CyberWire Daily - Fundraising and Cyber Startups [Special Editions]

Episode Date: August 31, 2016

Whether your bootstrapping your business on your own, borrowing from friends and family or going for your Series A venture capital round, raising money is something most business owners have to deal with, sooner or later. We spoke with experienced business leaders in cyber security to find out what they did to fund their companies, lessons they learned, and what advice they’d give. Learn more about your ad choices. Visit megaphone.fm/adchoices

You're listening to the Cyber Wire Network, powered by N2K. stay home with her young son. But her maternal instincts take a wild and surreal turn as she discovers the best yet fiercest part of herself. Based on the acclaimed novel, Night Bitch is a thought-provoking and wickedly humorous film from Searchlight Pictures. Stream Night Bitch January 24 only on Disney+. When you need money is the worst time to raise money. When you don't need money, it's the easiest time to raise money. And when you do need money is the worst time to raise money. When you don't need money, it's the easiest time to raise money. And when you do need money, nobody wants to give you money.

It's like catch-22. Ah, money. Whether you're bootstrapping your business on your own, borrowing from friends and family, or going for your Series A round, raising capital is something most business owners have to deal with sooner or later. For this CyberWire Special Edition, we spoke with experienced business leaders in cybersecurity to find out what they did to fund their companies, lessons they've learned, and what advice they'd give. Stay with us.

One of the things that helped us be so successful in our early fundraising efforts was the fact that we understood the customer in great detail. Robert Lord is co-founder and CEO of ProTennis, where they provide automated patient privacy protection for hospitals and other healthcare institutions. So we spent a lot of that time doing the interviews, doing the diligence, really understanding what the day-to-day was of the privacy and security officer in such a way that we really could put ourselves in their shoes. When we understood that, we could really start to build the proofs of concept, build the business case that all added up. That's the foundation on which you're going to build the proofs of concept, build the business

case that all added up. That's the foundation on which you're going to build the rest of your argument. And then we could also see that there were early partners who wanted to solve this problem. Individuals who were ready to put money on the table when this problem was solved and when a solution was emergent. And I think that's another big thing. You want to have some level of customer or user buy-in. I think that's probably that customer understanding and that institutional buy-in from someone who really is ultimately going to be paying for the product. If you've got those two pieces, you're golden. John Trout is CEO, president, and co-founder of Bricada, a company that provides intrusion prevention solutions for multi-location and high bandwidth deployments. I personally capitalized the

company and we lived off that for the first six months. When we started to figure out that we needed more money, we went out and we did a convertible debt round. In simple terms, convertible debt is a loan that can be turned into equity generally upon the occurrence of future financing. We were very successful in the convertible debt round, and we ended up raising multi-millions in convertible debt. We started to go out for a Series A last fall, and while we were in the midst of that roadshow, we closed a $2.6 million deal.

And fortunately for us, that enabled us to give us enough working capital that has given us significant runway going forward. So we really don't have to raise money right now. I'm not ruling this out at all going forward. And quite frankly, I think we will go out for Series A probably at the end of this calendar, early next calendar 2017. But, you know, I'm somewhat conservative in that I'm managing the company to try to drive it to profitability. Of course, if I were to bring in VC money, we would use it to expand our engineering staff.

But I think by and large, I would really add fuel to the fire in terms of sales and marketing. Mariano Nunez is CEO of Onapsis, where they specialize in securing SAP and Oracle enterprise applications. The company started in Buenos Aires, but it only took a couple of years for Nunez to realize he wanted to move their headquarters to Boston and expand their staff, particularly sales and marketing. So the kind So the bootstrapping would only get us so far, and there was an opportunity cost, right? If you didn't raise the money and you thought about a lot of dilution and keeping the ownership of everything, then you just may miss the wave that we thought was there, right?

Onapsis participated in a variety of startup challenges sponsored by companies like Intel, and Nunez says these experiences provided valuable insights into what potential funders would be looking for. We went through a lot of processes where you end up basically pitching your business and your value proposition and your idea to different people. Basically, they help us polish a lot of things, right?

