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Cheat Code: Try to Pay More

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When I was running my little “shareware” business in college, I hired my first PR firm. Press really moved the needle for us (credibility and reach), and I wanted more. This PR firm had some very big name clients and lots of connectivity to the journalists and publications we cared about.

There was a monthly retainer, something like $10,000, and I fought hard to negotiate it down to something like $5,000. Almost immediately I was disappointed. I was getting almost nothing from them.

But of course I wasn’t. The firm only had so many favors they could call in. Should they use them on their biggest customer, or their smallest one? I was their smallest one.

I had an epiphany: Don’t negotiate down. Negotiate up. Try to be the highest paying customer.

I fired them, met with this Boston firm named fama PR, told them I wanted to be their highest paying client, and asked them point blank what that would take. I was a college kid and they probably thought this was funny, but we worked out a plan by which I’d pay them $40-$60K+/month (in 2003!) for certain performance.

If I remember correctly, we had different tiers: get us on The Today Show and that’s $10K, front page of USA Today/NYT/WSJ also $10K, lesser tier $5K, etc.

We launched this product called DidTheyReadIt in May 2004, and it was on the front page of USA Today, and then Carl Quintanilla came out to interview me for The Today Show. And many more. I still have the PR book they built of all of the appearances. It was insane.

Mission accomplished: biggest client.

The moral of the story is you get what you pay for. There are related learnings, too. The principal-agent problem is real. Shared services with no currency are hard. Let’s dive into those.

This played out many years later when hiring tech recruiters who typically take a percentage of first year salary (of the placed employee). They might take 15-30% depending on the market.

Remember what a tech recruiter does. They often find a really good candidate and peddle him/her to every company to maximize the chance of earning their fee. (In many cases, they’ll send cold emails about this — “I have 4 amazing candidates!”).

At TrialPay we once lost a REALLY good candidate and learned that our recruiter (who sent us the candidate!) was ACTIVELY selling him to reject our HIGHER offer and instead take an offer from another company! What the hell? My team was so pissed.

But of course this happened. We had smartly (and stupidly) negotiated the fee down. Let’s say we offered the engineer $150K, the other company offered the engineer $140K, and you’re the recruiter — would you rather get 30% of $140K, or 15% of $150K?

Was this unethical of the recruiter? Yes. Is this how the world works? Also yes.

You get what you pay for. The world is a competition and you are better off maximizing outputs versus minimizing inputs.

Fundraising, Sales, Startups, Strategy, Tweetstorms, VC

Getting to Five Customers

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Originally posted as a Twitter thread on March 06, 2023

When starting a company, can you get to *5 customers*? Who are they? Why will they trust YOU?

As a VC, these are questions I always try to ask (selling B2B). I’ll tell my story of how my company got our first 5, and why 5 seems like a good heuristic of “you’ve got something”

I love the term “productize” — it effectively means turn a “service” or “consulting” project into a repeatable widget. Does a large n of customers need/want the same thing, or *roughly* the same thing with few customizations? Then…it *might* just be productizable

If you get your Uncle or Cousin to use your product, maybe it was a favor…which is a feature (not bug) if it indeed is the SAME product you can sell to a few other strangers. But a lot of times a “few” customers is just a collection of favors and is Fool’s Gold…

Fool’s Gold because it’s just not repeatable and hides brutal market feedback. You can only have so many college roommates, cousins, and uncles. But if you get 5 distinct customers to “agree” on the same set of features, it’s a very good sign and you’re off to the races.

TrialPay started off as something I used for my own freemium software business. “Don’t want to pay $10 for my app? Get it for free if you sign up for Netflix or get a Discover Card or shop at Gap.” It worked great so I decided to turn it into a company…and raise venture $

But a lot of times ideas/companies come in waves — two other companies basically popped up at the same exact time. Identical idea/value prop. Lift Media (@jmurz) and MyOfferPal (later merged/renamed TapJoy). We all pitched the same VCs within weeks in 2006!

I had a key advantage over them in that I still had my software business so could “create” traction — I was my own first customer. Could figure out if things were working. But more importantly, it gave me credibility in “my community” of freemium software developers.

