Last week I presented at the University of Antwerp, my alma mater. I was selected to be the 2016/2017 ambassador of the alumni and was asked to talk about my career and work. Presentations like this are a bit surreal because I still feel like I have a lot to learn and accomplish. Deep down I'll always be searching for something more. I want my life and career to be meaningful and creative, and full of laughter and friends. This presentation was very special as it was attended by my parents, friends from high school and college, professors whose classes I attended 20 years ago and the university's rector or chancellor, Herman Van Goethem. It was great to laugh and catch-up with old friends and family, and it felt meaningful to share some of my lessons learned to a group of young students.
I sent an internal note to all of Acquia's 700+ employees today and decided to cross-post it to my blog because it contains a valuable lesson for any startup. One of my personal challenges — both as an Open Source evangelist/leader and entrepreneur — has been to learn to be comfortable with not being understood. Lots of people didn't believe in Open Source in Drupal's early days (and some still don't). Many people didn't believe Acquia could succeed (and some still don't). Something is radically different in software today, and the world is finally understanding and validating that some big shifts are happening. In many cases, an idea takes years to gain general acceptance. Such is the story of Drupal and Acquia. Along the way it can be difficult to deal with the naysayers and rejections. If you ever have an idea that is not understood, I want you to think of my story.
This week, Acquia got a nice mention on Techcrunch in an article written by Jake Flomenberg, a partner at Accel Partners. For those of you who don't know Accel Partners, they are one of the most prominent venture capital investors and were early investors in companies like Facebook, Dropbox, Slack, Etsy, Atlassian, Lynda.com, Kayak and more.
The article, called "The next wave in software is open adoption software", talks about how the enterprise IT stack is being redrawn atop powerful Open Source projects like MongoDB, Hadoop, Drupal and more. Included in the article is a graph that shows Acquia's place in the latest wave of change to transform the technology landscape, a place showing our opportunity is bigger than anything before as the software industry migrated from mainframes to client-server, then SaaS/PaaS and now - to what Flomenberg dubs, the age of Open Adoption Software.
It's a great article, but it isn't new to any of us per se – we have been promoting this vision since our start nine years ago and we have seen over and over again how Open Source is becoming the dominant model for how enterprises build and deliver IT. We have also shown that we are building a successful technology company using Open Source.
Why then do I feel compelled to share this article, you ask? The article marks a small but important milestone for Acquia.
We started Acquia to build a new kind of company with a new kind of business model, a new innovation model, all optimized for a new world. A world where businesses are moving most applications into the cloud, where a lot of software is becoming Open Source, where IT infrastructure is becoming a metered utility, and where data-driven services make or break business results.
We've been steadily executing on this vision; it is why we invest in Open Source (e.g. Drupal), cloud infrastructure (e.g. Acquia Cloud and Site Factory), and data-centric business tools (e.g. Acquia Lift).
In my 15+ years as an Open Source evangelist, I've argued with thousands of people who didn't believe in Open Source. In my 8+ years as an entrepreneur, I've talked to thousands of business people and dozens of investors who didn't understand or believe in Acquia's vision. Throughout the years, Tom and I have presented Acquia's vision to many investors – some have bought in and some, like Accel, have not (for various reasons). I see more and more major corporations and venture capital firms coming around to Open Source business models every day. This trend is promising for new Open Source companies; I'm proud that Acquia has been a part of clearing their path to being understood.
When former skeptics become believers, you know you are finally being understood. The Techcrunch article is a small but important milestone because it signifies that Acquia is finally starting to be understood more widely. As flattering as the Techcrunch article is, true validation doesn't come in the form of an article written by a prominent venture capitalist; it comes day-in and day-out by our continued focus and passion to grow Drupal and Acquia bit by bit, one successful customer at a time.
Building a new kind of company like we are doing with Acquia is the harder, less-traveled path, but we always believed it would be the best path for our customers, our communities, and ultimately, our world. Success starts with building a great team that not only understands what we do, but truly believes in what we do and remains undeterred in its execution. Together, we can build this new kind of company.
Founder and Project Lead, Drupal
Co-founder and Chief Technology Officer, Acquia
From the day we started Acquia, we had big dreams: we wanted to build a successful company, while giving back to the Open Source community. Michael Skok was our first investor in Acquia and instrumental in making Acquia one of the largest Open Source companies in the world, creating hundreds of careers for people passionate about Open Source. This week, Michael and his team officially announced a new venture firm called _Underscore.VC. I'm excited to share that I joined _Underscore.VC as a syndicate lead for the "Open Source _Core".
