How to Fundraise and Use Startup Capital for Growth
How to Fundraise and Use Your Startup Capital for Growth
In this episode, Roy Stein, the CEO and Co-Founder of Babelbark shares how to set a healthy foundational spend culture for early-stage startups, and how to secure your first stage of VC funding – and how to spend your startup capital wisely to grow effectively and efficiently.
Speakers: Roy Stein, CEO & Founder, Babelbark
Roy Stein is the founder and CEO of Babelbark – BabelBark is a comprehensive software platform with mobile applications, intelligent cloud analytics, and marketing tools that connects owners, their dogs, veterinarians, and vendors in a comprehensive and completely integrated solution.
Roy is a serial entrepreneur and former executive in companies ranging in size from public corporations with thousands of employees to idea & seed-stage startups, with a proven track record in building businesses and turning a problem or company around.
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BabelBark is not your first rodeo as far as I understand – you left your job in corporate America and founded a few other businesses before starting up BabelBark. What have you learned during your journey as a serial entrepreneur?
I’ll tell you that both my co-founder Bill and I both started our careers in large multibillion-dollar organizations, and then we moved to the startup world. And I would say the biggest difference between being in corporate America versus being in startups is that in a big corporate world if you go outside the line and you think outside the box, you’re going to get slapped. But in the startup world, if you don’t go outside the line and if you don’t think outside of the box, you’re going to get slapped.
Startups – An Attitude of Not Being Able to Fail and Thinking Outside the Box
So you know, it’s completely contradictory one to the other. And that’s what we love about the startups because if you have that kind of bug of trying to do something new or thinking outside the box of challenging the envelope, of not being afraid to fail, startups are the way to go. We did three startups prior to this. The first one we weren’t founders. We were employees in that, but we joined really, really early on. It went from twenty-nine employees to a height of five hundred employees and it ended up being sold to a larger organization. That was our first startup kind of folly. And we learned a lot about how startups work and what not to do. After that, we founded two other companies. One was sold and one didn’t make it.
Learning #1 – Do Not Be Blinded By The Idea or the Product
And what I can say is what we learned along the way is two golden rules, in my opinion. The first one is not to be blinded by the love of the product or the idea. I mean, we need to keep an eye on the market. We need to keep a very keen ear and listen to what the market is telling us. We need to pivot to adapt or whatever to whatever the market is telling us. If you’re too obsessed with your own product and idea and you don’t listen to what the market is telling you, you’re not going to survive because your idea is yours. It’s great, but it’s not necessarily what people are willing to buy and pay for.
Learning #2 – Don’t Go Cheap With Your Talent, Good People are What Builds Great Companies
The second one that we learned is that we’re not rich enough to be cheap. By that I mean hire people by talent, don’t hire by cost. You know,a top-notch system architect for example is going to cost you a couple of hundred thousand dollars a year. You can technically go cheap and take somebody else for less for example – but for savings of tens of thousands of dollars, you’re going to pay twice because the product is going to be way more buggy and the time to market is going to be way longer and the issues along the way are going to be way harder to solve.
So when you don’t have a lot of startup capital, don’t be cheap because you’re going to end up paying twice.
As this is a podcast that focuses on the stories and intricacies when people spending in organizations meet, I’m really curious about hearing your fundraising story. Obviously, the first round of startup capital is always something that’s very hard for a lot of founders to secure. Can you tell me a little bit more about your journey to the $9.5mil you raised?
Yeah, we did that over two rounds, seed, and an A round. And it’s all from angels, high net worth individuals and family offices. So we started out in a fairly classic way with a convertible note way back when in 2016 because the company didn’t really have a market value. And instead of getting into a lot of back and forth between investors and us on whether the company is worth 3mil or 5mil or 4.1mil or whatever, we put together a convertible note.
We said we wanted to raise a small amount of money and we said you know, several hundreds of thousands of dollars, and we’re going to give you a 20 percent discount on the value of the shares in the first round. That will happen. And we kept the note at a certain valuation. So the initial investors who take the highest risk of all had a predefined cap on the value of the company, plus a discount. So that’s how we got our first several hundreds of thousands of dollars.
And then about seven, eight months later, when we had a proof of concept and we had people already willing to use it or that kind of stuff, we raised the ceiling seed based on angels and we used to say we went to the same high net worth individuals who gave us the initial convertible note and, you know, sold them. We expanded the network of their friends and people they knew. That’s how we put check sizes ranging from tens of thousands to hundreds of thousands of dollars together. And we did a $1.6mil yearly seed.
Two years later, when we went to do the Series A, we went back to the same investors and said: “OK, who else do you know? How else can we expand?” And again, for that network effect, we added a few family offices and some of the same investors came in again, some with seven-figure checks. But we added more family offices and more high net worth individuals. And that’s how we got to the big around. And then it’s kind of a snowball effect of how it goes forward.
Now what are some of the things that investors look for when they are considering pitching into your product?
Initial Phase – Do You Have the Vision and the Right Team?
