How to turn down money, keep your company – and your soul!
Mikkel Svane, the Danish entrepreneur behind global software success story Zendesk, on the desperate pursuit of capital to keep a start-up alive
In the second of three fascinating excerpts from Zendesk co-founder Mikkel Svane’s new book Startupland, the Danish entrepreneur recalls the desperate pursuit of funds to keep their business alive.
With cash rapidly running out for the company that would eventually achieve a $100m IPO on the NASDAQ stock market, he reveals why even in your worst moments you have to stick to your guns.
For those who want to read more, Startups.co.uk readers can buy a copy of the book with a 30% discount here using the code VBK10.
When it comes to money, there’s often a mismatch between perception and reality – and then there are different spheres of reality.
While the $50,000 line of credit I took to start Zendesk was a sizeable personal liability for me, it wasn’t a sizeable amount of money to build a company. It covered some of the hardware and the costs associated with running the service, as well as the ads.
We were very frugal, and we were earning modest revenue right after launch, but what we were bringing in wasn’t keeping pace with what was going out. There was Morten’s token salary and the pay cheques we had to give to the freelancers who were now helping us build and maintain the site. We wouldn’t be able to subsist on this for long.
Almost as soon as we launched, we started to approach investors. We were very much under the impression that, given we were three hard-working guys with lots of relevant experience who had invested a massive amount of time in building a next-generation product for a big global market, it should be pretty easy to raise venture money. That was what we read on TechCrunch, and there were also plenty of reports on the great state of the Danish venture market.
I reached out to everyone I knew. I reached out to people I didn’t know. Everyone gave me the impression that there was money to invest, but locating it was a lot harder. We spent plenty of time with Danish seed funds and venture capitalists, but that proved to be a waste of time.
They were nice and acted professionally, and I think many of them wanted to invest, but they didn’t have any significant capital. The Danish VC market was not very established back then; almost all of it was government-subsidised initiatives – nothing that could really go to our venture. The investment “industry” was almost a joke.
There were individual investors, but nothing like what there is in Silicon Valley. I got nowhere with something called the Danish Angel Network; they didn’t even reply to my email. Denmark has such a small economy, and there really wasn’t any risk capital at the time.
Running out of cash
Things were looking dire. We were rapidly running out of money at Zendesk, and I was rapidly running out of money personally. I did not want to go back to consulting and neither did Alex or Morten, but soon we would have to look for some better-compensated alternatives.
Part of me wondered if that was the more responsible thing to do. I had another infant daughter at home. Baby Erna was born two months after we launched, and I needed to provide more stability for my growing family. Mie was supportive of my chasing this idea, but living without an income had its limitations. Diapers are expensive.
I wasn’t alone in feeling torn between choosing to have this completely break apart or committing everything to finding a way forward. Alex, Morten, and I all shared an understanding that maybe this was only temporary, that maybe it would last only a bit longer, but at the same time we weren’t ready to let it go. I always found myself saying: “Let’s give this another month and then we can think about alternatives.” They always agreed.
But it was a very borderline time for all of us. You are balancing two extremes: one, you are completely invested and narrowly focused and wholly dedicated; the other, you are hyper-aware that there is very little chance you will make it. You are at odds with yourself, consumed by both ecstasy and fear. You have no balance, but you have found meaning. This is the every day, every moment dilemma of a start-up.
Finding an angel investor
And, then, suddenly, it looked like our problems could be solved. A friend of Alex’s introduced us to an experienced Danish angel investor who was very interested in funding us. This was the real deal; an investor with an apparently good track record and many connections. He gave us the impression that he wanted to invest up to $500,000.
“Let’s not make this complicated; let’s make it easy,” he said. It seemed too good to be true.
And then it became clear that it was.
It’s customary for prospective investors and VCs – both professional and amateur—to ask for materials to validate your business. After all, they are giving you money that, statistically speaking, they will likely never see a return on, and that they might lose entirely. This investor was no different. He was not shy about asking us to produce copious documentation:
- Details on how we fit into the competitive market
- Addressable market
- Go-to-market plan
- and so on and so forth.
He wanted a lot of the usual stuff that is purely fantasy so early in a start-up’s life.
I produced all of these materials, some of which we had and some of which we had to create or make up, working diligently to appear professional. Still, he kept on coming back, requesting more. At some point I became really confused. I thought we had produced everything he needed, and I was very unclear about what he really wanted. I wondered if he even knew what he wanted.
One evening, he called while I was out shopping for groceries. I was in the dairy aisle picking up milk and not entirely prepared to be grilled.
“I’m very disappointed you can’t do the basic things that I am asking for,” he said.
He was making it clear that he felt I was not capable of doing my job. I don’t remember the point of the call or what information he asked for, other than his trying to question my abilities and make me question my abilities.
It was a tense conversation, and on the way home from the market I really started to doubt myself. I felt that I was letting Morten and Alex down because I was failing to manage the investment situation. And in many ways I felt that investor had deemed me dispensable from the founding team.
But during a relatively sleepless night my confusion gave way to clarity. With each of the unnecessary demands, it became increasingly obvious he was exploiting the situation – trying to weaken us to gain more negotiation power. He knew we were running out of money, and he aimed to stretch us and tire us out as much as possible. I felt like he was messing with my mind and trying to take advantage of us. And it made me super uncomfortable.
We were facing a huge conundrum. Do we continue with this charade and do the deal with him – someone we didn’t trust – to keep afloat? Or do we turn away from the deal and face sinking on our own?
Turning our backs on investment
The next morning I approached Morten and Alex: “We can’t do this. It is going to be all wrong.”
They agreed. They also felt his vice-like grip exerting too much pressure. Alex, who had the original relationship, agreed that he would tell him that we weren’t ready to take investments.
The investor was offended; he took it personally. And in a way it was personal. We did not want to be controlled by someone who was aligned with what was best for him but not best for us, for the company.
I learned an important lesson in this experience – one that influenced all of the investor decisions we’ve made since then. There is a vast spectrum of investors. Professional investors are extremely aware of the fact that they will be successful only if everyone else is successful.
Great investors have unique relationships with founders, and they are dedicated to growing the company the right way. Mediocre and bad investors work around founders, and the company ends in disaster. The problem is, early on many start-ups have few options, and they have to deal with amateur investors who are short-sighted and concerned only with optimising their own position.
As so many start-up founders know, it’s really hard saying no to money, but sometimes it’s the right thing to do. Taking money comes with a price, and it can take you in directions that aren’t always healthy.
We dodged a bullet by saying no to that money, though it wasn’t an easy decision. We had no cash, we were back where we started, but we didn’t look back. Rejecting the offer carried the same relief you feel when you break off a bad relationship. We were free and ready to move on.
Poor, but happy.
You can get your hands on a copy of Mikkel Svane’s Startupland and get 30% off by using the code VBK10 here.