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To VC or Not to VC?

Clate and Scott are frequently asked about their experiences with venture capital. Last week’s guest, Drew Doolan, asked Clate and Scott after the recording about their experiience with venture capital. Would they do it again?

Short answer? Yes, but Clate and Scott delve into the why, the how, and the outcome of making the decision to seek venture capital.

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Clate Mask: Hey. This is a little bonus episode of the Small Business Success podcast. After we had the mics off with Drew Doolan, he asked a question that we get asked all the time from entrepreneurs, business owners, that are wondering about venture capital. And he just asked would we do it again? And would you recommend to entrepreneurs that they raise venture capital? So we had a good conversation about that. We’ll share that with you hear so that you can hear our take on it. But overall, yeah. I’d do it again, and there’s a reason why. So we’ll share that with you.

So, Drew, is there any question you’d like to ask of me and Scott?

Drew Doolan: Yeah. There is a question. I was thinking about it before. If you had to _____ again, would you go down the VC pathway? Would you have others invest in your business as much as you have? Or would you – I just learned these terms the last couple weeks – would you have bootstrapped it?

Clate Mask: Yeah. Great question. I’m happy to address this. Scott, do you want to talk about it?

Scott Martineau: Go ahead. You kick it off.

Clate Mask: All right. Short answer is yes, I’d do it again. I would do it a little bit differently, but the reason I would do it is that – by the way, we didn’t raise venture capital until we were at about a $7-million-a-year business. So we had built it up to that point, which is – gave us a pretty good experience of what it is to bootstrap a business.

But the reason we raised venture capital at that point was that we had a big vision of what we wanted to go do for the world. We saw – we saw that sales and marketing automation was a complete game changer for small businesses, and that the hundreds of customers that we had at the time needed to be hundreds of thousands, if not millions. And that wasn’t going to happen unless we could – at least it wasn’t going to happen in our lifetime unless we could accelerate things and that requires capital. So we had a – we didn’t raise venture capital until we had a vision that was so inspiring to each of us that we wanted to go get the capital.

And I’ll tell you the story real quick. Scott and I were – I remember this so vividly because it was a really – it was a really hard thing to decide we wanted to do this. Well, we had begun to have this vision of what we could do in the world for small businesses with sales and marketing automation.

I – my MBA background was saying, “Clate, this is something you should – you should go raise venture capital and you should take the company public, and you should really go pursue this big vision.” But I was concerned. I was nervous. And I was worried bout it.

And Scott was, like, “We’ll lose control. We won’t have control of the business if we do this.” So there was a big control concern that we had. And I remember very vividly one day. We were meeting with a mentor – the founder of ACT! software. His name’s Pat Sullivan. And he had met with us for a couple of hours in our old war room. I don’t know if you remember this, Scott, that meeting.

Scott Martineau: Oh, yes.

Clate Mask: And I remember this very well because I was leaving town right after that meeting to go to a quarterly entrepreneur workshop that I’ve done for years with Dan Sullivan called Strategic Coach. And I was leaving to Strategic Coach right after we’d had this meeting with Pat. And Pat was telling us, “Guys, you gotta go raise venture capital.”

I wanted to, but I was nervous admittedly. I was very concerned. And so I was in that place where – his meeting pushed me over the edge and it was, like, yes, we need to do this.

Scott was pulling back and was concerned and hesitant. And I remember on my old – [laughs] – this is funny – on my old – Palm handheld phone –

Scott Martineau: Oh, yes.

Clate Mask: [Laughs] It was like an assault weapon. It was so heavy and big. But I remember I sat – I left town, went to the workshop the next day, got out of the workshop, and I didn’t listen to my voice messages all day – and I got back and all through the workshop, I was, like, I know we need to raise capital. And I went to dinner that night with Charisse, and I was, like, “Scott doesn’t want to. I feel like we should.” I’m just sitting in this workshop all day, saying, “We need to do this to go pursue our vision that we have.” And I was thinking I was going to have one of these co-founder – have to work really hard to get to the same page, same vision.

And I was thinking – and Scott and I are almost always on the same page. But overtime, in 15 years, we’ve had some epic, philosophical tussles we’ve had to work through. Not so much recently, but in the earlier years, we had a lot of them – or big one, I should say. So I was talking to Charisse, saying, “How are we going to get on the same page and raise capital? I really believe we need to do this.” And she was, saying, “Well, I think Scott’s going to be – I don’t think it’s going to be as hard as you think it’s going to be.”

I got back from the dinner, into my hotel room, and I noticed my light was flashing on my phone and there was a message. And I listened to it. It was a message from Scott. And Scott said, “Hey. I’ve been thinking about everything that happened yesterday with Pat and he’s right. We gotta do it. We gotta go raise money.” [Laughs] “Let’s go raise venture capital. We got a big vision, and we if we’re going to go achieve that vision, we gotta raise money.”

