Funded in Austin Archives

By SUSAN LAHEY
Reporter with Silicon Hills News

Josh Kerr of Written, Cotter Cunningham of RetailMeNot and Utz Baldwin of Plum, photo by Susan Lahey

In many ways, Written’s Josh Kerr was the poster child for how one gets funding in Austin at the Funded in Austin panel at SXSW Tuesday afternoon.

Kerr spoke glowingly of the help, support and advice he got from Capital Factory. He talked about building relationships with various angel investors over coffee, lunch or drinks until he gave them the ask. And he gave interesting tips: For example he suggested telling angels he’d love to have them invest even a small amount just to get them involved, and usually they upped the number because the investment he suggested seemed too small.

And the company wound up with $1 million seed round.

By contrast Utz Baldwin of Plum (formerly Ube) said finding funding for hardware like his lighting system that can be operated by your smart phone has found few Austin funders. It did, however, raise nearly $1 million on Fundable.

Finally, Cotter Cunningham of RetailMeNot explained that funding had been a little bit different for his company because his business model entailed buying existing businesses, which is an easier sell in some ways than getting funding for an idea alone. He got a $30 million round.

The panel, moderated by Shari Wynn Ressler, founder and CEO of Incubation Station, explored the process and hurdles of getting funding in Austin. All the panelists agreed that raising money is pretty much the CEO’s full time job, which can be a challenge.

For one thing, as Baldwin said, there were parts of developing the user experience he really wanted to get more involved with because it’s part of the business he enjoys. But he didn’t have time because he was busy raising money. Kerr said his team initially resented the fact that while they were doing the work of creating the company, he was wining and dining investors. Once he got the money though, they forgave him.

Beware the Soft Yes

“It was a little tricky with our model,” Cunningham said, “because it’s difficult to raise money and do an acquisition at the same time.” On the one hand were the funders doing their due diligence and collecting data and on the other were the selling businesses asking “Are we going to do this or aren’t we?”

Kerr said he kept the amount Written was asking for small, so that it looked like they were close to success. Then as more money came in, he upped the raise amount.

Cunningham and Kerr worked on building their networks, asking “Who do you know?” Baldwin wound up raising money from people he knew might be interested in the idea. After a ten minute phone call to a retired Cisco executive, for example, the exec gave him $150,000.

People who initially say no might change their minds if you make tweaks to the product that they suggest or if someone else takes the lead investment position, panelists said. Cunningham said “You have to be persistent. “Some of the people who gave us money told us ‘Until you called four times we weren’t paying attention.’”

But when making the ask, you have to know exactly how much money you want and exactly what you’re going to do with it. You also need to have practiced your pitch “a million times.” Cunningham said. And it’s best not to shoot for your most likely big funder on the early pitches. Practice on less likely candidates so you have it down when you’re shooting your big gun. That was a mistake Kerr made, going to Austin Ventures with his first pitch.

“In a matter of seconds I became uninvestible when they asked what we were doing with the money,” he said.

All the panelists experienced “the soft yes” which is not a definitive no but a “let’s keep talking” that never results in anything. Entrepreneurs need to guard against the emotional roller coaster of thinking a soft yes is the same as a yes.
Baldwin said that after his company won a People’s Choice award at DEMO, Sandhill Road (investor central in Silicon Valley) opened its doors to them. But one investor would say “You don’t want to be a hardware company, you want to be a software company” and another offered suggestions about the company’s business model. Baldwin was changing up the pitch deck after every meeting and he wound up with a garbled story.

“You have to nail that pitch. Exude absolute confidence in what you’re doing, demonstrate absolute domain knowledge and ask at every meeting if there are any red flags. ‘What do you see in this that would keep you from investing in my company?’”

Know Your Investor

While a hardware product like Plum’s, has trouble finding funding in Austin, the others talked about the difficulty of getting funding from outside Austin because investors often want to be able to keep a close eye on the companies they’ve invested in. But Cunningham said he’s had success pitching the benefits of Austin, such as a much lower attrition rate than that of Silicon Valley.

“In Palo Alto, most of the companies have a 20-to-25 percent turnover rate. Someone will be sitting in the office saying ‘I just got a call from Twitter and they’re willing to offer me 50 percent more than you’re paying me. In Austin that doesn’t happen. Our voluntary attrition is under five percent.”

Any form of investment takes a lot of investigation, panelists said. Friends and family may cough up the money but they’ll call every week and ask how their money is doing or require reports you wouldn’t normally have to generate, which is a time suck. There are numerous angels in Austin who go to all the meetings but invest very little. And there are some investors who are more trouble than they’re worth. It’s important to call their references and find out if they’re the kind who like to call you up at midnight with a question.

Entrepreneurs structure deals differently as well. Baldwin said his Fundable investors were happy with uncapped convertible notes and responded to discounts for early investors. Kerr, though, said all his early investors expected caps.
All the panelists said it was crucial to hire the best attorney available, not to scrimp or hire a relative. Kerr suggested finding an attorney who would work for equity.

At the end of the session, one audience participant asked where a new Austin startup could go to find more information about funding and Kerr recommended Capital Factory, which he had mentioned several times through the session. Claire England of Tech Ranch stood and asked a question, prefaced by the comment: “There are a lot of resources out there besides Capital Factory” to which Kerr responded that he wasn’t trying to be an advertisement for the incubator/accelerator.
Baldwin leaned over, looked at Kerr’s Capital Factory t-shirt and said “Nice shirt.”

