Andrew: Hey, my work here is sponsored by three great companies. First is Teamwork PM. Teamworkpm.net is where you go when you want project management made easy. If you are already using a project management solution and you’re seeing prices increase, go to teamworkpm.net. They’ve got very reasonable prices and a system that will scale up with you as your organization grows. Scale up to the place where Universal Studio trusts them and the University of Texas at Austin and the U. S. Army and so many other organizations. So, check out teamworkpm.net.And if you need a lawyer, you need the entrepreneur’s lawyer. And that’s why I keep recommending Scott Edward Walker of Walker Corporate Law. He’s a lawyer who blogs. He’s a lawyer who answers questions on CORA. He’s a lawyer who is in this community, who knows who’s in it and can anticipate what you are going to be looking for.You’re probably going to want to know how to deal with options for your employees. You’re probably going to want to know how to raise money, how to structure a deal. You’re probably going to want to, at some point, either sell or buy a company. You need a lawyer who is in this industry who can help you with all that and so much more which is why I always recommend Scott Edward Walker of Walker Corporate Law.
All right. And, finally, I want to tell you about the last sponsor, Shopify. Shopify is where I first went online to set up my very first store. It’s dead simple. You get your own store front with your own company name and your own dotcom which is why I urge you, if you need to set up a store to check out shopify.com and get it all up and running easily and quickly.
Shopify, by the way, also is so easy that if you’ve got a friend who needs to set up a store or has been talking about it forever, selling something online, that’s where you could send them, shopify.com.
Here’s the program.
Hi, everyone. My name is Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart and the place where you come to listen to entrepreneurs talk about how they really built their businesses, how do you raise seed company for your startup and keep leverage with future investors.
Rafael Corrales coined the term “party round” to describe the way that he raised money for his company, LearnBoost. LearnBoost is a free online grade book and classroom management tool for teachers. I invited him here to teach step by step how he put together his company’s funding. So, Rafael, welcome to Mixergy.
Rafael: Hey, thanks for having me, Andrew. I appreciate it.
Andrew: How much money did you raise?
Rafael: Just under a million dollars.
Andrew: All right. How much exactly is it?
Rafael: 975K. Yeah, it started with a lower number, got over-subscribed and that’s how we ended up with that kind of random number.
Andrew: Why not round it up to a million?
Rafael: Yeah. One of our angels decided to double down, and we got to that.
Andrew: Why not round up to a million? Why not have one of those guys come in and just have a nice even, round number?
Rafael: We did them a favor to go up to 975. So, we just stopped it there. We really didn’t want any more money.
Andrew: I see. You got to a place where you could do a guy a favor and take his money and have him invest in your business. Is this your first startup? Have you started other companies before?
Rafael: It’s my first VC backed and angel backed startup. I started a company when I was 19. I was at Georgia Tech, got started in the tutoring space, and that did pretty well. Actually, this has been a completely different experience. With this one being VC and angel backed, you’ve got to grow faster. You’ve got to click on all cylinders all the time, but once I finished up that first company, went to grad school, and that’s actually where LearnBoost got started.
Andrew: OK. In school, at Harvard Business School, is where you started the business, right?
Rafael: That’s right.
Andrew: All right. What was the original idea for it?
Rafael: Actually, it’s pretty much the same thing. What I did was I started my second year, and I said I wanted to start something in education, sort at the intersection of education and technology. What I did was a lot of customer development work. So, a quick shout out to Eric Ries and Steve Blank.
Basically, I bought “Four Steps of the Epiphany”, followed all the steps in that book. And I sat down with 30-40 different teachers and administrators and people who were just experts in education.
From there, I just narrowed all the interviews down to what’s the biggest problem you have, and it led to what LearnBoost is which is, basically, right now that grade book that you mentioned. Where we’re going is taking on Pearson and Blackboard in the student information space.
Andrew: I was looking over to the side because I happen to still have the book right here that you mentioned.
Andrew: All right. Why look for a problem in the education space? Why not look for a problem in your own world or wait for one to just materialize? Why go hunting for a problem?
Rafael: Yeah. One of the things that I’ve been passionate about was education, and what I wanted to know was what specifically in education I should go after. So, the first company we really stumbled upon was doing this tutoring business which actually ended up being a very nice business, and I always knew I wanted to get back in the space. I kind of see that there’s a lack of techie talent in this space, in education, and most other industries are kind of inundated with a lot of great developers and technologists.
I also felt that the talent level going after anything in education is generally a little bit lower, and it just happens to be a passion of mine. So, those two things kind of hit at the same time, and then if you talk to any investors right now, they’re looking at education deals. They just can’t find enough great teams to back. So, they’re really excited about this space, too. Everything came together at the right time.
Andrew: All right. For the audience, I promise I’m going to keep this focused on my main goal which is find out about the party round and how he put it together. But I’ve got to understand the business that you got funded first.
The problem was and the problem that investors are looking to find is how to organize what students are doing, not how to get more information out there, not how to do more of what the Khan Academy is doing and just teach masses online.
Rafael: Yeah. You know, the wonderful thing about Khan Academy is that that’s really the learning part of things, but there’s this really quiet problem that all of these schools have, which is they have really bad software that they use. It’s very dysfunctional, and they happen to pay way too much money for the software, thanks to a couple of government distortions and subsidies that are going to be falling off the charts right now.
So, what’s interesting is these schools pay way too much money for the software. It’s really the point that they can hire a whole another teacher sometimes at the K through 12 level. And so, that’s sort of the aspect that we’re trying to take, the less sexy back in the administrative education, and that’s where we’re going.
Andrew: I see. So, they’re already paying for a solution. From what I saw, the solution isn’t even Web 2.0, let alone more advanced. And we’ve gotten further than Web 2.0. You have a much nicer design. Your idea was to bring Apple design to this problem, and that’s what you’re trying to do. And you’re trying to give it to them for free where they’re paying right now enoughâ?¦ They’re paying as much as they would pay a full-time teacher.
Rafael: That’s right. They pay 20 to 30,000 bucks a year, and we’re trying to do a freemium model, just to be clear.
Andrew: OK. So, what you would do is get 20â?¦ OK. All right. I think I’ve got a sense of the problem. Actually, how are you going to get your customers?
Rafael: What we’ve done is we realizedâ?¦ Actually, it just came up with raising money sort of to get into that topic. The biggest problem that most VCs and angels have in education deals is breaking the long sales cycle in education.
