VCs can promise you money, sign a deal, and then still back out

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: lawrence@krubner.com, or follow me on Twitter.

Interesting:

The VC meetings continued as our balance in the bank dwindled. We were running on fumes so we had to stop spending money acquiring new users. By this time, we had a pretty good idea about what it costs to acquire a user and a good guess about the potential monetary value of each user. Right when we were at the end of our runway, we got a call from one of the top venture capital firms in the world, Benchmark Capital.

After learning about the very real dangers of online predators through a situation of someone close to him, one of the partners installed our software. He tested it, he used it, it worked. He got it. He called us and said he wanted to invest as soon as possible.

We were looking for 5 million dollars, but after all the interested parties got together, we had about 7 million confirmed and a term sheet in hand. We were stoked. Our idea was validated, our company was going to grow and more kids were going to be protected. The terms dictated that we move our company from The Woodlands, Texas to Silicon Valley. Some of us, including myself, had young children at the time and deep roots in Texas, but we were willing to pack up shop and head west for the money, for our company, for our product and for the children who needed us.

As our wives started making arrangements to sell houses, research schools in California, pack garages, etc., my cofounders and I piled ourselves and our servers into a minivan and drove to Palo Alto. We stopped in Vegas to celebrate our success, though I don’t remember much about the celebration… because I was so excited to get to California, obviously.

We arrived in Palo Alto and set up shop in the VC’s office, literally. They had a boardroom that they said we could use as we started to hunt for office space. So we set up our things and got back to work, in their offices, as our wives sold our houses and continued planning the multi-family migration.

We had a term sheet, we agreed on the deal, but the money had not been wired yet. We asked several times about it, and were told there was just some delays with the paperwork, with the banking system, getting everyone’s signatures, etc. We were told not to worry. We were told the money is pretty much in the bank… except it wasn’t.

One Tuesday night after being there for a couple weeks, we were going to have our monthly board call. The money was to be wired the next morning, finally. The investor at the VC firm who led the round was going to be on the board the next day, so we invited him to the board call that Tuesday night.

Everyone was excited about the new board member. Introductions were made. Confidence was high. As usual, graphs were presented to highlight product trends. One of the reasons we needed more money is because it was costing us money to acquire users. We knew this, we had a formula, our product was non-viral by nature. Parents don’t talk about their kid chatting with strangers, it makes them look bad. Parents don’t talk about finding out their kids were behaving like predators, it makes them look even worse.

Our new user graph was not impressive. It was flattening out, but that’s because we starting reducing our spend as our balance dwindled. This is why we needed to raise money. We were excited to be able to affect this metric, starting the next day. Our new investor, soon-to-be official board member, seemed a little concerned.

We explained our strategy and our formula, but he seemed surprised that our product was’t exhibiting organic growth like Facebook and YouTube. He got spooked. He told us there might be a problem. He told us to figure out a way, in short order, to make our product viral. This is when the wheels fell off.

Our product was not viral, and it wasn’t going to be.

The next day was weird. We were told maybe it would be a good idea to head back to Texas as things got worked out. We were told they would be in touch and surely we could figure out how we could convince the other partners of the VC firm that our product had huge potential. Everything would be fine, but lets take it slow. We packed up the minivan again and drove back to Texas. We did not stop in Vegas this time.

Post external references

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    https://medium.com/what-i-learned-building/6972e9e7c15b
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