I'm very passionate about Open Source and startups, and want to see more Open Source startups succeed. In my role as the syndicate lead for the Open Source _Core, I can help other Open Source entrepreneurs raise money, get started and scale their companies and Open Source projects.
Does that mean I'll be leaving Drupal or Acquia? No. I'll continue as the lead of the Drupal project and the CTO of Acquia. Drupal and Acquia continue to be my full-time focus. I have been advising entrepreneurs and startups for the last 5+ years, and have been a moderately active angel investor the past two years. Not much, if anything, will change about my day-to-day. _Underscore.VC gives me a better platform to advise and invest, give back and help others succeed with Open Source startups. It's a chance to amplify the "do well and do good" mantra that drives me.
While Michael, the _Underscore.VC team and I have been working on _Underscore.VC for quite some time, I'm excited to share that on top of formally launching this week, they've unveiled a $75 million fund, as well as our first seed investment. This first investment is in Mautic, an Open Source marketing automation company.
Mautic is run by David Hurley, who I've known since he was a community manager at Joomla!. I've had the opportunity to watch David grow for many months. His resourcefulness, founding and building the Mautic product and Open Source community impressed me.
The Mautic investment is a great example of _Underscore.VC's model in action. Unlike a traditional firm, _Underscore.VC co-invests with a group of experts, called a syndicate, or in the case of _Underscore.VC a "_Core". Each _Core has one or more leads that bring companies into the process and gather the rest of the investors to form a syndicate.
As the lead of the Open Source _Core, I helped pull together a group of investors with expertise in Open Source business models, marketing automation, and SaaS. The list of people includes Larry Augustin (CEO of SugarCRM), Gail Goodman (CEO of Constant Contact), Erica Brescia (Co-Founder and COO of Bitnami), Andrew Aitken (Open Source Lead at Wipro) and more. Together with _Underscore.VC, we made a $600,000 seed investment in Mautic. In addition to the funding, Mautic will get access to a set of world-class advisors invested in helping them succeed.
I personally believe the _Underscore.VC model has the power to transform venture capital. Having raised over $180 million for Acquia, I can tell you that fundraising is no walk in the park. Most investors still don't understand Open Source business models. To contrast, our Open Source _Core group understands Open Source deeply; we can invest time in helping Mautic acquire new customers, recruit great talent familiar with Open Source, partner with the right companies and navigate the complexities of running an Open Source business. With our group's combined expertise, I believe we can help jumpstart Mautic and reduce their learnings by one to two years.
It's also great for us as investors. By combining our operating experience, we hope to attract entrepreneurs and startups that most investors may not get the opportunity to back. Furthermore, the _Core puts in money at the same valuation and terms as _Underscore.VC, so we can take advantage of the due diligence horsepower that _Underscore.VC provides. The fact that _Underscore.VC can write much larger checks is also mutually beneficial to the _Core investor and the entrepreneur; it increases the chances of the entrepreneur succeeding.
As founders of startups raise money from investors, their share of the company gets "diluted". This means the percentage of the company they own gets smaller and smaller. Last month a friend asked me the following question: "What do you believe would be a good equity position as a startup founder after a Series A? I don't want to be diluted too much.". This week, another friend who is in the process of raising money asked me if he should accept certain "preferences" from his potential investors in favor of a higher valuation and less dilution.
My answer to both friends was: "Well, euh, it's complex!". Because I get asked about this regularly, I decided to write a blog post about this. In this blog post, I'll discuss the dilutive effect of (1) of multiple rounds of funding, (2) reverse vesting, (3) options pools, (4) pro-rata rights and (5) liquidation preferences.
Let's assume that we have a company, and that our company raised four rounds of financing the past five years:
|Series A||Series B||Series C||Series D|
"Pre-money valuation" refers to a company's valuation before it receives outside financing, while "post-money valuation" refers to the company's value after the capital injection. So, the post-money valuation is the sum of the pre-money valuation plus the capital raised. The pre-money valuation of your company, along with the amount of capital raised will determine the founders' dilution.
