A Hobbits Funding Journey

(A Knock at the Door)

12 Dwarves and a Wizard show up on the doorstep of your comfy hobbit-hole at Bag End and convince you to go on a journey to a volcano to see a dragon and steal its treasure.  And somehow you say yes…

I was sitting comfortably in San Francisco in my proverbial hobbit-hole, working with a few tech startups on some neat projects in things like container security, intent-based networking, and IoT device discovery and security, and then one day there is a knock at the door.  Well, on email, LinkedIn, and Facebook –  I offer my friend Chris a “Good Morning:”and his response was something akin to the classic Gandalfian line of:

“Do you wish me a good morning, or mean that it is a good morning whether I want it or not; or that you feel good this morning; or that it is a morning to be good on?”

And then he invited me on an adventure…  and not a short adventure…  and not an adventure for the timid or the weak of heart or the lackadaisical or the daft.  Certainly not an adventure for those who like to enjoy their hobbit-hole and enjoy a life of casual intellectual pursuits, but instead he offered an adventure that is exactly the opposite of every one of those adjectives I almost had to break out my thesaurus to find.  He offered me a chance to join him in building a software start-up, this one, and all the joys of funding it, winning customers, figuring out product/market fit, and how to market and sell our product, and how to grow the team, and how to build the business plan, and how to price the product, and what to build next, and on and on.  

Along the way, and one of the first things we realized is that, yes while we had customers and growing operating revenues it does take a bit of capital to go from initial PMF to operating at scale, especially if you want to slay a Dragon!  (or at least steal its treasure and let some random unknown and a decidedly one-dimensional character named ‘Bard’ come in at the last minute and be a total scene-stealer with some great bow shot while you enjoy a fancy new ring and cool suit of Elven chain mail we’ll get back to in a minute.)

A Dance with Venture Capital

Chris and I started our dance with Venture Capital back in August.  We funded in late May.  We announced it yesterday.  This was not, by any means, a quick step in the journey.  You see we serve a market that is largely Government contractors, VARs who sell to the Government, and vendors who do sizable portions of their revenue from and through the Government (using the Big G here because we are largely Federal focused for now although I think we’ll add state government support in the foreseeable future).  We talked to somewhere in the order of 30-35 firms I knew of and had done some work within one-way or another in the past twenty years of my career.  Suffice to say, I was hopeful this Rolodex would help a bit in opening a few doors – it may have opened them, but it didn’t keep most of them from being a revolving door we couldn’t get out of…  Why?

Location Matters – Oddly

First, the most common thing I heard was, “Well you are in San Diego!”  Ok, so yes, the company is in San Diego, and I was in San Francisco and through the process of this journey became quite comfortable with the idea of moving to San Diego.  In fact, it seemed pretty cool.  But why would investors be turned off?  Is it because a board meeting has to be on a Zoom call, or a 1.3 hour direct flight – you can even take SurfAir down from SQL to MGY and back in a day!  Is it because San Francisco has some decidedly higher average IQ than San Diego? (doubtful!)

I can say this – I found the capital efficiency of the San Diego market to be amazing.  We have been able to identify, attract, and retain a great team of software developers while not spending a small fortune on rent every month.  Can you believe my last company had rent in the $8/sf/m range while here in San Diego rent is anywhere from 1/3rd to a 1/6th that on average.  What savvy investor would want to see their high-growth startup wasting their capital runway on things like high dollar rent?  Sure, fund it out of operating revenues when you have them, but not at this early stage!

The Lack of Allure for Government Business

The second push back we heard was – well we don’t like working with Government.  Ok, this rationale for non-investment I can understand more – I have certainly experienced the challenges of working closely with the Government on a variety of projects in the past, all have their own unique issues and experiences.  But see, our ideal client is not The Government directly, it’s the myriad of Contractors, VARs, and Vendors who do great work with the government.

I do think, in my enterprise tech experience, we had a bit of formula on how to grow sales.  Start in California and New York – get in with the high-tech buyers in the Bay Area and the financial IT buyers in New York.  Work with big tech brands and big banking brands and win some landmark customers.  I have seen many VCs build advisory boards and councils that mirror this GTM philosophy.  So when you have a potential portfolio company whose target customers are companies that most VCs have never heard of, or paid any attention to, then you realize that your ability to provide super-linear value to that entrepreneur is somewhat attenuated.