After starting the company, my co-founder @terryangelos and I went to the “Shareware Industry Conference” in Denver…and we signed several customers there, the largest being WinZip. I gave a talk on my results with my own products…so had the credibility and knew this niche

This was so niche that few outside of the industry even knew of this conference…or had the credibility/connections with this somewhat esoteric group of businesses/people. I remember meeting @bradfurber and @allennieman there…at a relatively unknown (but big revs!) company…

But sometimes, particularly when building a “transactional” business (versus “per-seat” where you know # of employees), there are these “diamond in the rough” customers that turn out to be huge. Brad and Allen’s company (Sammsoft) was one of them. Huge client.

My *now* friend @jmurz of Lift Media was super smart, incredibly hard-working, and was building his nearly-identical business…he was my arch-nemesis at the time!!…but we got a big early lead, which later turned into a big fundraising advantage too…

And honestly it was almost entirely because:
A. I had a captive early customer that would do anything I wanted (customer was…me!)
B. I found a bunch of other customers that “looked” like me — no chasm to cross. “I sell $30 Windows software, you sell $30 Windows software”

As we expanded, this was one thing that never ceased to amaze. Companies *across* verticals often have a hard time being the first in their space…getting Skype or Fandango to use us was not really helped by the fact we had WinZip. “Oh, that’s totally different.”

My advice to developing a killer product and go-to-market — and ensuring you don’t end up over-engineering into a void or losing to another competitor — is that you need both a founding team (founders/employees) and a founding *group of customers*

You need some vision, flexibility, and fortitude to make sure YOU are building the product, not your customers — otherwise it’s the Henry Ford “if I asked my customers what they wanted, they would have said a faster horse”

But you also need real market feedback so getting some friendly customers — who are willing to bet on you (kind of crazy to run your business on a money-losing startup!!), ride out some bumps, and give more than an occasional testimonial…is crucial

So sometimes 0->1 is not all that hard (if “1” is your Uncle). Getting 1->5 is actually what’s hard…synthesizing feedback, and building that trust that no 12-months-of-cash-left startup is just “entitled” to. It’s a crucial ingredient to success.

Some ideas on how to do this:
A. Give equity to your early customers or have them invest
B. Have no shame plumbing every connection you can – favors and believers
C. I tend to think the best companies are ones that came out of personal experience / you can be 1st customer

Thanks to @1nternetjack for the idea on this one. And watch this scene from one of the best Simpsons episodes ever, about the perils of *overly* conforming your product to just one customer:

Finance, Fundraising, M&A, Startups, Strategy, Tweetstorms, VC

Private-to-Private M&A

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Originally posted as a Twitter thread on October 17, 2022

How we almost merged our company TrialPay, many times, while navigating the “can’t raise cash without growth, can’t grow without raising cash” problem. The embedded thread shows the surviving path, but let me walk you through several that *didn’t* work https://x.com/arampell/status/1562557849128931328

It’s not uncommon during bull markets to have too many competitors on the field for a given space. A “roll-up” can theoretically create more pricing power while eliminating redundant teams, tech platforms, etc…increasing revenue while lowering OpEx! “Synergies” galore 🏦💵

And even without an “over-competed” space, you might have one company with LOTS of cash, and another with lots of product-market fit but unable to raise…so one way to “raise money” is effectively to just merge with a cash-rich competitor. If cash is king, merge with cash!

Let’s go back to May 28, 2013. Here I am in the *last* row of the now defunct AirBerlin, flying from LAX to Berlin to meet with SponsorPay regarding a merger. I needed to make a presentation and proposal, which I attempted to do from my seat…despite the reclining guy in front

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The problem with private-private mergers is obvious. How do you ascribe relative value to each company? For public companies, there’s a constant voting machine. For private companies, you have an old valuation, cash in bank, burn/revenue, and rosy projections around the future

We had just come off another merger that was almost magical. We bought a company called Lift Media with an identical product, moved all their customers to our platform, only needed one person from their team (not to sound heartless)…so we got all their revenue w/ $0 cost

With SponsorPay, we had more cash and more revenue. We were (internally) bearish on our future growth, since we were late to mobile. They were more bullish on their future growth. We both were probably showing a bit more bravado during the negotiations – my opening slide here

After looking at their financials and our relative cash positions, here’s what we offered (I figure the statute of limitations is up on sharing this stuff since neither company exists anymore! SponsorPay became Fyber became Digital Turbine, so you know how the story ends)

But it was a hard sell. Their investors wanted cash, or at the very least not common stock in our company. We were busy with our spinoff of Yub (see thread in 1). They had hired a banker to try to “shop” our deal. We basically got nowhere, but we didn’t have a sense of urgency

We were also very torn on further diluting our ownership to “double down” on our core strategy by doing a competitive merger. Did it really make sense to give up 20%+ to get more revenue scale but still have 10 other competitors? Like whack-a-mole…with the smallest mole.

