InsideSales.com founder and CEO Dave Elkington and his wife worked graveyard shifts in 2004 and 2005 for a cleaning service. They vacuumed a doctor's office, prepping it for the next day's visitors, all in the name of spare cash for their scrappy startup. At the time, their only outside funding was a $10,000 friends-and-family investment from Elkington's mother-in-law.

It wasn't until the summer of 2012 that the company, now a 570-employee, Provo, Utah-based maker of predictive analytics software, received its first round of venture capital: a $4 million infusion led by VC firm Hummer Winblad and Josh James, the founder of software-as-a-service powerhouses Omniture and Domo. 

As it turned out, that long-awaited infusion was just the start of the cavalcade. In early 2013 InsideSales.com raised another $35 million, from Hummer Winblad again and U.S. Venture Partners. One year later, the company closed a $100 million round, at a valuation near $1 billion. This time, the investors included Polaris Partners, Kleiner Perkins Caufield & Byers, Salesforce.com, three other VC firms, and several individuals, not to mention Hummer Winblad and U.S. Venture Partners, back for more.

Prior to closing the $100 million round, there were as many as 25 VC firms pursuing a deal with the company, says Elkington. He and the top team at InsideSales.com eliminated most of these suitors, turning away roughly $200 million in the process. How and why did Elkington screen his investors, and what advice does he have for other entrepreneurs in this enviable position? Here's a short list: 

1. Do not delegate the time-consuming work of vetting VCs. As the founder, you have to do it yourself, even though it will "distract you from operations," says Elkington.

For Elkington, this stressful period lasted three months, from December 2013 to February 2014.

"It was disruptive," he says, meaning disruptive to his plans for growing the business. Instead of courting new customers and key hires, Elkington found himself researching and assessing investors.

As badly as he wanted to get back to business as usual, he simply could not do it during this three-month window. To this day, he feels as if InsideSales.com's 2014 was really 10 months long instead of 12 months, because his January and February were so devoted to prospective investors. 

What could he have done differently? "Nothing," he says. "Just complain about the challenge and how hard it was. I can just be pissed that it was hard."

However, Elkington eventually learned to set a time frame with investors, giving them firm deadlines to make their offers, citing his own need to get back to business as usual.

2. Call other founders who've dealt with the same VCs--for better or worse. Elkington's process for screening VCs was simple: "Talk to other entrepreneurs who've taken money from them, or who [purposely] didn't take money from them," he says. 

Don't forget: You are not only screening the VC firm. You are also screening the individual partners at that firm. So when you're talking to other founders, make sure those founders have dealt with the relevant partners. 

Elkington says he generally spoke to at least a dozen entrepreneurs who'd either worked directly with a particular partner or decided not to. He also made a point of speaking to entrepreneurs who took the VC firm's money but experienced less-than-lucrative exits. He was curious how the VCs treated people, even when fiscal outcomes were unsatisfactory. 

Most of the VC firms provided these negative references. There were, however, firms that were less than eager to supply them. This reluctance made it easy for Elkington to eliminate the firms from his list. 

"I certainly gave him [contact info for] every CEO I worked with," says Dave Barrett, managing partner at Polaris Partners. "But being really thorough, he also checked on [Polaris] itself and checked with people I didn't give him, including founders who weren't CEOs. He did his own work beyond the list I furnished him, which was impressive to me."

There were also instances in which the VC firms gave references they thought would be glowing. But when Elkington actually spoke to the entrepreneurs, they painted a different picture. Typically, the entrepreneur would hedge his opinion, saying something like, "They're a good firm, but I don't know if...," going on to disclaim their faint praise in one way or another. 

3. Take copious notes of your reference-checking conversations--and cross-check them with your colleagues' impressions. Though Elkington led the mission, he was not the only one checking references. He and InsideSales.com's executives consolidated all of their notes into a single file.

They also created their own ranking system as a shorthand way to see which VC firms and partners had made the best collective impression.

4. Recognize that a great VC firm with superb partners still might not be the best match. "Sometimes firms I excluded weren't bad, they just weren't culturally aligned with what I was trying to build," says Elkington.