If our company raises its first round of funding (Series A) with a pre-money valuation of $4 million and the Series A investors were to commit $1.3M, the company would have a post-money valuation of $5.3 million. In the example, the Series A investors would receive 25% of the company ($1.3 million is 25% of $5.3 million).
|Series A investors||25%|
In an earlier blog post, I recommended a specific formula for deciding how much to give up to an investor in each round. For consistency, this post follows that formula. I consider this formula to be an ideal scenario, and recognize that most founders will be in a situation where they have to give up much more, or even be in a situation where they want to give up more. Don't get hung up on the actual numbers used in our example.
You would think that in our example, the founders would be left with 75% of the company after raising their Series A. Unfortunately, this is not usually the case; investors will often insist that an "option pool" is created. An option pool is an amount of the startup's common stock reserved for future employees. Investors expect the employee option pool will equal 10%-20% of the company post-investment; they also expect these shares will be set aside from the founders' equity.
Let's say that the Series A investors' term sheets requires a "15% fully diluted post money option pool" to be setup. This means that the investors want 15% of the company, after the financing is closed, to be in an option pool that will be granted to future employees. The "capitalization table" of our company after the Series A would look like this:
|Series A investors||25%|
|Employee option pool||15%|
The bottom line is that instead of owning 75% of the company, the founders will end up owning 60% of the company, and the investors 25%. For the founders, the $1.3 million financing was not 25% dilutive but 40% dilutive.
As an entrepreneur, I think it is flawed to take the option pool out of the founders' equity; the option pool should be carved out after the financing and dilute both the founders and the investors. After all, future employees who are granted options after the financing add value to the post-money valuation of the company. I'll leave that gripe for another blog post but for the purpose of this blog post, the key take-away is that creating an option pool is usually dilutive for the founders and an important part of the negotiation with investors. The option pool size and the pre-money valuation need to be looked at together and can both be negotiated. Investors should price on the basis of a complete team needed to execute on the opportunity. If the founders have done a good job of hiring that team, the pool size should be smaller. If there are still a lot of hires needed to create a full team to execute, then the pool needs to be larger.
Stock options provide employees the right to purchase a set amount of shares for a set price in the future. To encourage employees to stick around, they don't gain control over their options for a period of time. This period is known as the "vesting period". Once the options are vested, they can be exercised. When you exercise the stock options, you buy shares in the company, usually at a very low price.
Founders are different from employees because they received their shares when they started the company -- they don't usually have stock options. To make sure that founders stay with the company, investors will set up a "reverse vesting" strategy. This is similar to "stock option vesting" except that it gives investors the right to repurchase shares already owned by the founders. The "vesting period" in this context measures how many shares the company can repurchase from a departing founder. The longer a founder stays with the company, the less stock the company can repurchase if a founder were to leave.
A founder who remains with the startup through the end of a particular vesting period -- typically four years -- will be fully vested and retain all founder's shares. The founder who leaves before the vesting period expires will most likely be diluted as the company repurchases some founder's shares.
As our company grows and the time comes to raise a Series B, the expectation is that the valuation of our company has increased. Let's assume we used that $1.3 million well, and that the value of the company grew from $5.3 million to $13 million.
If we raise $3,250,000 additional capital in a Series B financing on a pre-money valuation of $13 million, then the series B investors will get 20% of the company. In the Series B, the founders, the employees (option pool), and Series A investors are all diluted. Often the new investors will require that the option pool is increased. Let's say they want the option pool to remain at 15% -- in this case, the founders, employees and Series A investors would suffer additional dilution on top of the 20%. In our example, the total dilution will be a little over 23%. The new capitalization table looks as follows:
|Series A||Series B|
|Series A investors||25%||19%|
|Series B investors||20%|
|Employee option pool||15%||15%|
It's not always as simple though. Investors will usually insist on "pro-rata rights". Pro-rata rights give investors the right to invest in a startup's future rounds and maintain their ownership percentage as the company grows and raises more capital. It is an important tool for early stage investors, as most of their investments fail. Pro-rata rights allow investors to "follow" the investments that are doing well. Their ability to double-down on winners is important to compensate for their losses. I believe it is fair to give early investors pro-rata rights; they are a reward for backing you early. But as I've learned, this is also where things get complicated.
