On April 28th we held a contest for the first blogger to post five details of the Series B Socialtext closed. Now, the details are out in our local paper. Socialtext raised a $3.1 million Series B round led by Tim Draper at DFJ that closed on April 15th. From tracking the blog contest, one guy in Chicago actually set up a blog to enter it and got four out of five details right. Unfortunately, the post and blog are gone, a case of blog churn. Until he turns up, I'm awarding the Socialtext starter package to Juri Kaljundi who was the first to unearth a detail.
Matt Marshall provides more of the story by blog, noting he tried to participate in the contest, but couldn't uncover a Deep Throat. Matt also notes that Draper is known for fast growth companies and our bootstrapping roots, whereas I'm a believer in building for the long term. Perhaps sharing some of the story of how we raised this round will help explain how building for growth and the long term are compatible.
I first met DFJ through Steve Jurvetson back when co-founding RateXchange during the boom. We happen to share a love for the little country that could and a dog made of velcro. I've given him a look at each of my deal knowing that the feedback is 10x the price of admission and in confidence. Two years ago we came in to talk Socialtext with Steve and Andreas when we were raising our angel round, the advice still resonates.
I met Tim Draper at the first Always On Innovation Summit and was immediately struck not only by his presence but his straight talking style. Also at AO I had a nice lunch with John Fisher, who introduced me later that day to one of best customers.
In the Fall of last year we were talking to a few VCs and I ran into Steve at the Accelerating Change conference. We were near a decision point and I stepped back to think, who do we really want to work with? Every interaction with DFJ provided value to Socialtext -- the one thing an entrepreneur can and should ask from the process of raising venture capital. They got Social Software, far earlier than most. So we got to work.
We spent the first quarter of this year meeting every member of the firm and digging through the tough questions. Joshua Raffaelli and Josh Stein dug really deep into the product and customer due diligence and shared what they found so we could learn from it. In a last meeting with Tim we talked through terms and they produced a term sheet on April Fool's day (nice touch).
We set up a workspace driven by a due diligence checklist for our Series B lead. Here is a redacted version of the homepage in my public wiki. We set a goal of getting through due diligence in three weeks and achieved it in two. When the money was in the bank, the deal was closed with a collective whoo hoo!
Stata Labs also used Socialtext to facilitate it's due diligence when acquired by Yahoo!:
But here's one interesting factoid: Andy Stack, co-founder at Stata Labs, managed that company's acquisition by Yahoo using Socialtext's product. "It saved on the exhorbitant costs of both legal teams going through all these documents," he told us. "It eliminated re-sending, and re-looking for them. Yahoo’s legal bill wasn’t as high. Our legal bill wasn’t high." Time will tell. Mayfield, though, is ambitious: "We're going after the 500 million business users of email," he told us.
I'm sharing the process and practices of raising venture capital, which is a lot like making sausage (Voiceover from Dana Carvey doing Ross Perot: ain't going pretty). It is a deeply personal process for a CEO, akin to a job interview where they remove a substantial number of hair follicles for drug testing. What matters isn't just the pitch, demo and deck. In the end someone is on the other side of the table thinking, "is this the guy?" while you are thinking the same. Just focus on building relationships while building your business -- that's how to raise a round.
Now that the deal is more formally announced I'm getting a barrage vendor calls that I'm redirecting through LinkedIn. We're getting an office in downtown Palo Alto next to the train station. Hired a person a week since the close of the round and are moving on things we lined up in advance. Now we are growing the team, with some key engineering and sales hires.
We chose DFJ because the size of the market opportunity is substantial. Over 500 million business users of email will gravitate towards wikis for group communication. Socialtext is the first mover, first prover and market leader -- and to sustain and realize this market opportunity we needed expansion capital with a track record in high growth companies. We will benefit from our bootstrapping roots and tradition of investing in the things that matter to our customers. Borne in the bust, our low cost business model and frugality enabled us to take less capital without sacrificing growth.
Ultimately, our community determines our growth path and helped inform the decision to expand. With greater resources, we can more actively cultivate this community and serve their needs. This inclusive model for growth is one DFJ has experience in (e.g. SugarCRM, Technorati) and is in line with our mission to bring wiki everywhere. Focusing on sustainable growth means setting significant objectives, managing costs and options, engaging communities and driving exceptional innovation.
So what else is new? Mostly my job, the subject of another post.
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