So, the common problem is you’ll never sell in the schools. You’ll never be able to sell the teachers. There’s no budget for it, one. Two, they take forever to make decisions. The way we’re trying to hack that problem is we give away the teacher product completely free. So that teacher grade book, the lesson plan solution, the all in one solution that we’ve created is completely free.
The benefit is that when one teacher finds it at a school, we’ve noticed that they start telling other teachers at the schools that they’re at. And then what happens is I can follow up with the technology director. I can follow up with a superintendent, whatever, and I say, hey there’s five teachers, there’s ten teachers at your school using this. We offer this freemium solution. I generally say free, and they go, wow, that is really interesting. We’re paying way too much money for our software.
And so, that’s been the sort of way we’ve hacked this long sales cycle, and thatâ??s actually one of the things that got the VCs and angel investors interested in the first place.
Andrew: I see. OK. I actually was able to create a class. I went in to learnboost.com. I said I was a teacher at Brooklyn Tech which is where I went to high school. I set up a class there. I added a fake student. I gave the fake student a grade. I said that he got something like 97 out of 100 percent right which you automatically adjusted to an A based on a template that I can adjust.
So, I can see it’s dead, dead simple. I didn’t even have patience to go through it. I did it because I had to be thorough in my research for this interview, and I only had a few minutes to prep for this interview, a few minutes to do this before you were coming on to do the actual interview. And I was still able to get it all done. So, I can see how simple it could be. I can see how a teacher doesn’t need permission, to just go on to LearnBoost herself or himself and get it done.
All right. You now found the problem. Before you go funding, before you created what I saw this morning, what did you do? What’s the first thing you did after you identified the problem?
Rafael: Yeah. So, I actually wanted to hold off the investor discussions as long as possible, and that’s generally one thing that I would advise is get as much traction. Basically, the way I see it is you need to focus on three things when you’re starting a startup, customer, product and investors. And my view was, do the investor part last.
Once I had the customers, I tried to actually sell them without having any product. So, it was customer development, basically, on steroids. And so, I had a couple different customers say, “Hey, I’m willing to pay X thousand dollars for your software,” and I hadn’t even built the software yet. I was still in business school.
So, once I had that, I said, OK, I should probably go build the product first, at least, having a working prototype before I even talk to investors. At that point, that’s where I contracted with a couple different developers, and we started building a working prototype.
Andrew: I see.
Rafael: After that happenedâ?¦
Andrew: Let me stop you there, contracted with developers. You didn’t co-found the business with them. You didn’t create. You didn’t look for a co-founder. You didn’t develop it on your own. What do you mean, contracted a few developers?
Rafael: Yeah. So, my two co-founders now came a lot later in the story, actually, after I had money. At this point it was just me by myself. I had a bunch of different commitments from customers ready to pay for a product that didn’t exist, and I said, let me actually go build this product first before I even get a co-founder because I knew I wanted to go to a co-founder and find someone incredible and tell him, hey, I’ve already done this. I’ve already built the product. I want to be different than most business guys who try to find a developer or two, and then say, hey, you’re going to build the whole darn thing.
What I did was, of course, I’m in grad school at this point. I don’t have any money. I actually took out more loans, so I’m actually more in debt than your typical MBA graduate, and I started paying some developers out of pocket. And so, we built up a nice little, really a working prototype. It was buggy, and it’s nowhere near as nice as the LearnBoost is now. But it was sort of a great visualization of what we were trying to do.
Once I did that, I was ready to go. And so, I could show this to different customers. I could say, hey, I have all these customers ready to go, and that’s when I got started with the whole fund raise.
Andrew: All right. I’ve got to take everything slower and slower and slower because I’m fascinated by this stuff.
Andrew: I’m wondering how it cost you to have it developed, and I’m wondering also where you found the developers who put together that first version that allowed you to go out and get real feedback.
Rafael: So, one of the great things, one of the positives of business school is that the network is incredible. So, I had one section mate at Harvard Business School who recommended some developer friends that he had. And so, I said, look, we can do some offshore development as well. We can do this relatively cheaply, and so thatâ??s how I got started on the developing side, building the first version of the product.
Andrew: And he had developers he was working with, or he worked with a company that had developers overseas and locally?
Rafael: Yeah. So, this friend of mine – I’ll give him a shout out – Brent, he worked with some other developers who he knew from before, and he recommended them. And so, they came recommended. The price was right. I said, look, for basically paying out of pocket, I can build a really nice working prototype for relatively cheap. And so, that’s where we got started going down that path.
Andrew: OK. You’re going, by the way, at the perfect pace for me. I like going into each detail and spending a lot of time on it.
Andrew: How about this detail? Do you remember how much you paid for that first version?
Rafael: Oh, man, probably something like 10 to 15K.
Andrew: 10 to 15K. You took on debt, 10 to 15K, committed to this project. You’re not a developer yourself. You’re just watching them work and making sure that they stay on track. How do you do that? How do you make sure they develop what you need, and actually how do you do that? I’ll limit the question to that.
Rafael: Yeah. So, at this point I had one professor, he’s Professor Karim Lakhani. He’s said, look, all the greatest CEOs really own the product vision. He said, you need to go and get your product manager hat on right now before you even try to raise money. and so, basically, for two to three months – this was after all the customer development work – I had my product manager hat on every single day.
I’d go to class. Then, I’d come home and talk to these developers and say, this looks great. This doesn’t look great. I need a spec and try to do some, frankly, crappy wire frames. I was doing everything on the product side, ad it, basically, took up all of my time. Because I was focused on the product piece, that didn’t let me focus on any more customer development or on the investor piece.
So, I basically went from customer focused to product focused to investor focused to then finding my co-founders.
Andrew: All right. What did that first buggy version have, the one that you spent roughly 10 to 15,000 on?
Rafael: So, it was really, really basic. It basically had a grade book that worked half the time. It had a little bit of reporting, but that was really basically it. Looking back on it, it’s almost embarrassing. I mean, it is embarrassing. It was a really bad version of it. It’s nowhere near what we have now.
The flip side of things was that when I did go eventually to investors to show them, and I could say, look, here’s this one man team who is also getting his MBA at the same time. And I built something, something that works as opposed to most people who show up and say, I have this grand vision, but I have nothing. And so, even though it was a really crappy product, it was great to actually have that and to have that proof.