They help us polish a lot of the things in the presentation, help us really think hard about business, think about really what were the things that would set us apart and the things that we need to work on before raising the money. But it's not just a matter of funding. So it's not just a matter of funding the right money, but it's also a matter of funding the right investors. Dario Forte is founder and CEO at DF Labs. Earlier this year, they secured $5.5 million in Series A funding. The real importance for us was not only getting the money, but also getting what people call smart money, so money from investors that know your field,

and they can also provide value to the entire project. I think that's one important thing is to find that fit. I think it is more personality driven than people realize. Danny Rogers is CEO of Terbium Labs. Their MatchLight product scours the web looking for clients' stolen data and does it in a way that doesn't compromise the client's confidentiality. In February 2016, they raised $6.4 million in Series A funding. Even before that stage where there's money in hand,

but you can kind of tell from the first conversation what the relationship will be like and whether you jibe. I think having that really well-trained gut feel is important. I think people don't listen enough to their gut instincts or have them kind of well-attuned enough. I think relationships are absolutely paramount. That's John Trout from Bricada. They say taking an investment from somebody is almost like getting married. And you want to make sure that you've got good chemistry, that you like the other person, that you can work with the other person. So very critical.

I mean, you do not want to bring in bad money. I mean, you're bringing in partners, right? And you want to make sure that they're good professionally, but they also share your values. And you help you kind of think alike from a personality perspective. Mariano Nunez from Onapsis. For us, expanding into Europe was a big part of our business strategy and expanding into the federal market

was another initiative that we had as a key initiative for 16 and 17. And therefore, I basically started mapping of the people that were interested, which would help us with that execution. It's basically surrounding yourself with the right type of individuals and people that can help you execute against an opportunity, I think.

And then also realize that we all have the same interests at the end of the day, and we're all here to build this thing. And as long as we focus on that, to me, I'm not super possessive about it. And I think, to me, it's like I'd rather see all of us succeed together than me fail by myself. To me, it's like I'd rather see all of us succeed together than me fail by myself. Making sure you and your investors are a good match is important, but it's only part of the equation. There are plenty of things you need to prepare when you go courting investors,

things they'll want to see before they'll consider coming on board. You need to be prepared with all the documentation and all the administrative part, because when the due diligence starts, you need to be quick in answering to the question. That's Dario Forte. The slower you are in answering the question, the less possibilities you have to be funded, because one of the major issues that funds want to avoid is funding people who are not prepared also from the administrative part. How do you prove the fact that there's a big market for what you're doing? And that comes down to customer references. Paul Padgett is CEO of Pony Express.

They're in the business of detecting rogue, misconfigured, and unauthorized devices on and around your network, both wired and wireless. Padgett is not a founder. on and around your network, both wired and wireless. Paget is not a founder. He led the company through a $12.9 million Series B funding round earlier in 2016, bringing their total VC funding to about $20 million. You absolutely have to have well-respected customers that are willing to go on record with investors and say, I think this is a big deal.

This is why we bought this. This is how we're using this. So that part of it doesn't come easy either because you have to make sure that the early system that you've built and you've installed is operating to a satisfactory degree enough so that customers will give you the testimony that you're looking for.

It took us six to nine months of dealing with some of these initial pilot customers to figure out what everyone was asking for and what everyone was using looking for. It took us six to nine months of dealing with some of these initial pilot customers to figure out what everyone was asking for and what everyone was using it for, and we found that. And so that's when we knew, okay, this is the general availability product we need to build,

and this is what we need to do it. And that's when we went out for the A round. Some things you think are going to be a waste of time turn out to be incredibly useful, and some things you think are going to be incredibly useful turn out to be a waste of time, but you don't know that beforehand, so you kind of say yes to everything and see where it takes you. I think one of the advantages we had, as I said, is our story is really simple, and so it kind of tells itself. We can say we can detect when your data pops up,

the instant it pops up, or within a few minutes, within a few hours, and we can do it without you having to tell us your data. I mean, that story, which was a real story, I mean, that conversation that was sort of the founding conversation for our product, recounting that to the investors, it was sort of, you could just watch people in 30 seconds, the light goes on, and say, okay, I understand what you do, which is rare in this world. I mean, there's so many security companies out there now that, you know, it is hard to understand what they do. They look at things like making sure you have the right team. Some of the reasons you're looking for the money is to attract team members that you

may need to go forward. But having a good core team is also part of it. So having a team ready, understanding the market, having a clear plan, all those things are necessary before you go out. Company founders in particular often have a tendency to keep their cards close to their vest, to resist sharing their ideas with potential investors. Ideas do matter. And I think that when people know, when people tell you

ideas don't matter, it's either they're incorrect or they're trying to steal your idea. So I mean, I don't want to feel paranoia, but I would say that I definitely fall in the camp of like, ideas do matter. That said, you know, you don't, when you're sort of selling your company, or you're selling your vision, I mean, not, you're not always just selling like your idea, you're selling your approach, you're selling your story. And it, you know, in many ways is the same thing you're going to tell your customers, you know, I don't need to tell you how I do what I do, but here's what I'm going to do for you. And what investors care about is much more about the, what are you going to do for the customer? When are you going to tell the customer to create some value for them that is sufficiently, you know, moves the needle sufficiently for them to give you,

