Because there's much more money out there than there are good deals, some venture firms these days throw down a term sheet almost right away, seeking to lock up a deal for 30 days of due diligence, James explains. By contrast, Guru.com's strategy put the entrepreneurs in control, enabling them to drive up the start-up's valuation through a polite and restrained bidding in which they held most of the cards.
What's more, their strategy succeeded. In the second week of October (right on schedule) Guru.com received term sheets from four of the six firms. Jon and James then split the list and embarked on an aggressive final phase of due diligence, requesting five references from the contact partner at each firm. They methodically asked the same five questions of every reference:
- Why did you choose this VC firm?
- How effective has the firm been in securing deals and partnerships for your company?
- How effective has the firm been in recruiting additional board members?
- How has the firm helped your company increase its valuation?
- How would you rate the contact partner overall, on a scale of one to five?
In the end Guru.com settled on two firms: Greylock and August Capital, which along with a few other investors put into the company almost twice as much as the Slavets had said they hoped for in September. Back then, the Slavets had cautiously pegged the deal in the $8-million-to-$10-million range. As this article went to press, in November, Guru.com was preparing to announce that it had raised $16 million -- a stunning comeback for a company that had been casually brushed off by VCs just nine months earlier. "The first time out, we didn't have anything. We were just three guys saying, 'Picture this," remembers Yau. "The second time out, we were able to say, 'Look at all this backing we've got from this A-plus list of angels; look at our team; look at this feedback from our site."
Indeed, in the view of Guru.com's new venture partners, the company is well worth its valuation. "These guys really understand the market," says August Capital's Andrew Anker. "They really see that for gurus, it's a lifestyle, not just a job, and they're going to give gurus all the things they don't even know they need."
Greylock's Bhusri, who has joined Guru.com's board along with Anker, concurs. "They have done the right things for the right reasons. Not to get the highest valuation or the most money but to help them build a company."
Now the Slavets confront the real task of making that company work. "They've got terrific traction in a very interesting space, but they're going to have to be very flexible and relentlessly focused on the needs of their customers," says CitySearch's Layton. "There's no model for what they're doing. They're organizing something that was inherently unorganized before."
D.M. Osborne is a senior writer at Inc.
Guru.com's Seven Strategies for Financing an Internet Start-Up
The formula for financing an Internet start-up is an imprecise mix of art and science, charisma and luck, timing and contacts. Some companies strike it rich right out of the gate, like Drugstore.com, in Bellevue, Wash. Founder Jed Smith's concept for an on-line drugstore went straight to the top at Silicon Valley venture firm Kleiner Perkins because Smith knew an assistant to partner John Doerr. Other entrepreneurs, such as Blaise Barrelet of San Diegobased WebSideStory Inc., have had to bootstrap their businesses and found outside funding only after proving their model in the market. Whether you're on the high road to capital, like Guru.com, or on the low road, here's a tip sheet for navigating the funding stream.
1. Go after smart money, not easy money.
THE HIGH ROAD: Scour your Rolodex for deep-pocketed contacts in the Internet arena -- and then check with all your friends, your boss, and your colleagues. That's what Guru.com did in spades, and it clearly worked well. Have your contacts introduce you to people who can provide funding or act as strategic advisers. Feature advisers in your investor pitch, and update the list each time a new one comes aboard. "Once the dollars start to flow," observes Salt Lake City entrepreneur Will West, "there's a herd mentality."
THE LOW ROAD: No contacts? Drop in on your chamber of commerce and find out who's involved in the local Internet economy. Track down your closest angel-investor group. Chat with the group's administrator about the sorts of businesses its angels have funded and why. Find out how best to submit your business plan for the angels' consideration. Do everything in your power to put off relying on relatives. In the Internet-finance environment, explains Harvard Business School professor William Sahlman, "from whom you raise money is often far more important than the terms."
2. Use your first dollars to buy topflight management.
THE HIGH ROAD: A truism these days among Internet angels and venture capitalists holds that a stellar management team is worth more than a supercool business plan. "The idea is irrelevant," states venture partner Andrew Anker of August Capital, in Menlo Park, Calif. He's exaggerating -- but not by much. "So many people are focused on the Internet right now, the reality is that any great idea you may have, five other people are going to have, too." Guru.com, for example, bet a lot on being able to hire technology director Kevin Kunzelman early on. Kunzelman, who had been the systems architect of E! Online's Moviefinder.com and Match.com's Internet dating service, was hard to woo. Guru.com had to up the ante twice -- and in the end resorted to offering to pay for him to take a vacation anywhere in the world (he chose New Zealand) on top of a signing bonus. As Guru.com's experience demonstrated, a team that has proved itself capable of running with an idea at Internet speed can break ahead of the pack.
THE LOW ROAD: If you can't bring top talent in-house right away, forge strategic alliances with others and then link their management with your concept. Remember, too, that customers speak volumes about a business.
3. Speed is paramount: get your site up and running.
THE HIGH ROAD: It was the subject of heated dissension among investors, but Guru.com's strategy on this score paid off in the end. Work out bugs in the business while you gain traction in the space. Instruct your Web designer to put a premium on users' experience; look and feel are as important as functionality. Track usage closely and keep the figures on hand when you look for financing. Guru.com deployed user feedback to great advantage in its second round. "The very fact that they had collected it showed that they cared very much and were building a business to serve customers," comments Guru.com venture partner Aneel Bhusri of Greylock.