At times, new investors don't want older investors to participate so that they can take more of the round. Usually, the new investors will insist that they put enough money to work so they can own a substantial-enough share of the company to make the investment worth their time and effort. In this case, the new investors will try to force the old investors to give up their pro-rata rights. Other times, the new investors want early investors to demonstrate their confidence in the company by participating in the round, and to show that they are not overpaying. To facilitate the "pro-rata dance" between investors, and to satisfy both the old and new investors, founders are often required to take more dilution and to give up more of their company. For simplicity, I ignored pro-rata rights in our running example, but founders need to be aware of how pro-rata rights can impact dilution in later funding rounds.
Our company continues to grow and goes on to raise Series C and Series D:
|Series A||Series B||Series C||Series D|
|Series A investors||25%||19%||15%||14%|
|Series B investors||20%||16%||15%|
|Series C investors||15%||13%|
|Series D investors||10%|
|Employee option pool||15%||15%||15%||15%|
In our example, the founders would end up with 34% of the company after four rounds of financing (assuming no additional option grants for the founders). As mentioned above, I consider that an exceptional outcome for the founders. Most founders will own substantially less at this point. For example, Aaron Levie, founder of Box, owned about 4% of Box when the company made its public offering in 2015. Zendesk founder and CEO Mikkel Svane owned about 8% at its IPO in 2014, and ExactTarget's co-founder owned 3.8% at the time the company filed its S-1.
But there is more -- I warned you it's complex! When investors put money in your company, they will require the company issue them "preferred stock". Investors' preferred stock has various "preferences" over "common stock", owned by founders and employees. One of the most common preferences are "liquidation preferences". A liquidation preference helps investors make sure that they'll be paid before common shareholders when a company is sold, declares bankruptcy, or goes public. This is especially important when the company is being liquidated for less than the amount invested in it.
If our company was to sell for $75 million, you would think that per the table above, the Series D investor would make $7.5 million (10% of $75 million) and the founders would make $25.5 million (34% of $75 million). However, if our Series D investor negotiated a "liquidation preference" equal to their $10 million investment and the company is sold for $75 million, they will be guaranteed their $10 million back. The remaining $65 million would go to the other shareholders. This is called a "1x liquidation, non-participating preference". In the event the company sells for less than the valuation at the time of the investment, the Series D investors will make more than their percentage ownership, and the founders will make less than their percentage ownership. In other words, when your investors have liquidation preferences, your percentage ownership isn't always what it looks like on paper (or in a capitalization table, to be exact).
Sometimes, investors want "participation rights". In the case of "participation rights", the investors would be entitled to the return of their entire investment prior to the distribution of any proceeds to the common stockholders. However, the preferred stockholders would then also be treated like a common stockholder and would share in the remaining proceeds. If our company sells for $75 million, the Series D investors would get their $10 million out first, and then get their 10% share of the remaining $65 million for a total return of $16.5 million ($10 million + 10% of $65 million).
There is also a concept called a "multiple". Where founders and employees can get really hurt is when preferred stock owners have a 2x or 3x multiple. If our Series D investors have "3x liquidation rights, participating", they would be guaranteed $30 million back (3 times $10 million) and take 10% of the remaining $45 million. The founders would make $15.4 million. Instead of their 34% share, the founders only get 20%. So, before you agree to any liquidation multiple or participating rights, you should run a few models to understand how much you and the other founders will receive based on various liquidation scenarios.
Because of the preferences, the price or market value of common stock is typically much smaller than that of preferred shares -- especially in the early days. Because common stock is worth less than preferred stock, your percentage ownership is often meaningless. This is often evidenced either by a 409(a) valuation in the USA, or the market price of common stock when sold to a third-party. Preferences generally expire at an IPO, at which time preferred stock converts into common stock. At that point, common and preferred shares have the same value.
In summary, valuations, multiple rounds of funding, option pools, reverse vesting, pro-rata rights and liquidation preferences can all have a dilutive effects on startup founders. As a founder, it can be difficult to predict or plan how much dilution you will suffer along the way. As with everything, the devil is in the details -- and hopefully this blog post helped you be a bit smarter about raising money and negotiating term sheets. In general, I don't think founders should worry about dilution too much but that is a topic for a future blog post ...
From time to time, people ask me how much money to raise for their startup. I've heard other people answer that question from "never raise money" to "as little as you need" to "as much as you can".