"They just didn't see the world the way I see it," he continues. "But friction is what kills a company, and it typically comes from misalignment." 

One of the main issues for Elkington was that he and his top team retain control of the company. He was happy for the VCs to provide consultative support, but that had to stop short of decision-making authority.

The good news, says Elkington, is that it's "amazingly easy" to determine if a VC will let the entrepreneur retain control. The reason? VCs are generally the bold-speaking types who come right out and say how they feel. "Venture folks are the alpha male typically in society," he explains. "They don't want to hide anything. They don't think they need to."

For investors, the issue is seldom the abstract principle of whether a founder should retain control; it's whether the founder's vision and leadership style are a match for what the investor is seeking in a partnership.

Sometimes, investors can detect a potential partnership match long before negotiations begin. For example, investor Mark Gorenberg, who has participated in all three VC rounds (the first two with Hummer Winblad, the second and third with Zetta Venture Partners), developed a special feeling for InsideSales.com when he first encountered the company at the Dreamforce conference in 2011. 

"Dave's team was quite a powerhouse there, and you could see how well they treated partnerships and potential customers," he says.

Gorenberg again experienced these feelings during his first meeting at InsideSales.com headquarters, a few months later. At the time, the company had about 40 employees. Having arrived early, Gorenberg was content, he says, "just to chill in a conference room" until Elkington was ready to talk. 

Instead, Elkington urged him to sit in on an all-hands company meeting. Gorenberg thought he was simply going to stand quietly at the back of the room. Instead, he was introduced to most of the staff. "I saw a collaborative and transparent company," he says, noting that Elkington was openly sharing revenue figures and other key numbers.

In addition, Gorenberg saw how employees were motivated by the company's 1/1/1 campaign for its Do Good Foundation. Patterned after the Salesforce.com foundation's 1/1/1 model, InsideSales.com donates 1 percent of its employee time, revenue, and product to local causes, such as the Utah National Parks Council of the Boy Scouts of America. "The employees were talking about all of the company's nonprofit projects, and how excited they were to work on those, too," he says. 

The point is, Gorenberg got a glimpse of Elkington's ability to lead and build a culture--well before the two sat down to talk about an official partnership. Therein lies a key lesson in founder-investor courtships: Transparency, early and often, is wiser than concealing weaknesses for the sake of closing a deal.  

5. Do not let anyone else control your fate. "I created my own term sheet, basically saying we'd be engaged as a partner [of the VC firm] but providing me with all of the control and ability to do what I needed to do for the company," says Elkington.

He compares the control parameters of his term sheets (which he politely declined to share with Inc.) to the so-called super-voting provisions Mark Zuckerberg established for himself at Facebook. 

Elkington credits the company's board members and his advisers and mentors for encouraging him not only to seek these controls, but to use them as a means to vet investors. "The right investors really trusted me," he says. 

In addition, Elkington had learned about the importance of keeping control from an early experience in InsideSales.com's history: The company had survived an almost-fatal cash shortage in October 2008.

It was a gut check for the company, which at the time was leaning heavily on a bank credit line. Like most bootstrapping entrepreneurs in fast-growth mode, Elkington leveraged his cash to the hilt (what he calls a "just-in-time cash flow") to hire aggressively (engineers and sales staff) in pursuit of revenue growth.

When the bank pulled the credit line on short notice (most readers will recall the financial crisis of late 2008), Elkington experienced what it was like to lose control of your company's fate, thanks to an unhealthy dependence on a financial arrangement. Though InsideSales.com overcame the blow, the experience, Elkington says, "critically defined how I chose my investors."

In short, it taught him to value control above all else. To be sure, the concept of retaining control is a central tenet in the founder-meets-VC handbook. But as Silicon Valley lawyer Andre Gharakhanian points out, there are no magical legal provisions that guarantee founder control. The best you can do is increase your chances through bold negotiation and attention to legal detail. 

And to negotiate boldly, you need leverage: the ability to walk away. The ability to say: I've built this company just fine without you, and I can continue to do so.

How to Bootstrap Your Way to Profitability
Published on: Feb 10, 2015