you know, to give you money for it. But the like nuts and bolts of how you do it really, like it's, it's up to you to achieve the technical magic. And I think that's where, you know, you, you on the inside do all the technical things you need to do to achieve this vision. And on the outside, it's the vision that you're selling at the end of the day. The Series A, like any capital raise, is going to be based on what inflection points you've hit and then what inflection points you want to hit moving forward with that capital. That's Robert Lord from Protennis. And so for us,

we had a product that worked, we had happy customers, but what we really needed to do was scale the solution because we think ultimately Protennis is something that needs to be in every hospital in the US and beyond. And so to achieve that mission, we realized what we had to do is put together a terrific sales and marketing team and then expand our capacity to also deliver the solution with implementation engineers and data scientists. And so we really thought of the Series A as that fuel to the fire, and that's really what it's been so far. It's allowed us to grow in a strategic way to enhance our ability to project the product outwards and to build a robust sales and marketing machine that continues to bring in a lot of leads and interest. Seed Round was sort of pieced together by a lot of individuals.

And there was just, you know, a sort of groundswell of sort of grassroots interest in us as a seed round company. What it meant was we have a very long list of individual investors, a few institutions with small stakes, but it's a lot of people involved in that initial part. The A round was very different in that it was led by one institution, by 4 or 6 ventures out of Boston. One of the things they did was move very quickly. No founder likes to spend a lot of time on the road pitching, and so the fact that they moved really quickly and kind of jumped out in front and said,

here are some terms, and there was obviously some back and forth, but I think relative to what it could have been, our goal was efficiently and fair, and I think we achieved that. The company was funded back in 2013 in an A round, which is really the initial stage round to develop the product. That's Paul Padgett from Pony Express. Once we saw some success and started to develop some traction, then my task became to raise money to try to expand the sales, marketing, and engineering very quickly because we saw a huge opportunity here and obviously it takes

money to go after it. There's that saying, hindsight is 20-20, and our group of experts certainly learned their share of lessons along the way. You know, there's a million little things I probably would have done differently in hindsight. You know, it was really interesting to read this Jeff Bezos quote from a little while ago, the sort of two kinds of decisions, the ones you can and can go back from and the ones you can't. And, you know, fortunately, most of the little mistakes I've made have been things you can go back from and recover from.

But, you know, I think there's no one path to success. I think there's a sort of countably infinite number of paths to succeed. But then for each path, there's a million or an infinite number of ways that you can go off. And so, like I said, just careful decision-making, being willing to revisit when you sense that something isn't right. The most important thing is not to panic and to kind of sit back and be honest with yourself. Okay. What, what, what is happening? Really being in tune with your gut. You know, one thing I've learned from, from our, our chairman, he's a very intuitive person and he has great intuition. And I've learned that kind of intuition in many ways and kind of running a business is just as if not more powerful

than logic and trying to kind of reason your way out of things sometimes. And the reason is just because you don't always have complete information, right? And so, you know, having a really well attuned gut feel and, you know, a really well attuned instinct and then kind of finding a quiet place in your head to listen to that instinct and follow it is it's hard, but I think it's really important. I will probably repeat 90 percent of the things that we have done. I will probably have opened the door to the fund to investors six to seven months before. But on the other hand, I have to say I was very lucky to know the people at Evolution. Evolution Equity Partners is the venture capital firm that handled DF Labs Series A. The way they handled the deal and the capability they have to understand the business and the sector

and to support you made us basically recover the six to eight months that we've lost before. So in my particular case, I will probably act a little bit quicker in opening the door to external capital. But at the same time, I was enough lucky to get the right people on board. So the impact was neutral. I think the way that I handle setbacks is I try to be thoughtful about what the lesson learned is here, not necessarily beat myself or all the other parties up about what happened, but get to the bottom of it, see if there's something that can be improved. And if so, implement that

and see if there's a way we can reduce the probability or eliminate the chance of that occurring in the future. It really takes a lot of time. I mean, in our case, in one of the rounds, we had a bad quarter in the meantime, and that definitely adds some friction to the process. And the reason for that was because, yeah, it was kind of like basically the guy selling and himself selling, I was raising money. But there's only so many hours in the day, right? Yeah, I went through a lot of meetings where people were really telling us that this wasn't a good idea