Andrew: When you had it, did you also take it to customers and say, hey, you offered me money for this product that I didn’t build? It’s now built. Pay up. Time to sign up.
Rafael: So, I would go to the customers and I’d say, here’s the first version of the product. I called it my alpha. And so, I’d say, look, this is my alpha product. It’s very early, but you have a chance to really guide the development of what is LearnBoost.
And so, they would come back and they would say, I want, of course, a million different features. The design needs to be better. I mean, all the stuff that I knew was wrong with it, but it was great because I could go back to them in this space, the space that we’re in, the administrative software space. They’re not responsive at all. Just the fact that I was willing to show them anything and then take their feedback and iterate on that was just a huge win from the customers.
Andrew: You said your next step was to look for investors. Why not say, let’s add that premium product right away? We see that there’s a hunger for customers here to get a solution. If we give them something that is basically free with a little bit of an add-on, maybe, they’ll even take the money out of their pockets for now to pay for this to solve their headaches. Maybe, they’ll get the school to pay for it. Why not go down that road instead of pursuing investment?
Rafael: At that point I realized that these schools, even though they had LOIs that would say Iâ??m willing to pay thousands of dollars for this software, I didn’t think that was actually going to materialize. So, at this point I realized, look, I need to raise funding, one, because I’m not going to be able to keep funding this out of my own pocket. I’m already six figures in debt at that point.
And I also said, two, the developers, the offshore developers, are a nice, very short term solution, but it’s nowhere near what I want in terms of building a fantastic product and fantastic technology.
And so, I needed the investor money to actually attract the best co-founders possible, So, by delaying this until getting the co-founders, doing the financing, and then getting co-founders, they actually found two incredible co-founders. They’re my guys right now, and I love these guys.
Andrew: All right. So, you decide you’re going to go after funding. Did you know any investors at the time?
Rafael: So, I knew a few different investors, maybe, two or three. What really helped was actually having a social media presence, which is kind of cheesy. I had a blog that was fairly well read. I don’t know.
Andrew: The blogger blog, blogger.com, that I’m seeing for you. You’ve got it on your own domain, blog.rafaelcorrales.com. That helped. How?
Rafael: That helped a lot. Actually, this is a story I haven’t told, so we’ll tell it here. Actually, he was an associate. Now, he’s a vice-president at Bessemer. He was reading my blog. Once I had the product ready to go, I went back to the customer development process while finding investors.
At this point I was meeting with this lady, Kate Bennett, and she’s great in education. She knows a lot of people, and she also pinged me and she said, oh, by the way, my husband is a VC at Bessemer. He’s been reading your blog, and he’d like to meet with you. And so, I said, great. Bessemer is a fantastic firm. I’d love to meet the guy.
So, he’s read my blog. I share the vision of what LearnBoost can be and what I’ve done. And he goes, we need to get you in front of Felda. Well, Felda’s a partner of Bessemer. He backed, I think, five or six multi-billion dollar company. So, he has a lot of credibility, and that led to that meeting. And then, Felda committed in that first meeting.
Andrew: So, what was it about your blog? Was it your vision of education? Was itâ?¦ You know what? I shouldn’t ask you these questions and make them multiple choice. I’ll ask it open-endedly. What was it about your blog that drew them in?
Rafael: You know, it’s tough to say. The way I kind of look at it is it’s kind of like using a Harry Potter reference here. It’s kind of like my pensieve even. It’s just a way for me to dump out a box that I have.
So, I actually didn’t really have any unifying theme. I actually didn’t focus on education that much. I just basically tried to share all the random thoughts that come through my head and try to have an interesting take on the world.
And so, it was basically a mini version of reporting, a mini version of condensing the stuff I was learning in school and sharing that on the blog. I guess it must have caught Kent’s eye and Kent was the guy that led us to Felda. So, that’s the story of how I got to Bessemer.
Andrew: Don’t be modest with me. Tell me what you think it is that would have drawn his eye or drawn someone’s eye back then? Look back on it and say, ah, this is where I might have shown promise. This is where I might have shown that I was a guy worth doing business with.
Rafael: Honestly, I don’t know. You know, I just try to say smart things on the blog, and maybe it was some stuff like having timely observations, like the party round thing. But that was later after I had a couple of my investors. Those kind of observations that then people ended up saying were common knowledge. I was trying to have those a little bit earlier in the process before they were mentioned by a bunch of famous investors. So, maybe that was it, but honestly I don’t know. I just had a voice. I stayed consistent.
The other important thing was that I was consistently blogging, I think, at a high level. And so, I was writing two or three times per week, and it was trying to be very thoughtful at the same time.
Andrew: What about this? You’re adding your insight, and you’re a guy who’s unproven at the time. You didn’t even have funding. You didn’t have a company really, and you’re out there throwing your ideas in a world where Eric Ries is pioneering with his lead startup ideas, where Steve Blank is out there with his book and with his ideas, Chris Dixon is offering insight.
How do you go in there with the nerve to say, “Here’s my idea. Here’s my insight. I’m a guy who’s still in school, and I’m going to tell everyone what’s right”?
Rafael: I don’t know. I mean, looking back on it, it seems kind of like throwing a Hail Mary. But a couple of things that helped. One of them was actually Hacker News. So, Hacker News drove a lot of traffic to my blog for a lot of the most timely posts. So, that was incredible to get in front of a lot of people.
And then, the other thing was in terms of my background, I skipped a bunch of grades and done well in school and all that stuff. And so, that kind of gave me a little bit of confidence to say, OK, maybe I can observe a couple of things going on and try to add my own little spin on things.
So, those two things and actually commenting in the early days before Chris Dixon’s blog was popular, you can go back and see that I was one of those guys commenting there. Maybe, that helped start the dialogue and spark some thoughts, too.
Andrew: OK. Is Chris Dixon one of the angel investors?
Rafael: No, not one of our angels.
Andrew: I want to make sure that I didn’t miss that. I think I’ve got a list here of your investors. So, your blog helps you. What else helps you?
Rafael: I think the other thing was I was laser focused while I was in my second year of business school. And so, I basically put a couple of blinders on. It wasn’t about partying. It wasn’t about all these random trips and all that stuff. I was literally working all the time and at times pretty lonely to be starting a startup while in business school when everyone else is going to get jobs.
