we had found our home.
5. Take a marathon approach to relationship-building. I am a big believer that entrepreneurs should always be cultivating relationships with prospective financers, acquirers, bankers and even competitors, as you never know if the best outcome will be combining with one of your competitors. Pandora and Ticketfly built a relationship over a number of years, and when Pandora decided it was time to enter the live events space, we already knew each other and didn’t have to start from square one.
Just after our Series A, I made the mistake of neglecting relationships with some of the prospective investors who had been interested in Ticketfly at one point. Those relationships went cold, and I vowed to never make that mistake again. I would strongly urge all entrepreneurs to do whatever they can to get to know their prospective exits, prospective future financing partners, aspirational hires and, again, even your competitors. Meet them, develop relationships, communicate frequently and get them excited about your business so that when the time comes to do something together, you’re already halfway down the field.
*By 2009 semantics, our $2.4MM financing was technically labeled a Series A, though that was a time when Series Seed financings didn't really exist. I refer to it as a Seed round here for clarity vis a vis today's standards.