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Things are heating up in the Drupal world as both CommerceGuys and SubHub raised venture capital money. We're still waiting for an official announcement, but word on the street is that CommerceGuys raised around 1 million euros to develop a number of e-commerce products and services for Drupal. SubHub raised more than 1.2 million euros to date to develop SubHubLite, a hosted service for Drupal 7 comparable to Drupal Gardens and Buzzr. In addition to CommerceGuys and SubHub, I know of at least two other Drupal companies that are in the process of raising money from investors ...
Selling a product has more upside potential than selling consulting and professional services which you can only bill by the hour. However, it is difficult to bootstrap a product based business without a major investment of funds -- usually from outside investors. I've seen many try and fail. In almost all cases, it failed because the company was under-capitalized. It takes a lot of resources to create a successful and defensible product. Furthermore, people tend to forget about sales and marketing. It's not enough to build your product -- you have to bring it to market as well. That is not trivial either.
I don't have a rich uncle, so I would not have been able to co-found Acquia without venture capital financing. We decided that we wanted to focus on being a support and software product company with a strong partner eco-system. Starting Acquia wasn't the easiest route for me, but looking back at the past three years of Acquia, I believe that I made the right decision. Based on how much Acquia has contributed to Drupal and what it has enabled me to do, I like to believe it would have been a loss if I had taken a more conventional route -- or had I decided to continue to work on Drupal as a hobby project.
It's refreshing to see that more and more Drupal companies aspire to become successful product companies and that they are seeking venture capital. I always admired the Ruby on Rails community for its seemingly entrepreneurial attitude. I'm glad to see more of it in the Drupal community as well. There is a good deal of fear surrounding venture capitalists but if Drupal is going to grow, we should expect to see more venture-backed companies building Drupal products. Venture capital financing can be good, especially if these companies give back to Drupal and if they build products and services that make our life easier. We all benefit from that.
In this post, I want to focus on one of the most difficult questions for entrepreneurs raising money from investors: what is the right amount of capital to raise? We debated this question extensively in each of the three rounds of raising venture capital at Acquia. It's particularly a tricky question for people like me who are relatively new to venture capital. I spent plenty of time thinking about this and talked about it with numerous successful entrepreneurs that have raised money before.
Based on my own thoughts and my informal survey, my current best answer is the following: the right amount of money to raise is somewhere between the following two choices: (1) enough to build the business that you want to build and (2) as much as you can without being insane or irresponsible. Unless the company does incredibly well, the difference won't be that large.
Raising less money than you actually need can be really destructive. First, it could cause you to miss opportunities because you won't be able to expand fast enough. Second, the company might not survive unexpected setbacks. Last but not least, without sufficient capital you might not be able to attract or retain the right talent you'll need.
Conversely, raising too much money unnecessarily dilutes the ownership of both the founders and the employees. It also makes it difficult to raise more money later on. And it makes it harder to sell the company: the more money you raised, the bigger the price tag becomes as the investors will look to make a multiple on their investment. At a minimum (worst case), you will have to sell the company for at least the total liquidation preference -- hopefully a 1x non-participating.
When in doubt, raise more money rather than less. Growing a start-up is hard as it is. You don't want to introduce more risk by not having enough capital. You want to be able to run a few experiments, make a few mistakes or be able to take advantage of unexpected opportunities.
Being able to project how much cash you'll need is an important discipline to master. Cash is the lifeblood of any company. Making financial projections and forecasts is obviously more difficult when the company is pre-revenue or just starting to take in revenue. You'll have to make many assumptions.
Trying to determine how much money you need feels like trying to solve an equation with too many unknowns. It's a balance between the size of the opportunity, increasing the likelihood of success, optimizing for the financial outcome of all employees, the business' situation relative to the market, and so forth.
At Acquia, we made assumptions about the number of customers, average sale price, customer acquisition cost, product mix, etc. We used these assumptions to estimate our costs and revenues. To help ensure that we weren't fooling ourselves, we tried to validate as many of our assumptions by talking to other entrepreneurs and comparable companies. So we talked to key people from other open source companies (e.g., MySQL and jBoss) that are in the commercial support business.
The better your assumptions, the better you can estimate how much capital it takes to build your company. In each of our funding rounds, we raised at least enough money to achieve our goals and some extra beyond our plans to handle bad surprises or unexpected opportunities. So far, that has been a good strategy for us.
To my surprise, a lot of people that I interview at Acquia don’t understand stock options or have never heard of it. This blog post explains what stock options are about. It is a very technical topic but for the sake of this post, I am going to keep it really simple and make some over-simplifications.
In essence, a stock option is a right given to an employee to purchase stock at some point in the future at a set price.
When a company is founded, the founders own 100% of the company. When they raise money from investors, they give them a share of the company's stock in exchange for money. In addition to that, most institutional investors will require that you establish an "option pool" which usually accounts for 10% of the company. So if you sold 30% of your company to an investor for 2 million dollars, and you set aside 10% for the option pool, the founders still own 60% of the stock and have 2 million dollars to work with.
Having an option pool is very common for a venture backed startup, and fairly uncommon for most small companies. At Acquia, which is a venture backed company, we give our full-time employees stock options on top of a competitive salary. These options come from our option pool.
If you are an employee of a startup, stock options are a big deal as you are going to receive stock options as part of your compensation. It is a big deal because it means you have the option to be a shareholder and to share in the gains. It's a big part of the startup culture, and an important reason why top engineers prefer venture backed startups.
So what exactly does that mean for you as an employee?
When you join a startup as an employee, in addition to your salary, you might be granted 10,000 stock options at a strike price of $1 per share. Those options are taken from the stock option pool that is set aside especially for employees. In our example above, all employees together can own up to 10% of the company.