I was honest with them that we were busy on our spinoff and likely to see some short term financial pain, and didn’t want to enter the negotiation on “defense” as a result of this. But honestly, my biggest concern was the adage that two turkeys don’t make an eagle

As the year went on, we missed our numbers. They were doing better. We still had more cash. But while we kept opportunistically trying to make this happen, we became further and further apart on price and *strategy*…and after about a year they pulled out, rightfully so.

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We were pursuing other deals as well. Accel had a challenged company called GetJar which we looked at buying, but we couldn’t get there. I spent a ton of time with PE firms looking at doing a take-private + merger with a public company, Digital River, that needed new tech

This one (DRIV) was arguably the most insane. Merge our unprofitable company plus tech-forward and differentiated team into a profitable but slow-growing public company, steered by a slash-and-burn PE firm. But valuation was even more challenging in this model.

We prostrated ourself in front of every company adjacent to us but our cash position, once our strong point, was weakening. We even had conversations with “that stock might be valuable!” tech companies (future eagles, with us almost acting as VCs) but we had too much rev/opex

In the end, the path we took was the one I wrote about here: https://x.com/arampell/status/1562557849128931328

But several learnings from this experience of private-to-private M&A, including when I’ve seen it work well.
A. 🦃+🦃 ≠ 🦅. Make sure there’s a *real strategy* you can get behind
B. Don’t waste time. If you are cash rich in a bad market, that’s your value. Move fast.
C. “Optics” converge on irrelevance quickly. “Optics” are a reason not to cut burn, not to eliminate products, etc. You’re merging with a private company, not a BigCo
D. Roll-ups are good if they get you to market leadership, but not if they leave you with high fragmentation
E. To quote The Godfather II (and Sun-Tzu): “Keep your friends close, but your enemies closer.” Being on good, text-message-banter terms with the CEOs of all your competitors is *always* a good idea…particular in an environment like this.

Hope this was helpful. I think we’ll see a lot more private-to-private deals, particularly amongst late stage companies, in this market cycle. Fin.

Fundraising, M&A, Startups, Strategy, Tweetstorms

Exiting the Catch-22 of a Stalled Startup

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Originally posted as a Twitter thread on August 24, 2022

How a company I co-founded (TrialPay) once exited the Catch 22 of “can’t raise cash without growth; can’t grow without raising cash” which is potentially the most “unsolvable” (Kobayashi Maru) situation a VC-backed company can face

First, a refresher. There are basically three outcomes for a VC-backed company:
-go public/get bought
-go out of business
-become a zombie

Let me explain the third one…because you might be thinking “wait, you mean become marginally profitable forever? That’s good!”

Most businesses generate profits + are valued at the present value of those future profits. VC businesses: more valued as call options — “if this thing works, it could be huge!” — which is why a day 0 company with just a PowerPoint presentation is “worth” $50M sometimes

Once things go south, a doom loop can happen:
-best employees don’t believe in the equity and leave
-you need to pay people more to stay, amplifying burn
-customers get nervous
-AND company with immature product can’t (always) cut to profitability…so still burning money

And again, cutting to profitability with almost zero cash cushion might mean never being able to restart growth (esp having lost the best talent in the co), and then the opportunity costs of the founders kick in…why stay? Particularly with albatross of a “stale” cap table

Now to my story re TrialPay. As a payment company servicing digital goods, it was pretty bad when all of the major platforms (eg Facebook, Apple etc) decided to “own” payments. We went from $25M revs (2010)->$70M (‘11)->$77M (‘12)…to $55M (‘13). Not good, esp when market⬆️

Many of our most talented people started leaving. We had gone through M&A conversations with every major strategic buyer and twice been left at the altar — very hard to come back once you have that Scarlet letter. We executed a big RIF, downsized office space, etc…the usual.