The reason the answers vary so much is because what is best for the entrepreneur is seemingly at odds with what is best for the business. For the entrepreneur, the answer can be as little as necessary to avoid dilution or giving up control. For the business, more money can increase its chances of success. I feel the right answer is somewhere in the middle -- focus on raising enough money, so the company can succeed, but make sure you still feel good about how much control or ownership you have.
But even "somewhere in the middle" is a big spectrum. What makes this so difficult is that it is all relative to your personal risk profile, the quality of the investors you're attracting, the market conditions, the size of the opportunity, and more. There are a lot of parameters to balance.
I created the flowchart below (full-size image) to help you answer the question. This flowchart is only a framework -- it can't take into account all decision-making parameters. The larger the opportunity and the better the investors, they more I'd be willing to give up. It's better to have a small part of something big, than to have a big part of something small.
Some extra details about the flowchart:
My view is that of an entrepreneur having raised over $120 million for one startup. If you're interested in an investor's view that has funded many startups, check out Michael Skok's post. Michael Skok is Acquia's lead investor and one of Acquia's Board of Directors. We both tried to answer the question from our own unique viewpoint.
The older I get, the quicker the years seem to fly by. As I begin to reflect on a great 2014, one thing is crystal clear again. People are the most important thing to any organization. Having a great team is more important than having a great idea. A good team will figure out how to make something great happen; they'll pivot, evolve and claw their way to success. I see it every day at Acquia, the Drupal Association or the Drupal community. I'm fortunate to be surrounded by so many great people.
By extension, recruiting is serious business. How do you figure out if someone is a great fit for your organization? Books have been written about finding and attracting the right people, but for me the following quote from Dee Hock, the founder of Visa, sums it up perfectly.
"Hire and promote first on the basis of integrity; second, motivation; third, capacity; fourth, understanding; fifth, knowledge; and last and least, experience. Without integrity, motivation is dangerous; without motivation, capacity is impotent; without capacity, understanding is limited; without understanding, knowledge is meaningless; without knowledge, experience is blind." — Dee Hock, founder of Visa.
Most hiring managers get it wrong and focus primarily on experience. While experience can be important, attitude is much more important. Attitude, not experience, is what creates a strong positive culture and what turns users and customers into raving fans.
Business model innovation is usually more powerful than technical innovation; it is more disruptive and harder to copy than technical innovation. And yet, so many companies are focused on technical innovation to compete.
Consider Airbnb. What makes them so successful is not a technical advantage, but a business model advantage that provides them near-zero marginal cost. For a traditional hotel chain to increase its capacity, it needs to build more physical space at significant cost. Instead of shouldering that setup cost, Airbnb can add another room to its inventory at almost no cost by enabling people to share their existing houses. That is a business model innovation. Furthermore, it is extremely difficult for the traditional hotel chain to switch its business model to match Airbnb's.
The same is true in Open Source software. While it is true that Open Source often produces technically superior software, its real power may be its business model innovation: co-creation. Open Source software like Drupal or Linux is a co-created product; thousands of contributors build and enhance Drupal and everyone benefits from that. A large Open Source community produces vastly more software than a proprietary competitor, and shares in the production and go-to-market costs. It disrupts proprietary software companies where the roles of production and consumption are discrete and the production and go-to-market costs are high. While established companies can copy key technical innovations, it is extremely difficult to switch a proprietary business model to an Open Source business model. It affects how they build their software, how they monetize the software, how they sell and market their software, their cost structure, and more. Proprietary software companies will lose against thriving Open Source communities. I don't see how companies like HP, Oracle and SAP could change their business model while living quarter to quarter in the public markets; changing their business model would take many years and could disrupt their revenues.
Take Amazon Web Services (AWS), one of the most disruptive developments in the IT world the past decade. While AWS' offerings are rich and often ahead of the competition, the biggest reason for the company's success is its business model. Amazon not only offers consumption-based pricing ('pay as you consume' vs 'pay as you configure'), it's also comfortable operating a low-margin business. Almost 10 years after AWS launched, at a time that vast amounts of computing are moving into the cloud, HP, Oracle and SAP still don't have competitive cloud businesses. While each of these companies could easily close technical gaps, they have been unable to disrupt their existing business models.