But I think what was important about this was a lot of professors and a lot of key people took notice of what I was trying to do. And the rapid iteration that I was doing in the fall and then in the early spring of last year, this past year, actually, was really helpful because these professors who a lot of them are experts in their own right and know a lot of people.
They would take notice, and they would be willing to help a little bit more than usual. And so, that would lead to really interesting introductions and really interesting help along the way.
Andrew: I see. The professors see that you are making progress on your product. They’re plugged in to investors who talk to them, who want a heads up on who’s the smart kid in the class, who’s going places, who should they meet, and they see that you’re making progress, and they make an introduction for you.
Rafael: Yeah. That’s how it went.
Andrew: All right. A blog, professor introductions. What else got your foot in the door? Your guy wasn’t super plugged in. You’re like anyone who’s listening to us right now. What else?
Rafael: Hustle. Hustle was a huge part of it. So, one of the things that I was doing, when I was doing any meetings, was I would end the meeting and I would try to say, “Is there anyone else that you think I should talk to? Anyone else that you could introduce me to?” And they would say, by the end of the meeting usually, oh, you should talk to this person, that person and so on.
And so, that actually spawned a web of connections that basically led to all the investors that we ended up having. So, that was super helpful along the way, not just for investors to be clear but also for product, also for recruiting. It was incredible. And also being willing to follow those connections, too, because a lot of the time people would say, I want to introduce you to person X. And I’d think internally, oh, man, that doesnâ??t seem relevant.
And those were the meetings that ended up being the most helpful, the ones that looking into it, going into it. I’d say, I don’t think that’s going to work, and they’d usually be the best ones. So, hustle was a big part of it.
Andrew: That happens to me in interviews, too. Sometimes, I’ll look at my schedule coming up and I’ll say, I don’t want to interview this one person. I don’t know anything about that business. I don’t care, and he doesn’t seem knowledgeable. Boom, I bring the guy on or bring the woman on, and they’re just incredible. They become the best guests that I have.
For me, I’m doing one a day here. It’s only taking an hour of my day. I don’t have to get up and go out to do a meeting. It doesn’t take that much time. It doesn’t take that much work to go out and do an interview and meet with someone. So, I can take a risk.
You, though, have got a reference from someone important to you to someone else who’s important to them, and not just one other person but two other people. You know, how it goes. If two people each introduce you to two people and so on and so forth, you’ve got a lot of work ahead of you that you have to follow up.
How do you do it all and make sure that you have enough time to build your product and go to school and maybe get some sleep here and there?
Rafael: It was really tough, and that was when bringing on the two co-founders I have. That’s why I love these guys, and I respect them so much because when I was trying to do everything else I had a real appreciation for – my God, coding is so difficult, let alone designing a wonderful product and focusing on design itself.
Andrew: Were you coding at the time and designing or working with the designers and coders?
Rafael: No, no, no, working with them, working with them.
Andrew: So, there were still those outsourcers a friend introduced you to. You still had to stay on top of them, and you’re saying that now you appreciate having two people who can handle that for you.
Andrew: But back then, you didn’t have that, and you had to go out and have all these meetings that could potentially introduce you to new funding, potentially introduce you to new developers, designers and so on. How did you get to see them all? How’d you get to fit it all in?
Rafael: It was tough. One way that I sort of shortcutted finding the actual permanent developers and finding, basically, permanent co-founders was, again, funding out of my own pocket and taking on even more debt.
I started placing Facebook ads, targeting developers. And so, just long story short, I was targeting grad students at MIT and Stanford. I was targeting developers at different companies with different interests. That actually led to really shortcutting the process for finding incredible developers because they keep seeing this ad that says something like, do you want to change education and join this incredible startup? That was one angle I took. Maybe, it was desperation. I don’t know.
Andrew: Did it work?
Rafael. Yeah. It worked. That wasn’t how I found my co-founders, but it was how I found a lot of incredible candidates. And so, I would then meet with these folks, and then I’d have to get outside reference checks because Iâ??m not a developer. So, it’s kind of like buying a car without having done any homework on your car. I could have gotten taken.
But I would ask my developer friends, hey, can you check this guy out. Is he a great coder, that kind of thing? And it led to a lot of those interviews with different co-founders. In the end, it ended up not working out going that route, and it was very serendipitous how I met my two co-founders.
Andrew: Let’s hold off on that for now.
Andrew: I want to go back to the funding. Party round, what does it mean?
Rafael: So, when I got that first commit from Bessemer, I then went out to AngelList. So, I had an anchor tenant which was Bessemer, but they did a small, small part of the rent. And so, what I wanted to do was have multiple VCs and mass syndicate the round. Now, this was something that Nivi and Naval at Venture Hacks with their AngelList service sort of gave me the tips to do.
So, they gave me early access to their mass syndication piece that was well regarded, and a lot of people listened to. What I realized is it’s more party than it is a massâ?¦ I didn’t like the name, mass syndication, and I thought, look, if you do this multiple VCs in a seed round, it is kind of like a party. It’s analogous to a party in the sense that if things go really well, if one guy starts to have a lot of fun, then two guys start to have a lot of fun. Everyone has a blast. That’s incredible. That’s a situation where things are going well with your startup.
But if one guy starts to not have fun, and they’re the Debbie Downer in the party and they’re in a bad mood, then that really is contagious as well. So, that’s analogous to not doing well.
So, what this did, this party round approach, was it made it even more of a high beta outcome. It made it that if we’re doing well, we will, fortunately, have multiple VCs who already know us, who’ve already been dating us, so to speak, wanting to follow onto the next round. If we’re doing poorly, then we’re never going to raise another dollar again.
Now, to be fair, what this does, and Chris Dixon’s actually written or tweeted about this before, is that one of the critical moments for a startup when you need someone to be leading around and double down for you, you may lose out on that opportunity if you do a party round first. Maybe, you do. Maybe, you don’t. But even he says, this is kind of a brave new world approach to things because we’re one of the first ones to try this and see what happens. So, that’s the party round in short.
Andrew: The idea is that at your stage most startups would either have no venture capitalists and just focus on angels, or have one or two venture capitalists. And the problem there is, correct me if I’m wrong, but the problem there is if you have one venture capitalist and he says when it comes to raise more money, Iâ??m not in.