And so that’s kinda how it happened from us – from my perspective. Anything you want to add, Scott?

Scott Martineau: Oh. It’s fun to hear the story. I’d completely forgotten, which is usual.

Clate Mask: [Laughs]

Scott Martineau: Yeah. I – I think I’d add a couple things. I think one caveat is that this came after a decision that we wanted to go change the world for small business. And that there was a market opportunity that we needed to take advantage of, and speed was of the essence. So I don’t think – I’m – here’s the reality. In almost every case as we’ve raised capital, you get flush with cash and you just are dumb. You just make stupid decisions. And so I would say, number one, don’t do it unless you need to and it’s an escaping market opportunity because I think it’ll just genuinely be more wise. And two, I think we need to invent some type of silent VC round where nobody actually knows. All of a sudden the balance sheet shows up because you’ve gotta approach it as if you're guarding the dollars. And I think the skill that needs to be developed is the ability to say, okay.

Here’s – it’s a mindset of experimentation and we didn’t develop this until – we’re starting – we’re beginning to develop this company-wide. We didn’t have it early on. But it’s how do you take a minimal investment and – this is kind of a Lean Startup concept. I think if we had this baked into the company, it would have been much more effective. But how do you take a small investment, have a hypothesis about what you're going to create, and have a – with the least investment, maximize the learnings and then double down on those investments. I think if you have the right mindset, you can avoid some of the stupidity that just comes naturally. It’s almost too impossible to avoid. You know, just having gone through several rounds of venture capital.

Clate Mask: And that’s why we both love bootstrapping businesses because I would argue that in the early stages of Infusionsoft, we were more – we were much more disciplined with our investments because we had to be.

Scott Martineau: Had to be.

Clate Mask: You just have to be. You can’t just go put money into an initiative and – you know, the business – you're going to go out of business if you don’t do that right.

So you have to do a more hypothesis-driven test-based approach. And I think we did that as a bootstrapping company. So at the very beginning, Drew, I said I would do it again. And it – and I would do it differently. And Scott addressed both of those points. The reason I would do it again is because we had a vision that required funding. The way I would do it differently is I would constrain the capital. I wouldn’t – we were a company that did $7 million a year in revenue and we were cash flow positive, and we brought $9 million of cash into our bank account.

And I don’t care – I don’t care how disciplined you are, you as the entrepreneur might be able to be very wise about that money, but your company, it just – it just doesn’t – [laughs] – it just gets used in some unwise ways. And so when I say I would constrain the capital, if we raise $9 million, I would actually only – I would bring it in in tranches or in pieces, and we’d only have access as we achieve certain milestones.

Because I think the $9 million was a bit of a problem. It was a much bigger problem when we raised $54 million from Goldman Sachs and $55 million from Bain Capital. That was – it’s just really, really tough to have a body of employees not look at say, “Hey. We got money to do whatever we want.”

And I think you do – I will tell you. Scott’s exactly right. We’ve done some really dumb stuff. And I think most people that raise venture – I think almost everybody who raises venture capital does some really dumb stuff. Maybe they don’t admit it, but it’s true. You do. And so I would – yes, I’d raise the money again, but I’d constrain it in different ways and actually build that contractually into the dollars that you're raising so that you don’t do so many dumb things.

Drew Doolan: Thank you.

Clate Mask: You bet. I hope that response – that it was useful and not just nice story time from Clate and Scott. [Laughs] But that it actually – actually useful for you.

Drew Doolan: No, that was – it was great. I got into it ‘cause I can identify with it, but it’s really valuable what you just said for me.

Clate Mask: Good.

Drew Doolan: I mean, I think about it at different times, but I don’t know valid it is for us.

Clate Mask: Well, for most people, I’ll tell ‘em this. Don’t raise venture capital if you don’t have a vision of at least $100-million-a-year business. ‘cause it’s not going to be worth it to you. You got to have a big vision that’s not just about dollars, but in my view, it’s got to be about some significant purpose and mission you're trying to accomplish. But also has the kind of revenue goal or plans that would justify investors putting in money. They need to get a return on their investment and they’re not going to get that unless you’ve got a plan – a viable plan – to build up the business to north of $100 million.

So thanks, Drew, for that question. We love answering questions from entrepreneurs. It’s actually the reason – one of the big reasons why we started the Small Business Success podcast so that we could help business owners in a variety of different situations, a variety of different ways.

But really, sometimes those questions don’t come up on the podcast. Other times, they do. But if you’ve got a question you’d like us to address, we’d be happy to do it. Send us an e-mail at [email protected], and Scott and I will cover it in a future episode. Thanks so much for listening. This has been a bonus episode of the Small Business Success podcast.

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