So it depends on what stage your startup is in. For example, for the initial stage, they are looking at the big idea, and I think it’s about the team. Especially in the beginning, every sophisticated investor knows that the idea is going to evolve and develop over time, right? I mean, they really start off on the eve of your first lightning strike idea to what the actual product is. It’s going to take time, even look at huge companies like Apple and Facebook.
People forget what Apple went nearly bankrupt in the middle after the initial Macintosh and they know Steve Jobs left and only when he came back that Apple became what it is today. If you look at Facebook, the original name was even Facebook. It was something else.
What they’re looking for is the team. Is there any tension between the team? Are there any risks of political backstabbing between the team?
Is the team experienced enough to invest their hard-earned money and turn a profit? So I think those are the main things that the initial investors are looking for to see, because there’s no product yet, there’s no real anything.
Later Stages – Product Market Fit, Monetary Responsibility, Efficiency of Costs
It’s that then in later stages, investors are looking for more of a market fit market validation, efficiency of cost, monetary responsibility, stuff like that. So have you built the product? Have you met your milestones? Has the market checked the box and are there people willing to pay for your product? How are you managing your finances? How much are you being foolish or smart? Depending on how much you are asking for and how late the stage is, the questions from investors get harder and harder for obvious reasons As a founder, you’ll need to prove more and more market fit and market validation.
And I think as startups mature, sometimes they do end up wasting a lot of the money like we see about a lot in some of the bigger startups, even at Silicon Valley, where even though they have all this funding, sometimes the way that they spend it is questionable. And obviously, we won’t name any names here, but that fiscal responsibility starting very early is such a good habit to have, as you mentioned.
You get stories all the time about unicorns failing and about companies that raised hundreds of millions of startup capital failing. And these are the companies with the most expensive offices ever, paying a million dollars a year rent or whatnot, and bringing in all kinds of extravagant chefs to make lunch for the employees and whatever. All of that is great. I used to work as an employee in a company like that, and I was sad when I had to go home because I had better conditions at work.
But at the end of the day, is that expense really worth it? And I think that’s what many startups fail to understand or to do that evaluation. When you have a lot of money in the bank that you think is going to be enough for three years, three years, go back really quickly.
If your sales haven’t matured and your sales are not starting to bring in money to at least cover your expenses, then before you start spending lavishly, take a step back and look at realistically your expenses. Your sales don’t start spreading money like no tomorrow before you’re profitable. And even then be smart about how you do it.
Who actually holds the purse strings at BabelBark? How do you make decisions on investments to grow the company and best use startup capital?
As a smaller company, it’s quite simple at BabelBark. I make the final signoffs. The Spend Culture is also very straightforward. We look at the company’s money like your own money, that’s it.
If you need to fly somewhere, don’t take a direct flight and that might cost you a thousand bucks. Take a flight, which is a little early in the day or a little later in the day or whatever, or with a layover that might cost you only 250. So in the same way you manage your own finances, manage the finances for the company. We all work on Brex, you know the corporate card with Brex, the company.
It’s a great card. It lets you centralize the analysis and oversight on spending and gives alerts for every dollar spent over a certain limit. You can put limits on every employee. So some clear employees have a limit of a thousand dollars. They can’t spend more than that in a cycle somehow. It depends on the job. It depends on the level of responsibility. You can report daily and see exactly who spent what.
When there are question marks, ask a question. You always call them off or send an email and say, can you explain this expense? Why? In my experience, when employees know there’s oversight, I know you’re going to ask them any time. That’s not because you told them, but because it happened.
When are you ready to bring in a strategic finance leader like a controller or a CFO? How can they work well with the CEO?
Hire a CFO Who Aligns With the Company Vision – Not Just a Number Cruncher
I go back to the talent answer for me earlier. You must find the right person. There are many types of leadership executives out there – I’ve seen them, you know them. What I look for are people connected to the vision of the company. That’s instead of people who are only connected to the books.
So it all depends on if you hire somebody who’s locks up with you in the vision of where the company is going. The whole interview scheme can’t revolve around how the numbers match up. Rather, it must ask questions like: “Where do you see the company going? What’s the vision? How much are you lockstep with us?”
Yes, they need to be correct about the numbers and be on it for the controls. But, you know, there are different ways to do it. So if you hire the right CFO based on that mindset and the cultural fit with the executive team and the company vision, you’re going to be fine. However, if you hire a CFO because of financial expertise alone, that won’t work well. This is especially true for CFO positions. The variety is huge and people vary their mindsets and experiences based on the background. The mindset of the CFO about what the company needs varies so much. You need to find the right fit.
This interview is taken from an episode of the Spend Culture Stories podcast.
If you’re interested in hearing more stories from other forward thinking executives, you may enjoy these Spend Culture episodes:
- Ryan Lazanis of Future Firm on forward-thinking accountants in the new normal
- Suzanne Shiflet from Gym Launch on running a remote finance team
For more tips on remote work practices for accounting teams and CFOs, check out:
- 8 tips for running a successful virtual month-end close
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