Everyone else is going to say, if he’s not in, then why should I be in? If this guy who brought the girl to the dance doesn’t want to take her home, then there must be something stinky. There must not be something good here.
And so, that’s the problem, and you’re hoping to avoid that problem by having four people in, four venture capitalists because if one’s not happy with you, the other three might still be happy. If one’s having his own mental issue, the other three might still be OK with you and pay attention to the realities of your business.
Rafael: That’s exactly right. So, what you do is you mitigate the idiosyncraticâ?¦ So, let’s say you have one VC who led your seed round. For an idiosyncratic reason, they say no. So, let’s say, it looks like a nice business but it’s not blowing up, but they say, you know what? There’s one other investment that is blowing up, and thatâ??s where we’re going to do the next series in.
Well, in that case you are in big trouble especially if it’s a great firm like a Bessemer or a Sequoia, which is not one of our investors. The better the firm, the stronger the signal you emit. So, that’s exactly right. My hope was that if you have three or four, then what happens is all four pass, you probably weren’t going to get funded anyways. That’s just the reality of the way it was going to work.
But if you’re doing well or if you’re blowing up in a good way, you’re just killing it, then, of course, they’re going to be competing. And there’s no way that you have that idiosyncratic problem or one or even two of them say, we’re not investing and then no one else wants to.
Andrew: What about James Hong, who used to run Hot or Not who is now an angel investor, Naval from Angel List and the other angel investors? Why have angel investors at all?
Rafael: When we were going through this process, we basically had in order, we had Bessemer come in and CRV. And they, we went to AngelList. Actually, CRV came in through AngelList as well. And so, we had angels join in at the same time, and what I realized was that one, I thought these guys, especially that many of them are former operators, could really give me a perspective that a lot of the VCs may not have. Maybe, they would, but maybe, they wouldn’t.
And the other thing was that these angel investors, these guys, it’s their personal money. So, they’re really going to dig in. And if I really need some help, I can ping them and they’re super responsive. It’s not like they’re running an institution, and they have 40, 50 different investments.
So, just one guy that you didn’t mention is slightly lower profile but he’s fantastic, Hoffman LaRoche. This guy coaches us all the time. He’s fantastic. He makes introductions. He works so hard for us he’s almost like a member of the team. And so, that was the thinking behind getting these angel investors on board. It’s that, one, they could really coach us throughout this process and then, two, they could be really helpful with introductions and be really hands on.
Andrew: OK. You mentioned AngelList a lot, and you and I talked before the interview about AngelList. It’s something that you wanted to talk about and tell people how it works and how they can use it to their advantage. How about we start with what is AngelList?
Rafael: AngelList is basically a service that connects you to basically all the best VCs and all the best angels in the world.
Andrew: They all subscribe to this mailing list, and that’s how it connects you to them, OK. I just interrupted you. Sorry. Go ahead.
Rafael: No, no, that’s perfectly fine. And so, if you get through to AngelList, you basically submit a very short application to AngelList. It’s a free service. Nivi, Naval and their team has expanded at this point. They review your startup. They look at your application, and they check out your service. They work incredibly hard. If you get through to AngelList, you can go out to all the VCs and all of the angels at once.
So, one of the benefits is not just the introductions and actually going and getting in front of these guys and girls who are super busy, but also the fact that you’ve batched them altogether at the same point. So, if you try to do a fund raise that lasts six months, as Paul Graham writes in one of his essays, that’s the top idea in your mind. You’re basically not going to be as productive as you would be for those six months because you’re just thinking about financing.
But by batching it altogether, it’s incredible because these VCs and these angels, it’s mostly the VCs, can’t sit back and take an option on you and wait six months to see if you’re going to get all this traction. They basically have to think it’s just going to get funded by other folks, especially now when it’s a very competitive seed investing environment.
If it is going to get funded, I should probably take a meeting. Oh, who else is going to take these meetings? Oh, maybe, I should move quicker than normal. And so, it basically shortcuts this process of fundraising that used to take months and now it takes weeks. So, that’s basically AngelList in a nutshell.
Andrew: You know what? Stepping back away from your specific situation, just looking at this, doesn’t it feel a little ridiculous that angel investors have to make a decision on a company that doesn’t even exist and a founder who they’ve never done work with and do it all very quickly while that guy’s running his business and do it all much faster than even… They might have to evaluate IBM or a publicly traded stock.
If the publicly traded stock said, hey, you can only buy us today. Everyone has to jump in, and you all have to make your decision quickly. Let’s say, there’s something shady here and we need to investigate the whole investment process. But we’re doing this with a much more opaque company, one that’s not as proven. Doesn’t it feel a little ridiculous?
Rafael: So, there’s pros and cons. I’m not an investor, so I can’t really speculate from the investor’s perspective. But from the entrepreneur’s perspective it’s not like someone needs to commit in that first meeting. I don’t think the highest quality entrepreneurs for the most part want someone to commit in that first meeting. They just want them to commit quickly.
They basically want themâ?¦ Actually, let me correct myself. They want to know, yes or no, quickly. Before, the way it used to go was you would do a meeting and, maybe, it would be with someone at a firm. And then, oh, we’ll meet again in a week or two or a month down the road, and then maybe you’d have a partner there.
And then, if they were still interested, that would be delayed and then you’d meet with the whole partnership. And then, maybe, they’d commit or, maybe, they’d drag on with the process. And so, it’s basically the shortcut of the process. I don’t think it means these firms have to commit in the first meeting without doing their homework.
So, I think what’s happened is that instead of doing your due diligence, especially as a VC firm, over the course of weeks and basically having optionality. It’s taken some of that away, and I don’t think you need to commit on the spot. I think, maybe, if you’re committing on the spot and you’re just kind of shooting an automatic weapon and just shooting anything that moves, that’s a different approach to investing. Does that work? I don’t know.
But in terms of actually what it’s done, it’s basically made it a lot easier to raise financing for folks who didn’t have a lot of great connections in the first place which is kind of silly because it shouldn’t be about having incredible connections. It should be about building a fantastic product, having incredible traction or being someone so talentedâ?¦
Andrew: It’s not about that because at that point you didn’t have incredible traction, you didn’t have an incredible product. What it is at this point, and don’t get me wrong. I say take advantage of whatever life hands you, and you have to deal with the situation as it is instead of shaking your fists in the air and saying, this is wrong. Somebody fix the system.
