How to Raise $2 Million in Two Days From People You’ve Never Met
A little less than a year ago the startup now known as TrueVault was comprised of just a couple of first-time startup founders who’d been rejected from the Y Combinator startup program.
Trey Swann and Jason Wang had a wonky idea about taking personal information out of the databases of stores, hospitals and other types of institutions and securely storing it elsewhere. Turned away from Y Combinator at the interview stage, they were told they needed to figure out who exactly would use and pay for such a thing.
As of last week, Swann and Wang were perhaps the fastest sprinters out of the gates of the first 2014 Y Combinator class, raising $2 million in the 48 hours immediately after presenting onstage in Mountain View, Calif., to a room of 500 investors. Their total seed round amounts to $2.5 million from 22 separate individual investors, the bulk of whom signed after a single conversation.
While other YC startups also quickly raised money last week, in many other cases the deals had been in the works before Tuesday, and the money came from venture capital funds rather than such a large pack of investors signed on the spot.
“Your classic hair-on-fire problem.”
How did TrueVault’s instant jumbo party round happen? First of all, Swann and Wang took the initial rejection advice to heart. Last summer, they decided to focus TrueVault on serving customers in the health care space.
Pushed along by legislation mandating that business associates of health care providers needed to comply with privacy regulations by September 23, 2013, TrueVault last week was able to tell a solid Demo Day story of being a “HIPAA-compliant data service” with 47 percent weekly revenue growth.
“Health care startups aren’t supposed to grow this fast,” Swann told the crowd of investors, appearing second in a lineup of 67 startups and wearing a bright blue shirt so they could pick him out of the offstage scrum. “But last fall, the law changed. HIPAA no longer applies to just hospitals … and because the law changed, a startup like us can go after it. This is your classic hair-on-fire problem.”
Of course, that “47 percent weekly revenue growth” at the moment only adds up to $15,000 a month in revenue. And, in fact, many investors at Demo Day weren’t looking for a health care startup — but Swann told Re/code he reeled them in by telling them the larger vision for the startup was to securely manage personal information for all sorts of businesses.
Basically, to avoid another data breach like those at Target and LivingSocial, TrueVault wants to be the company that encrypts and shields everybody’s information.
“Two-and-a-half minutes is no time at all, but when we got offstage, we said, ‘Health care is really a beachhead,'” Swann said.
Ironically, that was the original pitch Y Combinator rejected. If they’re not satisfied with the egg, tell them about the chicken.
“Fundraising is not winning.”
What’s the point of raising money so fast? Y Combinator teaches startups that raising funding is a distraction from the real task of building their companies. That’s basically the point of Demo Day.
“Fundraising is not winning; it’s about getting it over with so we can get back to work,” Swann said. “We wanted to optimize this round for speed. We just wanted to get money in the bank.”
By the end of the day, Swann had a stack of more than 100 investor business cards. (Swann said he got advice from a Y Combinator alum to hold his stack of cards in his hand to show how much buzz TrueVault was attracting, but his hand capacity topped out at about 50.)
Perhaps TrueVault took Y Combinator’s quick fundraising advice more seriously that it was intended. “That’s unusually fast,” YC president Sam Altman told Re/code. “Believe it or not, we actually discourage it. We think people should take the time to get to know the investors on both sides.”
But actions speak louder than words. TrueVault’s quick fundraising was aided by Y Combinator’s standardization of what it calls “SAFE financing documents” and formalization of “The Handshake Deal Protocol,” in which an email or text message confirms the terms of a deal before the documents are signed.
And in preparation, Swann and Wang spent extensive time sorting through Y Combinator’s hush-hush in-house database of investor reviews, picking 50 whose reputations they trusted, and who they agreed they would be delighted to say yes to if they approached on Demo Day.
Swann followed up on each handshake with legal documents sent and signed via Clerky (another Y Combinator startup). Interested investors who asked for things that would be very normal parts of a funding negotiation — like a slide deck that described TrueVault’s business and market opportunity, or extra time to check with their partners — were turned away.
“The plan was to raise a million dollars.”
Demand was so strong that halfway through the day, Swann decided to up the stakes from a $10 million cap (a cap is basically a valuation for an early-stage company before it actually hands out equity) to a $15 million cap. So later investors got less for their money, and in this case “later” was measured in hours.
“The plan was to raise a million dollars. We were trying to slow it down,” Swann said.
At the end of the 48-hour sprint, the investor list included former Zynga chief Mark Pincus, NBA player Jermaine O’Neal (“Are you a Warriors fan?” “Absolutely, I am now.”), IA Ventures, angel investor Bill Tai (who is no longer investing actively with Charles River Ventures but is still involved there) and LinkedIn founding team member Ian McNish.
Tai was one of the investors from the list that the TrueVault guys had never met before Tuesday. He found them offstage and offered $200,000 but was cut back based on the big valuation to $50,000.
“They were the only one I hunted down in one of the breaks,” Tai said. “I have two portfolio companies that have had to turn away real revenue because they haven’t had the time to be HIPAA compliant.”
Because of that need, and because he liked the guys, Tai was ready to shake hands right away. “It’s very rare for me, only a couple times have I agreed to invest on the spot,” he said.
When Re/code checked in with Swann again on Monday, he said he’d reversed his own commitment to stop fundraising and get back to serving TrueVault customers. Sure, $2.5 million is a lot, but $3.2 million might be better. That’s what Swann expects to close by Wednesday. The number of individual investors is now up to 34.