LESSON LEARNED: THE COST OF NOT
RAISING SMART MONEY
I was employee number five in a company that launched the same month as YouTube. Our team had built an online video platform just like YouTube’s. During the first six months, our traffic was essentially the same as YouTube’s. We monitored the traffic metrics and knew we were onto something big. We began pitching investors. In short order, we got a local venture capital firm to commit to half of a $5 million Series A round, with one caveat. We had to find another firm to invest the other half.
Sure, we went to Silicon Valley to pitch a few high-profile VC firms. But we spent most of the time with investors in our own backyard. Why? Because they were local and enthusiastic, which made getting a deal closed faster and easier for us.
In hindsight, we focused on getting the FIRST investors rather than getting the BEST investors. It didn’t take us long to raise the $5 million and we were ecstatic that YouTube had only raised $3.5 million.
We thought that we were way ahead.
While YouTube raised less money, they raised it from Sequoia Capital. And, Sequoia was one of the top VC firms in Silicon Valley, with a long history of successful exits in the consumer Internet sector. In fact, they were
one of the original investors in Google and had funded Apple, PayPal, Tumblr, Dropbox and many others.
YouTube’s investors could literally march those founders into Larry Page and Sergey Brin’s office and tell them why they should buy the company and how much it was worth. We had very intelligent and wealthy investors, but they didn’t have these kinds of relationships.
As time passed we raised a total of $30 million while YouTube raised only $11.5 million.
So, how did it all turn out?
Google acquired YouTube for $1.65 billion. That acquisition occurred less than a year after YouTube raised its series A round of financing. Both companies had great products, great traction and a great team. The reason
YouTube was acquired and we weren’t wasn’t because they had a better product.
It was because they had “SmartMoney” investors that brought relationships to the table that were essential to getting a successful exit regardless of who had the better product.
This painful lesson for our team illustrates how important it is for you to get more than just cash in your deal.
You have to get SmartMoney. Otherwise, it can mean the difference between getting over a $1 billion deal and getting nothing.