To me it feels like it would be a happier situation where the entrepreneur has the upper hand. The guys with the money don’t have very many options right now apart from this. They feel they know the space. They want to be engaged in this space. And there’s a little bit of pressure, and there’s also a little bit of reward for it, the reward being everyone loves you for being an investor. Everyone cheers you on and attaches the angel investor name to you. Potentially, your lottery ticket could end up hitting and you could do really well.
I feel like we’ve got a system here that’s a little imbalanced towards the entrepreneur, and I say, as long as it’s imbalanced towards the entrepreneur, if you’re an entrepreneur, jump in and take it. Take advantage of it fully. And you can’t say it because we’re sitting on different sides of the microphone. So, I’m going to say it. Take advantage of it fully.
They prep you for the AngelList. How do they prep you?
Rafael: It’s great. I made a joke with Nivi. They’re basically sherpas trying to help you climb the mountain that is fundraising, and that’s exactly what they do. So, along the way when we tried to do this party round, there were a lot of issues that a lot of the VCs that we met with ended up not committing had problems with it.
So, guys like Nivi, even Naval, would hop on the phone and say, hey, here’s how you can think about this. Here’s an interview that we did that we haven’t even released publicly. This will help you. That will help you. You go talk to this guy.
And so, these guys were basically, while we were fundraising, really hands on coaches, and it’s really great coming from them because they’re basically these really incredible guys who know exactly what they’re talking about. And they’re biased in your favor. So, they’re going to try to help you find ways to solve your problems in ways that are beneficial to the entrepreneur as opposed to, maybe, meeting with, a hypothetical example, meeting with someone at a VC firm who is going to have more biased advice.
And so, these guys are sort of more independent or, at least, biased in your favor. And so, that’s really how they can help is prep you for meetings, help you with your pitch. And then, ultimately it’s also on the entrepreneur to go to venturehacks.com and read all the blog posts that they’ve done because those resources are incredible.
Go buy, I think, it’s called the Venture Hacks Bible. That thing is incredible. It’s everything that was ever written. So, there’s them helping coaching you, and there’s also the written word, the resources that you can look up yourself.
Andrew: Rafael, what’s their screening process like? How do they know who to bring into the list and who is just not ready for it?
Rafael: One of the things they’ve done is they’ve grown and basically gotten more popular and more coverage. They actually outsource a little bit of the diligence. So, something they call scouts. Actually, I should clarify with this disclaimer. I’m one of the scouts on AngelList as well.
Basically, these scouts, most of them entrepreneurs, who have been there, done that before, and they have a decent feel for what it takes to be a funded company. And so, what they’ve done is they’ve outsourced some of their initial due diligence to these scouts, and a bunch of the entrepreneurs can reach out to these scouts and say, hey, I have this company. Here’s what I’m thinking about this process. What do you think? Can we meet? Can we talk about my business?
And then, in my case, I would meet with someone, and I don’t know where I find the time. It’s a weekends kind of thing. Meet with these folks over coffee, and if I think, holy smokes, this guy is onto something incredible, or they have incredible traction. Then, I contact Nivi direct, and Nivi responds because we’re a scout and we’re a company that has been funded by AngelList. He gives it a little more priority than if you just submitted a blind application to AngelList. And that’s one way that they’ve found incredible companies.
Andrew: What does a scout look for?
Rafael: For me, I can’t speak for everyone because everyone’s looking for different things, for me I basically want to see someone who’s running through walls, someone who’s so scrappy that they’re going to find a solution to anything that’s in their way.
And so, at this point when I meet with someoneâ?¦ One recent example is a company, I’m not going to mention it because I think they’re still in, he went to me and this guy was also a MBA but he taught himself another program. He basically built a service that is being used by hundreds of folks every single day actively, and he had something incredible that he was doing.
This guy had also built an incredible connection of advisors. It was basically something that was, from my perspective, going to raise money in no time. And so, I said, look, I’m happy to recommend you to AngelList. Maybe, you don’t even need AngelList. Before this guy went to AngelList, he actually received a funding commitment. And so, that was one example of what I kind of looked for.
And then, the other piece of it is, do you have a really novel solution to the market? So, have you done this customer development work? Have you really figured out this competitive advantage that makes you the most qualified person in the world to run this particular business? And that’s what this entrepreneur that I haven’t mentioned also exhibited. And so, those two things for me were huge. I sent an email to Nivi.
Andrew: And you can’t say that person’s name?
Rafael: I shouldn’t.
Andrew: All right. So, a scout will talk to an entrepreneur. If he likes the product, thinks the guy is scrappy, likes the way that he’s been thinking about customer development, passes it on to the two co-founders. They look at it. They say, all right, this seems like it’s a good fit. We’re going to give you a little bit of training before we send an email out to our investors and say that they need to meet with you. They train you. What kind of training do they give you?
Rafael: So, a lot of it is pointing you to the resources you need. In my case, it wasn’t talking about how to do a presentation. Fortunately, I had that ready to go. But, it was more, what do you do when you meet with these investors, and how do you basically set valuation?
So, a lot of these investors early on would say, OK, what’s the valuation on this? How much are you willing to sell? And so, just one small example of what Nivi would teach is, say you’re selling X percent of the company for Y money that you’re trying to raise. And that does an implicit valuation. We’re willing to sell up to 10 percent of the company for hypothetically $100,000. Well, boom, there you have your valuation. But it’s actually a great way to set it and measure their reaction and see how they do things.
That’s the kind of stuff that before, even a couple of years ago, you just wouldn’t have access to. And as an entrepreneur, going into the first VC backed up startup that I’ve done, I would never have known how to do this kind of thing.
Andrew: I see. And if you had trouble presenting, they would have directed you towards presentation blog posts and, maybe, given you a little bit of help in finding your pitch. I see. All right.
Now, they’ve given you the training. You’ve gone through the whole process. It’s time for them to send out the email. What was the reaction after that email went out?
Rafael: I think we might be a little bit more idiosyncratic, but we were the first one to go out on a Friday afternoon. That was not good. So, we had a strong response in the sense that roughly 10 people responded to us and wanted to meet, but now we’re hearing stories of guys getting 30, 40 responses all immediately. So, part of it was that we were at the time one of the earliest companies. I don’t think we were one of the first, but we were one of the first to go through AngelList.
