Unconventional Fundraising: How One Startup Auctioned Off An Equity Stake For $22.5M
The following post is from Rob Bernshteyn, CEO of Coupa, a provider of cloud spend management solutions.
Raising my third round of venture capital for Coupa Software, I decided we should play by our own rules. In February 2012 we held a sourcing event, much like an auction, with the intention of selling the opportunity to invest in Coupa to the highest bidder. We pulled it off, landing $22 million in a round led by Crosslink Capital, but not without one heart-stopping moment along the way.
Applying sourcing techniques to venture capital was something I had never seen or heard of. I didn’t know if it could be done. But we had executed extremely well with the funds from our first two rounds. Venture capital markets were heating up again; our position was very strong and I thought we could use that to our advantage.
I raised round one during the 2009 recession as a newly minted CEO and first-time fundraiser. I camped out at Starbucks on Sharon Park Drive, schlepping my pitch-deck up and down Sand Hill Road, going to three or four meetings a day for weeks. I got a lot feedback from venture capitalists, and refined the business model over and over again before finally landing a $7.5 million round with El Dorado Ventures, who believed in the people, opportunity and the deal.
Raising round two in 2011 was a very different experience, with more casual meetings at the sprawling, stylish new Rosewood Resort on Sand Hill Road. We were able to leverage our growing track record to get a fair valuation—$12 million—and get the deal done fast with Mohr Davidow Ventures, a firm that brought operating experience as well as money to the table.
At this point, we had our strategy and our people. We were coming off a strong year. We just needed additional money to accelerate.
I felt that we were in a position to say, “Here’s what we’re doing. We’re doing it well. If you want to be part of it, you need to write a sizable check, and by the way we’re likely to go with the highest bidder.”
Why not? Our buyers run supplier reverse auctions all the time. Our software enables these kinds of processes and our support people coach buyers at some of the world’s biggest companies on best practices. This is part of our DNA as a company. Why not apply this approach to fundraising?
I thought this could save us a lot of time and energy so we didn’t have to break stride on execution. But, I also thought it had the potential to frustrate some of the investment community.
I recommended the approach to some of our board members, and they supported us, because they knew we were smart enough to include the right investors and get the best possible deal. We moved forward, creating a very structured process for getting the deal done.
First, we went through a list of all the investors we’d gotten to know over the last three years and identified those for whom Coupa would be a fit. We came up with eight.
We sent them all personal e-mails saying, “We’re raising a round. Here is our process. Beginning February 15th, we’re going to spend five weeks meeting and sharing information about what we’ve done and what we’re planning to do.”
“We’re going to close the quarter on March 30th, 2012. On Saturday the 31st, we will send you all the metrics for Q1. We ask for your term sheets by noon on Tuesday, April 3rd.”
Then we held our breath.
Of the eight firms we contacted, seven were interested. Three more got wind of it and asked to be involved, so we ended up talking to ten firms.
We gave them all of our data up until the beginning of 2012. It was delightful to be able to show that almost everything we’d laid out in previous rounds had been accomplished. There was now a history that one could easily extrapolate into the future.
As March wound down, it became clear that six of the firms were seriously interested. Everything went according to plan and we expected to receive six term sheets.
Then, on March 26th, we received paperwork of a different kind. Ariba, a huge company and the biggest vendor in our space, filed a direct patent infringement lawsuit against Coupa. I was stunned. I didn’t understand it. And I thought for sure that this would kill the deal, if not the company.
That evening, I got on the phone to each of the six interested firms to deliver the grim news. To my surprise, they all still wanted to be part of this opportunity, and we got terms sheets from all six.
Most were pretty close in valuation, with outliers on the high and low end. We wanted to go with one of the higher bids, but also with the investor that had spent the most time getting to know the company, and that was Crosslink Capital.
Their entire partnership engaged in understanding the business. They looked at all the data. They were very thoughtful about the space, and the challenges and the opportunities in the market. They were sober about the risks, but also bullish about the possibilities. Their terms were fair and it was an easy selection.
We had set up a fast, structured process and then got out of the way to let market forces work to our advantage. But we also had to make a game-time decision when a wrench got thrown into the works. The only way I know how to do that is with immediate, real-time transparency: You pull out the wrench, you tell everyone what happened and you move forward from there.
For the full article, visit Forbes.com.