If you're in a startup, innovating on a business model is easier than if you're in a large company. In fact, an innovative business model is the best weapon you have against large incumbents. Technical innovation may give you a 6 to 18 month competitive advantage, but the advantage from business model innovation can be many years. Too many startups focus on building or acquiring innovative or proprietary technology in order to win in the market. While there is usually some technical innovation around the edges, it is business model innovation that makes a successful, long-standing organization -- it tends to be a lot harder to copy than technical innovation.
Background in business is a 'nice to have', not a 'must have' for an aspiring entrepreneur. I had no solid business background when I founded Mollom or Acquia (I launched them roughly at the same time).
Other than the standard things (an idea, passion and the willingness to act), the most important thing that aspiring entrepreneurs need is the understanding that 80% of entrepreneurship is sales and marketing. If as a founder, you're not obsessed with sales and marketing, you're a liability rather than an asset.
You don't have to be the best sales and marketing guy (I am far from that), but you better enjoy getting other people excited about your project, company or product. It will help you not only with finding customers, but also with recruiting a world-class team, raising venture capital, and more. So if there is one thing you should learn before starting a company, it is "sales and marketing" (in the broad sense) — and you better be passionate about it, because you'll invest years of your life to selling and evangelizing to make your company a success. Without customers or a team, you won't need any other skills, because you'll be out of business.
You need to be talking about your idea all the time. Too many entrepreneurs believe that if they build a killer product, customers will come. It almost never works like that. Smart entrepreneurs do it backwards; they find customers first and build their product only when they have customers ready to start paying. Not testing the market by selling from day one can lead to months, if not years, of wasted time and money. So stop being so secretive about your idea. You will never find your product-market fit by keeping your idea secret until it is perfect. If you're afraid of people telling you that your idea is stupid, chances are you may not be ready to be an entrepreneur.
When I started working on Drupal in my college dormitory 12 years ago, I had no idea that one day it would be used by 2 percent of the world's websites. What is even more exciting is the open source community that has grown up around Drupal.
I co-founded Acquia six years ago to support the growing number of organizations that rely on Drupal, and also co-founded Mollom to solve the spam moderation challenges for website owners. Six years later, Mollom was acquired, and Acquia has almost 400 employees. As I've encountered challenges every step of the way. Here are three lessons learned.
So often I meet entrepreneurs who are working on a startup concept. They have a great idea and a business plan to bring it to market, but they're thinking too small about what they're trying to do.
I believe companies are most successful when they have a mission to change the world. When you set ambitious goals, you'll better position yourself for success. You become what you believe.
Being shortsighted can be a big barrier to success, because you can easily miss the window to capitalize on an opportunity. It's why I founded Acquia in the United States; I immediately had access to a larger market. We moved quickly to be a global company to maximize our opportunity, and it's made all the difference.
"Fail fast, succeed faster" is a philosophy that's been adopted across the company at Acquia. It's perhaps counter intuitive, but the idea is that in building a startup, you're going to fail. There will be problems, and the faster you run into them, the faster you can learn, adjust, and grow.
Implied in the fail-fast philosophy is that you'll be open to failure, and that can be hard for entrepreneurs who are so focused on success. People don't like to fail, so they're not inclined to celebrate their failures and embrace the lessons learned. Yet doing so means you'll more quickly make the needed – and often painful – adjustments to get on the right path faster.
In the initial business plan for Acquia, we expected to support a specific distribution of Drupal that we'd closely manage. Early prospects told us repeatedly it was a great strategy, yet when we took our offer to market, the buyers weren't there. We realized very fast that our business plan needed a big change, that we needed to support Drupal in whole. It was a terrifying proposition at that stage of our business, but we realized that was what the market needed most. We made the change, and it quickly put us on a successful course.
I think some people get inspired to launch a startup because of its potential rewards, but launching a successful business starts with having a passion to solve a problem. I was passionate about building websites; it was my biggest hobby before it was ever a business opportunity.
When we started Acquia, our lead investor told me the key to a successful startup isn't in a good idea, but rather is in having a good team. A good team will figure out how to make something great happen. They'll pivot, they'll change, and they'll claw their way to success. Find talented people who share your passion, and together you'll find your way toward building a great business.
(The blog post below was a guest article I wrote for Inc Magazine and was published in September 2013. It has been a while since I shared a startup lesson on my personal blog so I'm cross-posting my article here.)
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.
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