So, it was a lot smaller network of angels and VCs. And, two, it was a slight improvement at that point, how great angels could be for investors. And then, three, it wasn’t as hot of a fundraising environment in April and May of this past year as it is right now.
With that said, we had, I think, roughly 10 responses at that point. We also did a bunch of custom introductions afterwards, too. And once that happened and got the ball rolling, that really made things come together. And then ultimately, when the first of those meetings led to a funding commitment, which was George Zachary at CRV. It puts a huge stamp of approval when you have Bessemer and CRV already committed. So, that helped a lot, and it led to more introductions on AngelList.
Andrew: You said, custom introductions. What do you mean by that? Can you give us an example?
Rafael: I should clarify that. So, Nivi would sayâ?¦ As you could tell, Nivi was very hands on. Nivi would follow up and he’d say, look, I think it might be interesting for you to meet with this guy and that guy on AngelList who maybeâ?¦ Our pitch went out to everyone, all the angels. But it went out on a Friday afternoon. He said, they would be really flattered if you followed up and said, I want to meet with this investor for this particular reason because they have this wonderful background.
All of the information is on AngelList anyway, so if I can’t find a reason to meet with a particular investor, then it’s on me. It’s my problem for not finding a reason. And so, that was really helpful because everyone wants to be, basically, singled out from a huge crowd and have an entrepreneur say, I have to meet with you. You’re one of the two or three guys that I used the custom intro on. I have to meet with you.
And so, I’m trying to think which of our investors actually committed that way. But it was probably one or two of our angels. I’m blanking out right now.
Andrew: Is this a process within the site, or we’re just talking about a basic email from you to an angel investor with Nivi making the introduction?
Rafael: So, when I did it, it might have changed at this point. It was, basically, I would pick three different investors who I wanted to custom intro to. I would write the email for each particular one. I would send it to Nivi, and I’d say, “Dear Nivi. I want to meet with X investor for Y reason. I think they’ll really help with Z, and this would be fantastic and helpful to LearnBoost. Thank you, Rafael.” He would then send that on, and then if they said, great, then they would follow up.
And so, even if they were investors and then took meetings and didn’t commit, it was great for meeting these guys and getting in front of them, and then they might even introduce us to other angels. So, it might have changed at this point because it’s really sophisticated what AngelList is doing now, but when we did it, it was all email.
Andrew: Here’s who’s the venture capitalists you mentioned earlier, Bessemer, Venture Partners, Charles River Ventures, RRE Ventures, Atlas Ventures. Fred Destin was here doing an interview recently from Atlas Ventures. Those are the four. How do you get them to go along with this? How do you get them to say, yeah, we’re in this party round?
Rafael: Well, one, you don’t call it a party round when you’re raising capital.
Andrew: You save that for a post-party round blog post. OK.
Rafael: Yeah, yeah, because people can take things the wrong way. I mean it in a tongue in cheek kind of way because very frankly, well, if people are competing, poorly, we’re toast. But, anyway, all that said one of the interesting things was that we created a hell of a problem early on to avoid a mountain of a problem later which is that signaling issue.
And so, it actually was kind of difficult raising money this way. Investors are becoming much more comfortable with it now, but when we were doing this in April and May, it was basically a situation where I’d have to explain to investors, look, I don’t want to give you a board seat. Also, I want to limit how much you can give to me. Also, I’m not willing to cut out investors.
So, we actually had a differentâ?¦ They’re none of our VCs right now. But we had outside VC firms try to do the whole round if we would cut out our existing investors. And to make a party round work if you really want this to work, you have to be so stubborn or confident as a founder and basically say, you know what? A verbal commitment is a commitment to me.
Bessemer believed in me first before all these other guys, and then it went to all the other VC firms, and they believe in me. I’m willing to bet that they’re going to back me and stick with me when things don’t go well, but in return I should view it as exactly that. I should never cut them out. I shouldn’t even try to think about that stuff.
And so, we could have raised the money like that [snaps fingers] from one particular firm that basically offered to do the whole thing, but I didn’t want to cut anyone out. Soâ?¦
Andrew: You must have gotten some signals from the environment, some signals from the response that you got from people that let you know, yes, this is going to happen if I stand my ground because you’re not a stubborn guy. There’s something about the environment that made you see that. What was it? What was it about this environment?
Rafael: You know, I think a lot of the VC firms, again citing Chris Dixon, again, him bringing up the signaling issue early on. A lot of the VC firms have to think about how they can help entrepreneurs mitigate that signaling risk. And as I explained it to them and, of course, they were already on board with this, this was one way to mitigate that signaling problem.
And so, going to them and saying, look, if I raise from one or two of you, then fine. That could be great. But if both of you decide not to fund me for the next round, then we’re going to be dead in the water, and maybe we have a nice business at that point. And so, it was basically the idea of selling them that this is a lot bigger than this one particular transaction, and this is something that could become the model of financing in the future.
All the credit goes to the VC firms that backed us to be really early leaders in thinking about it this way, and now you’re seeing all these other VC firms get really much more active in seed safe deals and doing these party rounds. Back then in April and May, I say back then, this was six months ago. It wasn’t that long ago, but these guys saw where things were really going and that’s part of their job.
So, just sort of making it sound like it was an inevitability, I believe it was and it looked that way, that helped. Credit to them, of course.
Andrew: I’m looking at, by the way, Hoffman LaRoche, that’s one of your angel investors you said earlier that we can’t overlook. This guy is incredible. He was at Google where he managed a number of products, including Google Toolbar, Google Gears, Early Firefox Extensions, Wells Fastnet.
Prior to Google, he was at Access Systems and look at this. He is an investor branch out at OtherInBox, LearnBoost and a director at Twitter, and an investor in Foodzie. That’s a guy I’ve got to get here on Mixergy.
Rafael: We’ll make it happen. Just tell me when.
Andrew: I’ll ask you for an introduction. You kept asking other people for introductions. Now, it’s my turn to ask you for an introduction.
Andrew: Anything else? What other advice do you have? I’m going to come back in a moment and dig deeper into the business itself. And I have a note here to ask you about your co-founders, and I’ll get it all done by the end of the interview. What other advice do you have for entrepreneurs who are looking to raise money and want to put together the kind of deal that you did?
Rafael: I think one of the things I haven’t mentioned yet is that for all entrepreneurs that, well, I’ll mention two things. One is cui bono. So, keep in mind who benefits when they are giving you advice and when they’re telling you to go one approach versus the other.
