Don’t worry, raising venture capital is hard for everyone--even those with a distinct advantage and knowledge-base like Brian Halligan, the co-founder and CEO of HubSpot.
Halligan, who has also authored two books, Inbound Marketing and Marketing Lessons From the Grateful Dead, worked in venture capital before he co-founded the inbound marketing company HubSpot in 2006. On Thursday, Halligan joined an Inc. Live Chat with Inc.com Deputy Editor Allison Fass and shared his genesis as an entrepreneur, his experience raising venture capital and what he learned from the process.
“I was an entrepreneur in residence at a venture fund and that’s a really interesting gig… I got to see how the sausage is made inside a venture fund,” said Halligan in the live chat. “It was actually a lot different than I thought, so it was very useful.”
It was while he was working in venture capital that Halligan came up with the idea to start HubSpot. During the ten months Halligan worked at the fund, it was his directive to work with small companies to help them grow. He quickly learned that the traditional marketing model was broken.
“They all had that same marketing playbook. This sort of tried and true 1990’s old school playbook and the more I watched the playbook; the more I came to the conclusion that the plays didn’t work anymore,” Halligan said. “People were sick and tired of being marketed to and sold to.”
So Halligan and Dharmesh Shah founded HubSpot with the intention of rewriting the marketing playbook. This meant the duo needed money to fund the startup and set out to get it from VCs as so many startups do. Today, HubSpot has a reported $131 million in funding--of which $100 million is from high profile VCs. But, according to Halligan, raising capital wasn’t easy for the startup.
Look, It's Just Hard
Halligan stressed that raising capital was difficult for him even with his background in the VC space and that movies and television make it look a lot easier than it actually is. He specifically referenced the Social Network as being one instance where Hollywood got raising capital wrong.
“In reality, it’s a bear to raise capital,” said Halligan. “Even I was a total insider in the game and I had a heck of a time raising our Series A.”
Halligan walked through the process of raising capital from VCs, starting with the first meeting. He said this meeting is always with a principal--never a top dog in the firm.
“You have about a 50/50 chance of convincing that principal that you have a good idea, a good market and a good team,” he added.
If you do catch the principal’s attention, next comes a meeting with a partner. Which if you are lucky doesn’t lead to a meeting with other partners typically according to Halligan, but will get you an introduction to one of the partner’s colleagues that runs one of his companies before you are finally accepted into the fold and meet the other partners. In other words--it is an uphill climb.
“By the time you are through with all of the meetings, the [chance of getting funded] it’s like one-over-two to the tenth power,” said Halligan. “It takes a lot of time.”
So what are Halligan’s pointers for raising capital?
Get the geography right
He stressed that you need to approach the right firms--firms that actually care about investing in a startup in your area.
“Let’s say you’re in Baltimore, it is pretty unlikely that a Silicon Valley venture capitalist would fund--at least a series A--round in Baltimore,” said Halligan. “It is very unlikely, so you have to get your geography right.”
Get the firm right
According to Halligan, it is vital that you are approach the right type of VC firm. If you want an early stage investment, be sure you don’t ask a firm that typically does late stage investments, and vice versa.
But he also added that securing top tier investors in the early stages is important. If you get investments from top tier firms--he brought up Sequoia as an example--other investors will follow.
“If you go with a second tier investor, the top tier guys tend to turn their nose up at you. They shouldn’t but they do,” Halligan continued.
Get the partner right
Even once you have the other two in place, you need to make sure that within the VC firm you pick the right partner to make your case to. The partner you approach should have a background compatible with you company and experience in the area.
“Say that that partner has a background in biotech, hat partner in biotech is not going to invest in a marketing software company," said Halligan. “At the end of the day, if that partner is going to stand up to his partners and tell them that they are doing this deal and convince them, he has to have some domain expertise and background. You need to find the partners that really get your space.”
Click here to watch a playback of the Live Chat.