But we did three unorthodox things that uniquely turned things around and yielded a 9-figure exit:
A. Promoted aggressively from within
B. Spun-out a company (dividended it out to shareholders) which later had its own exit
C. Sold some of our IP

Promoted from within: companies compensate people with cash, equity, and title/responsibility. We were low on cash, nobody believed in our equity, so we started taking junior people and making them VPs+ — a huge amount of responsibility they wouldn’t and couldn’t get elsewhere

Generally speaking, people want career/title progression, and don’t like leaving a company to take a “lower” job elsewhere…which is a nice realization if you are bleeding talent. Responsibility can really motivate fresh people.

next: Spinning out a company. We did an IRS Section 355 tax free spin out — which basically means we took one product, wrapped it into a new company, mirrored the cap table but flattened preference stack and removed most liq pref, added a new big option pool, and spun it out

This was almost alchemy. On one hand we had people who wanted to stay at the mothership if they had more title/responsibility; on the other were engineers and product people who wanted a true high growth startup again, not a colossal shrinking turnaround

At TrialPay we had this $6M/year project/team to build an “offline affiliate network” using credit card rails which TrialPay could then use for offers (eg “get Zynga coins for free if you shop at Starbucks”). It was a great idea but only yielding cost, no revenue

So this is what we spun out.
But with lower cost because we gave people big equity packages at an exciting new startup with a very low valuation and no preference overhang.

So it was better than zero sum: we reduced burn at TrialPay (costs spun out), implemented more startup-like packages at our spin-out (less cash, more equity — with an easier path to exit for that equity) — so the burn of NewCo was lower than the same team had been at TrialPay

Sure enough, within ~6 months a company (Coupons Inc) bought our spin-out for $30M, and there was lots of interest since it was a lean engineering-centric organization. It wasn’t a home run but everyone (including TrialPay employees, since we mirrored cap table) made money

Many of the would-be acquirers had passed on buying TrialPay since we were losing too much money and were too big with too many things (they wanted us for X, not X + Y + Z). But spinning off a key strategic asset changed that.

Finally, at TrialPay we sold a license to our core software to Visa, an existing investor in the biz. This provided a meaningful amount of cash to TrialPay (we turned a profit that year), further shoring up our balance sheet, and a small team went to Visa to help implement

This gave birth to the Visa Commerce Network, but since it was still reliant on many parts of TrialPay, Visa decided to buy the whole company of TrialPay later that year, ending a daunting 2 year battle of “can’t grow without capital; can’t raise capital without growth”

It was a very trying experience, and I distinctly remember @bhorowitz taking the time (as a non-investor who barely knew me in 2013!) to give my co-founders and me guidance and counsel as we navigated between rocks and hard places. Hope this helps others in the same boat. FIN

Economics, Finance, Fundraising, Startups, Tweetstorms, VC

How IPOs Work

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Originally posted as a Twitter thread on August 28, 2020

There’s been a lot of misinformation about IPOs — particularly around the narrative of “intentional underpricing” and subsequent IPO pops / “money left on the table.” IPOs aren’t perfect, but the problem isn’t the pop — a sideshow caused by quirky supply/demand imbalances.

The things to fix are aggregating the most demand, blurring the lines between private and public for a seamless transition to being public, and more thoughtful lockup releases, while also ensuring that a company is sufficiently well capitalized.

Many are celebrating SPACs and Direct Listings, which both have their place as valuable tools, as the “death” of the IPO *because* of a misunderstanding of what causes a pop. A price without a quantity is not a price: block sales happen at a discount, M&A at a premium.

But today, an IPO remains the best way to raise a large block of primary capital. It *should* improve, but the way to measure improvement is not pop against low float, but on aggregation of the most demand (*all* investors) in a way that sufficiently capitalizes the company.

There’s a lot more data and examples to back this up in this piece which @skupor and I put together. It’s long but hopefully shows exactly the dynamics and game theory in play around how a company goes public and what’s in a price:
https://a16z.com/2020/08/28/in-defense-of-the-ipo/