I think the way to really to do is to cast a really wide net and get opinions from seed stage investors, super angels, angels and VCs, basically, see the whole ecosystem. Read everyone of their approaches and then basically decide for yourself what’s best for you because think about it, if a seed stage investor, sorry – if a super angel says take 500K from me and that’s it.
Well, of course, they want to do the whole round. But what happens when, let’s say, you need eight million and they’re not a deep pocketed VC and they can’t exactly make that next round happen. Well, you have to think through that as a founder.
And so, I think cui bono, keeping track of where they’re coming from and how they benefit from the advice they give you and where they’re trying to guide you, I think that’s really important. You should basically develop an independent opinion as you go through this. That’s one thing.
And then, the other thing to keep in mind is that this is a multi round game, if you think about it. Being a guy who’s in his 20s, even if LearnBoost fails and, of course, hopefully it doesn’t, I’m going to be at the startup table in some way, shape or form, presumably for the next 20, 30 years.
And so, if you keep that approach, if you keep this long-term approach that it’s this multi round game, you’ll treat everyone with respect, you’ll make these connections, you’ll think long term. And ultimately, you won’t even give in to the temptations of screwing over one investor for another or doing the short sided deal with someone else as opposed to the other person.
I think that’s really important because when you’re starting a startup, everything seems urgent. It seems like the whole world is on fire, and you need to do a million different things. And you try to optimize in the short term, and you can really, really cause problems later. And so, I think, that keeping track that it’s a long term game, a multi round game, I think that’s super important.
Andrew: All right. Here’s what I have in my notes from our conversation. Talk to your customers first before you do anything. Then, you said, build a buggy version. I like the way that you built that buggy version. And you didn’t bring in a co-founder. You just went out there. You paid. You had the first version put together before youâ?¦
And that gives you a little bit of an advantage when you’re looking out for co-founders. You don’t have to make the split quite as even when you’re bringing in co-founders after you built that first version and after you’ve raised money. And then, it’s great for them because you’ve taken a lot of the risk out of the way for them. They now have a company with money and the ability to sustain them.
You talked about blogging. Just get your ideas out there. That’s the way to reach people who you wouldn’t have access to otherwise. Make the deal inevitable. This is the direction you’re going in. You want on board? Come on board. Otherwise, forget it.
And AngelList. You kept saying that over and over. If there’s one thing that was most helpful to you, was it the AngelList?
Rafael: Throughout the entire process?
Andrew: Yeah. If we can take the one thing that helped make your deal come together?
Rafael: You know, from the financing perspective, I would say AngelList. I think, from the overall perspective, it’s tough to say because we’d take up half the interview if I mentioned all the people who have helped me along the way.
Rafael: Not just the professors, but fellow students. It’s different folks who’d meet with me, all the random interviews, all the customer development work. But, yeah, from a financing perspective, the AngelList was the most helpful.
Andrew: What do you mean by random interviews because you used that word earlier in the interview and I didn’t get to find out what kind of interviews you were doing?
Rafael: I basically sat down with the teachers and administrators thing with 30 to 40 different interviews.
Andrew: I see.
Rafael: I was meeting with everyone. Looking back on it, it was random folks in Jacksonville. I even talked to international schools. It was all over the place. I just lined up calls back to back to back to back. And then, that would lead to more of those random interactions and those random connections. All of those people were really helpful along the way.
Andrew: Why spend the time doing an interview with me? You’ve now spent an hour with me. You know it takes a little bit of time. Most people in the audience don’t know it takes some prep time for us to even put this interview together. You took time to put this interview together. Why do this? For what?
Rafael: I just want to help. From my perspective, these kinds of resources were incredibly valuable along the way. I had no clue what I was doing a year ago. Exactly a year ago I was just getting started. I was doing this customer development work, and it was because of those other people who gave up a little bit of their day to do these interviews, write blog posts, to help other folks out.
That’s actually part of what makes Silicon Valley so special is that people are paying it forward constantly. And they’ll meet for coffee, and they’ll help people out. They don’t have anything to benefit from it, from a financial perspective.
And doing this, of course, I can find an hour in my day to do something like this and help people out. Of course, my email, if people want to follow up, is Rafael R-A-F-A-E-L @learnboost.com. Send me an email.
So, people helped me. I want to help people and, hopefully, the people I help will help other people. And it keeps going.
Andrew: All right. Let’s go back to the co-founders. You raised money. You went out and got two co-founders. Who are they, and what are their roles in the company?
These two started a company when they were actually based out of DogPatch Labs. And Ryan Spoon who runs DogPatch Labs in San Francisco had blogged about them, and multiple people said, hey, this looks kind of similar to what you’re doing. Maybe, you should meet with him.
This goes back to the following through piece. I cold emailed them. I said, let’s meet. Long story short, what was supposed to be a 15 minute meeting turned into several hours, just brainstorm about what we could all do together. At that point, I went to them and I said, guys, at that point I think I had most of my round done. I said, “Guys, I’ve raised hundreds of thousands of dollars with, honestly, no discernible product and no discernible team. I’m the team of one.” I said, “Hopefully, that says a little bit about what I’ve tried to do and what I’m trying to bring to the table. Clearly, you guys are incredible. Maybe, we should consider joining forces.
To shorten the story, we ended up meeting a while later, and we formalized that. You mentioned the piece where if I build the product, I get a better equity split. Well, I’m comfortable saying this now. We basically did an almost even split, a third, a third, a third.
Andrew: Get out. Really?
Rafael: Yeah. And I think this is super important. I think people under value the power of incredible teams, and I think they try to optimize in the short term. For me, it was, are these two folks, is Tian, is Guillermo, are they the two best folks to do this? I thought so.
And based on what we’ve done so far just in GetHub and open source, that’s already being proven already. Looking at these two guys versus other guys I’d interviewed with, they can run circles around them. These guys are incredible co-founders. So, to me it was absolutely thinking long term, not trying to optimize in the short term.
And we said, look, we’re basically even partners in this thing, and let’s go crush it. Let’s go create a much bigger pie.
Andrew: So, basically, how is there a little bit of a difference?
Andrew: You said basically all even.
Rafael: I had a small, small premium, to be clear, because I had raised all this money and a lot of the work I had done at that point.
Andrew: How did you raise so much money when you don’t code, you’ve got a bus