Suffice to say, we never got past the front door and there was no special hidden back-door with a map from Thorin to get us in at most of these firms.

Finding a Partner

(At this point I don’t know how well my analogy/parable is holding up, but I still love the story and am going to stick to it for a while, mostly out of stubborn pride by now.)

We first met with Paul Leggett and Ajay Royan about our company in the Fall of 2017.  Unlike most of the revolving-door experiences they ‘got it’ pretty quickly, I would assume because a portion of their investments is at least adjacent to the government space.  They are also friendly to companies that are outside of the Bay Area – they have an appreciation for the capital efficiencies of other geographical markets.

Appropriately, the firm name is Mithril Capital – the most valuable possession Bilbo brought back with him from the first part of his journey with Gandalf and the Dwarves – and one that he passed on to Frodo for what really is parts two through four – was the small mail shirt made of Mithril!  It also saved his life a few times, and that of dear-nephew Frodo, plus it looked really cool in the films.

Along the journey we had a lot of work to get our closing done, what we came to realize is that this was a wonderful compelling event to get all of our processes, systems, and legal structure right so that we could have a solid foundation for growth.  There was a lot to this, and its probably worth a separate post at some time in the future.

Avoiding Distractions

During the period of fundraising we didn’t distract our sales and engineering team – we grew sales, we released several key software releases, brought new capabilities to market, and grew our client base 2x and then 2x again Q/Q.  I keep hearing horror stories (as opposed to hobbit stories!) where startups spend so much time/effort on fundraising that they simply fail to execute and do anything for a couple of quarters – I am happy to say that having the right partners on this journey helps immensely (That’s you Chris, thank you!)

We’ve expanded our executive team with a broad group of individuals from diverse backgrounds from healthcare, to VARs, to FFRCs, to startups, and defense contractors.  We need to hire someone with Coast Guard experience because we have Army, Navy, Air Force, and Marines all well represented.  We’ve started hiring more in the Northern Virginia area as well as continuing to invest in San Diego and have several distributed/remote employees in Texas, North Carolina, Washington State, and Maryland – I see this trend continuing – but we’ll avoid Rivendell and Mordor for a while – no need for infighting!

Growing the Team

We’re still hiring with quite a few open roles in Software Development and Production Engineering, Sales and Customer Success, and Marketing.  One thing we have realized is that someone with great experience in the military may not have completed their four-year degree, but very well could have the exact experience and work ethic we are looking for.  If you’ve done four-or-more and are looking for a great job to transition into that accepts and rewards your time in uniform – please give us a shout-out.

As I said up top our clients are largely government contractors so having people for them to work within customer-facing roles who have practical experience in program and contracting shops and know the customer is invaluable in ensuring we engage with our customers in a productive and meaningful way to offer actionable insight and value.

So what is next?

I can’t give away our entire roadmap – we do have point competitors in the market in each area that the Capture2Proposal service delivers – research, capture management, secure proposal development.  But we do believe that the integration of these capabilities together in a way that streamlines the workflow from BD/Identification to Capture Management and Team Development/Coordination and on to securing the Proposal Development process and the environment is an area that there is a ton of room to innovate and execute – it’s a big open field.

I also personally believe that there is a ‘long tail’ in the Government Contracting market and there is a decided information disadvantage to overcome for Small Business.  There is also a taxonomy and process that Small Business can learn that helps them partner with the larger scaled-up prime contractors and more successfully engage with them on joint ventures.

Lastly, I see a pending shift in the ‘look’ of government contractors – I have run across several recently that style themselves ‘New Defense’ and they are using far more off-the-shelf products and then adding defense/government specific modifications to rapidly bring capabilities to market.  This is in areas like 3D Printing/Additive Manufacturing, Drones, AI/ML, Cyber, and so on.  This shift may result in different procurement models, but will also likely produce a wave of targeted M&A and a host of new successful primes over the next five to ten years.

Happy Hunting – even if you’re hunting for Dragons!!!

dg