BY L.A. LOREK
Founder of Silicon Hills News

Justin Jensen with Cinetics, Matt Cohen with Onespot, Barry Evans with Calxeda and Claire England, executive director of RISE Austin

Barry Evans, co-founder and CEO of Calxeda, bootstrapped and eventually landed Venture Capital funding after seeking investment from California and Boston for his microchip company.
Justin Jensen, founder and CEO of Cinetics launched two successful Kickstarter campaigns to fund products for his company.
And Matt Cohen, a former partner with G-51 Capital, an early stage investment company in Austin, received angel money to launch OneSpot, an online advertising company.
They all detailed how they got money to back their ventures during a “Funded in Austin” panel in the Greater Austin Chamber of Commerce’s Office at South by Southwest on Sunday afternoon.
“We really wanted to explore the entrepreneur’s perspective on fundraising in Austin,” said Claire England, executive director of RISE Global, an entrepreneurial conference in Austin. She moderated the panel.
People packed the room to hear the stories about how to get investors to back an early-stage startup. About a third of them were entrepreneurs, some investors and others interested in the subject, according to an informal survey England took of the room.
At first, England quizzed the panelists about their experiences and then the audience members asked the founders questions about their ventures.
Calxeda, founded in 2008, spent a year bootstrapped, got some strategic investment, Texas Emerging Technology Fund money and angel money and in 2010 closed on a $48 million Venture Capital round, Evans said. Calxeda makes ultra-low power server microchips that use ARM-based processors, which are the same ones used in iPhones and iPads.
Austin in 2008 through 2010 would not invest in early-stage hardware companies, Evans said.
He said he “burned a lot of time double checking that fact” and then went to Silicon Valley, Boston and even the Middle East for investors. The company’s first round of funding came from ARM Holdings, Abu Dhabi-based Advanced Technology Investment Co., Texas Instruments, Battery Ventures, Flybridge Capital Partners and Highland Capital Partners.
Eventually, Austin investors did back the company, Evans said. Last year, the company closed on a $55 million round adding Austin Ventures and Vulcan Capital as investors.
“The breakthrough for us was the help of the ATI (Austin Technology Incubator) we were able to figure out the VCs in the Bay that had investments in Austin,” he said.
Evans made sure to get on their schedule when they were visiting Austin. He also learned Battery Ventures was an early investor in Bazaarvoice, Solarwinds and others in town.
In the beginning, Evans spent 50 percent of his time looking for funding and now it’s about 10 percent to 15 percent, he said.
“You never stop fundraising as a CEO,” he said.
It’s Evans first startup and he learned a lot from the early days of fundraising. He said he developed a tactic early on where he would reach out to a potential investor to meet for coffee to just talk about his big idea. If they said yes, then he would pitch them. If they weren’t a fit, it was OK, because it really wasn’t a formal pitch, he said.
His biggest mistake was trying to raise too little money.
“I was asking for $5 million and ended up getting $48 million,” he said.
It was easier and faster to raise a larger amount and spread out the risk among several VC firms.
“It spoke to the risk that everyone was feeling about this crazy idea,” he said.
Onespot, an advertising company that created a platform to turn online content into ads, raised $1.5 million in angel funding last year.
“Angels invest for slightly different reasons than VCs,” said Cohen, the company’s president and founder. “Typically the main reason why angel investors are investing is that they really want to help out companies.”
Onespot sought out investors that could help the company make connections and give it advice, Cohen said.
“Angel investors have a lot more availability and time to give us than VCs,” Cohen said. “We will almost certainly raise a venture capital round later on.”
He advised the entrepreneurs in the room to continue to develop their minimal viable product and gain traction in their marketplace while seeking funding.
“If you’re not making a lot of progress fundraising, make progress on the product or service and then the actual fundraising processes will go a lot easier,” Cohen said.
It’s also important to find the right investors, he said. The most important thing is to do research on which angel investor is the best fit for your company, he said.
“Angel investors are investing in an individual,” he said. “They are putting their bet on you.”
Angel investing is about cultivating relationships, building a network and getting warm introductions anywhere you can, Cohen said.
At G-51 Capital, Cohen often took recommendations from lawyers that work with startups. Many of the lawyers will defer fees until a company gets funded.
Angel investors have their own vetting processes but they like referrals from lawyers and other trusted sources, he said.
“Angel investment is one of the areas where Austin really shines,” Cohen said.
Most angel investors write checks between $25,000 and $200,000, Cohen said. To be successful angel investors, they need to make between a dozen and three-dozen investments, he said.
“I wound up getting a number of angel investors in Austin and also in New York and California,” he said.
Cohen said he’s looking forward to seeing successful entrepreneurs in Austin giving back.
“The thing that brings capital and resources to a town is success,” he said.
In October of 2011, Cinetics completed a successful fundraising campaign on Kickstarter. The Austin-based startup originally sought to raise $20,000 and ended up with $486,518 from 2,019 backers.
“We were bootstrapped,” said Jensen. “We went to Kickstarter for presales.”
Cinetics created CineSkates “a portable tripod slider system that enables fluid, rolling video without the hassle of bulky camera gear.”
It’s a camera dolly that fits into a backpack for independent filmmakers and hobbyists so they “can get shots without breaking their bank or their back,” Jensen said.
“It was really a product that didn’t require a lot of prototyping and funding,” he said. “We built the first product for under $10,000. We really didn’t need any significant capital.”
Jensen advised entrepreneurs to put as much information as possible on the Kickstarter campaign so that potential funders don’t have to ask a lot of questions.
In January, Cinetics launched a second successful Kickstarter campaign for “CineMoco, a compact motor controlled dolly and slider for video and time-lapse photography.”
The CineMoco campaign more than doubled its goal of raising $50,000. The company ended up raising $113,913 from 283 backers.
When Cinetics started crowdfunding, it was one of the first Austin hardware companies to do so, Jensen said. But now many resources exist for companies seeking crowdfunding. He recommended the Austin Hardware Startup Meetup Group to learn about projects and funding.

Tag: Funded in Austin

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