When the company is founded, the stock is basically worthless. The founders, the employees and the investors will want to steadily increase the value of the company, and by extension, the value of the company's stock.
At the time of an exit, the stock is hopefully worth $100 per share or more. So if you were granted 10,000 options at a strike price of $1 per share, you can buy 10,000 shares for $10,000. However, at that point, the shares are immediately worth $1,000,000 as over the years, the stock price has increased to $100 per share. In other words, the 10,000 shares that you got when you joined, can make you a $990,000 profit on top of your salary.
Granted, the value of the company might not always go up, or it might not go up that fast, but it certainly could. Hundreds of Google employees became millionaires overnight when Google went public. Hundreds of Google employees left to join Facebook -- not because they get a better salary but to get some of Facebook's pre-IPO stock options. When a startup is growing and successful, the price will go up over time. At the same time, if the company fails, the employee equity will be worthless.
The reason startups use stock options is because it allows them to attract and retain high-quality people at reasonable salaries. You can choose to go work for a startup for $85,000 per year in salary and 10,000 stock options granted over 4 years, or you can choose to work for a company for $90,000 in salary and get no stock options at all.
Do you want to take the reduced salary and some risk and swing for the fences, or you do you prefer predictability without the potential for a big upside?
My first job out of college I worked for a venture backed startup that granted me two rounds of stock options -- both grants were rendered worthless as the company didn't survive the bubble in 2001. Even so, I never regretted the choice to go work for this startup. I still got paid a fair salary, I learned a lot and just loved the start-up culture that we had created.
I firmly believe there is an entrepreneur tucked away in many of the best people. For those people, the daily satisfaction of working with high-quality colleagues in a fast-growing company, and the ability to share in the company's success as a shareholder, is worth a lot more than a bigger salary and predictability. I knew that was true for me when I was 21, and I know it is still true now that I'm 31.
Last week in a restroom in New York city, I washed my hands inadvertently with mouthwash. It sounds silly, but it looked like the soap to me. The bathroom was so posh and the container it came in was deceptive: who expects to find mouthwash in a restroom? But, this wasn't a normal restroom.
The Yale Club of NYC with its twenty-two stories is without doubt the most impressive private club house I've ever seen. Access is restricted almost entirely to alumni and faculty of Yale University. Needless to say, it is not the usual location for a Drupal event. However, this was not a normal Drupal event.
This was the location for the first Drupal Business Summit run by Acquia. The Summit brought together business leaders from many leading companies, including a number of CIOs and Vice Presidents from public companies.
Despite my faux pas while washing my hands, the event was a nice reminder for me that Drupal has made its way to many large global organizations and is on the radar for business executives in a way it has never been before.
Last year, I wrote about how CIOs are starting to take notice of Drupal. Today, CIOs of hundreds of companies are actively evaluating or adopting Drupal. A lot has changed since I wrote that blog post, and the next eighteen months promise to be a roller-coaster ride. It's happening.
Acquia has organized three more Drupal Business Summits: one in Washington D.C. on November 18, another in Chicago on November 30; and a third in San Fransisco on December 2. As indicated by the event in New York City, it's an excellent way to spread the message about Drupal to communications and IT executives. Nothing is as effective as for people to hear about Drupal from their peers. It's not an event for developers -- unless you get a kick out of washing your hands with mouthwash.
Exciting news today! We are announcing that Acquia closed $8.5 million in Series C funding. Combined with our Series A funding and our Series B funding, this brings our total funding to $23.5 million USD.
In the last year, our business grew by more than 300% and we went from 30 to 70 full-time employees. Drupal Gardens grew from 0 to 25,000 sites, we added 100 enterprise customers to Acquia Hosting, and our support business has in excess of 550 customers. Drupal itself now powers more than 1% of the web.
I sometimes joke that Acquia is 3 startups in one; our support business (Acquia Network) is similar to RedHat’s business model, our managed cloud hosting business (Acquia Hosting) is similar to EngineYard or Heroku, and Drupal Gardens is like Wordpess.com, Squarespace or Clickability except that it is all based on Drupal. The good news is that each of these 3 product lines are doing really well. As a result, we had a lot of interest in the round and saw another large increase in valuation.
We weren’t sure if we could go any faster but we just found the turbo button. We are going to use much of the capital we raised in our Series C round to:
- Help grow Drupal and expand the market for Drupal in the enterprise world. We'll continue to contribute code and user experience design, sponsor and organize events, promote Drupal in the enterprise, and provide leadership in various areas of the Drupal project. We're dedicated to raising the tide for everyone in the Drupal community.
- We’re going to grow our engineering team and increase our investment in our products; Acquia Network, Acquia Hosting, Drupal Gardens and Drupal Commons. In future blog posts, I'll start to share more details around my vision for Acquia and how everything we do fits into a bigger picture.
- Accelerating the growth of our world-wide operations by hiring sales, marketing and technical staff in different parts of the world. A startup is a search for a scalable, repeatable business model. We found a couple, and now is the time to put the pedal to the metal. In early 2011, Acquia will expand to Europe.
- Continue to build a global partner ecosystem to help organizations create killer web experiences.
Acquia’s growth is a testament to the growth of Drupal worldwide. Acquia wouldn’t have made it this far without our customers, our partners and our friends. Thank you!
I plan to write more about the process of raising money, what it means to work for a venture backed start-up and lessons learned in starting a business in the Open Source world. If you have questions, feel free to ask them in the comments and I'll do my best to answer them.
3/5 of the Acquia team celebrating our Series C funding.