Why Ownership Matters

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For those of you rushing to raise venture capital with a deck of slides or a minimum viable product, let me offer you a challenge: How can you get to a $20 million pre-money valuation in Series A, raise $5 million, and keep control of 80% of the equity?

That’s what Christian Chabot, founder of Tableau Software, can teach you from his real-life experience. Chabot, needless to say, did so by bootstrapping the early stages of his company, validating the customer need, building a great product in the domain of analytics and visualization, and generating serious revenue and OEM partnerships?before?going out to raise any venture financing at all.

Where did he get the money to bootstrap Tableau? Well, he started a prior company, BEE-Line Software, also bootstrapped, and sold it to Vicinity for a nice upside. He then used that capital to launch Tableau. Chabot says he started BEE-Line with the plan to flip the company for a quick return, but then started Tableau with the intention of building a large company. And for that, he has raised a $5 million Series A and a $10 million Series B from Silicon Valley venture firm New Enterprise Associates (NEA).?You can read more about Chabot’s valuation-building strategy here.

Greg Gianforte, CEO of RightNow Technologies, can also teach you a thing or two about the topic of valuation and ownership. Gianforte is a huge proponent of bootstrapping and a master at cold-calling to find customers even before writing a line of code. Gianforte is also a serial entrepreneur who bootstrapped a smaller company earlier, sold it, and then used the cash to bootstrap his second, a much larger CRM company that went public and has since been bought by Oracle for $1.3 billion.

“I had no trouble finding companies that did a lousy job of serving customers over the internet. Most had a website with a button that said, ‘Click here for customer service,’” Gianforte recalls. “Back in 1998, I could click on that and find a phone number. Who goes to a webpage hoping to dial a phone? Nobody – but companies did not know any other way to work! All I had to do was convince those employees that there was a better way of doing business.”

And convince he did. “We let companies try it for a while to see if they liked it, because in order for us to do business they had to recognize the value,” Gianforte says. “Typically we eliminated 50% to 70% of the emails coming into the business. When we came a month later to shut down the trial application, the companies would say, ‘No! Where do we sign?’ That is how the business was built.”

In 1999, RightNow did about $440,000 of business the first quarter. The second quarter they did $697,000. By the third quarter things had really picked up: The company did $1.5 million in that quarter and $3.3 million in the fourth.

“What I like to emphasize is that we doubled revenue and the number of employees every 90 days for three years without outside funding,” Gianforte emphasizes. “This is because of our sales process. I hired six salespeople before I hired the first engineer. I had 30 salespeople before I hired someone for marketing. Sales are the lifeblood of a business, period.” And what about financing? “We raised about $27 million in 1999 and 2000. We had a $6 million-a-year business and the VCs gave us a $130 million valuation. On those terms, I would probably raise money again today,” Gianforte recalls.?Read more of Gianforte’s wisdom here.

Contrast that with my early experience. In a talk I gave at the Indian Institute of Management (IIM) Ahmedabad, I shared that I once drank the venture capital Kool-Aid, but you shouldn’t. You see, I came of age as an entrepreneur in the 1990s, a time when venture capital was flowing freely. Quite mistakenly, I bought into the conventional wisdom of that time that venture capital is a mark of success for entrepreneurs. In the Valley of 1998, it was the prevalent philosophy among entrepreneurs.

I raised money early on and allowed the investors to bring on board an incompetent CEO. Then I got fired from my own company and was totally screwed on my equity share. I can tell you, it was not a pleasant experience. I certainly don’t recommend it.

Today, with the benefit of hindsight, let me emphasize a simple lesson:?ownership matters.

Looking For Some Hands-On Advice?

For entrepreneurs who want to discuss their specific businesses with me, I’m very happy to assess your situation during my free online?1Mby1M Roundtables, held almost every week. You can also check out our free?Bootstrapping Course, our?Udemy courses,?YouTube channel,?podcast interviews?with VCs and Founders, and, to?follow my writings, click "Follow" from?here.