or there wasn't a big enough market or that we were not going to be able to execute against this. You have to go through a lot of that frustrations and make sure you keep yourself to the ground and keep trying. It's a lot about persistence as well. And I think the second piece of it is just the human element and the incredibly important element that I have the best co-founder

a person could possibly ask for. On really tough days, Nick is right there with me, and we've got each other's back, and I can't imagine building this company without him. I think that that is a really tremendous competitive advantage that people don't always talk about. Having a great co-founder to build the company with, that at the end of the day can really help you overcome a huge array of challenges, get that perspective that you need, and understand

what you need to do to go forward. One of the most important things is to have a really clear and confident vision and to stick with that. There's a lot of people giving a lot of advice. Take all the free advice for what it's worth. And there's a lot of good stuff out there, but there's also just a lot of volume. And be okay saying no to things.

I mean, I said before, kind of say yes to everything. What I would say is say yes to every conversation, but be ready to say no at the end to say, okay, I've had this conversation and it doesn't fit with that vision. I would do a lot of research about the market. I would not leave it to your gut. You got a good idea, that's great, but I would most certainly

do your due diligence and do your market research and make sure that there is a market for what you want to sell or offer. Industry analysts are very important, but I still remember the time. It was in 2011 and 2012. We And after one week, we got our first PO from a Fortune 10. It was about $300,000. So, okay, analysts are very important, but they are not the Holy Bible. Make sense? So you need to trust analysts, but if you are convinced that your product is good and is going to solve a problem, keep going. Don't just listen to one voice. When VC invests in you, one of the first things that they're going to watch is the quality of your technology and the quality of your team. So invest in your technology and your team first, and then, of course, the majority of the business will come later on. And I would say our example is very clear.

We invested almost zero money in marketing, and the majority of our customers are inbound. So customers, and I confirm, very important customers that just knocked our door because they've been referred by other customers in the same segment that were satisfied about us so believing what you're doing and of course be very concentrated on quality i wouldn't get too obsessed with with illusion and and control but most important raising money with the right people which what do you think are the right people so doing a lot of due diligence on the investors. They're going to do due diligence on you in terms of how's your business.

They're going to do reference calls with some of your customers or partners and things like that. I think that you should do the same. You should speak with former, I mean, you should basically go through the portfolio companies and try to reach out to their CEOs

or former CEOs, people that have exited successfully and had good runs with them and people that failed especially, right? Because everyone's nice when things go well, but trying to understand what's their mental process and their attitudes when things do not go well, I think you learn a lot from that. And that's something anyone should definitely do, I think, when they're raising money, because you're bringing the partners and you want to really know them how they are.

People sometimes think I'm crazy because I've said no to investors before. I mean, there's a kind of mentality out there of if somebody is willing to give you money, you take it at all costs. I don't believe in that. You know, from our perspective, it was we knew exactly what we wanted to build. And so it's, you know, take what you need from the right people to get what to to give you the resources to build what you want to build. And then say, you know, thanks. We really appreciate the interest, but we're not we don't have any more space right now to everyone else. You know, and and I think that's, you know, you have to feel OK doing that. And that's been something that people have given me funny looks when I've done,

but it's something I really do stand by. Unfortunately, there's no magic formula. There's no kind of say these magic words and all the investors will come flocking. I mean, investors fundamentally are human beings too with their own idiosyncrasies and their own biases and their own interests. And people like to think it's rational, but it's not. You know, it's as much about stories and feelings and people as any other human interaction. It's just this one involves money, so it's probably even worse. something people forget and sort of hope it's more logical than it actually is. If you have a solid idea and are perseverant, and that's the big one, the ideas do matter a lot, especially in this space. And then perseverance matters equally, where you just keep going and don't give up.

And I think especially if you're in the right space at the right time, then good things will happen. If there's any advice I could give to people is if you can come out with a software-only solution, I would recommend it. That's John Trout from Bricada. That comment is particularly interesting because Bricada's solution involves hardware. If you can position your product so it is a subscription service or software as a service or security as a service or infrastructure as a service. I would highly recommend that.

You're going to get a lot higher valuation right out of the chute and, of course, with a higher valuation, less dilution. In one of my meetings I had with Bain Capital, it was very interesting in that one of the gentlemen I met with was the former CEO of Symantec. And when he had heard that we were a network security appliance, and of course there was hardware involved, he referred to it as sales friction. And he said, you know, how are you going to get past this? And, you know, he goes, I personally don't believe in hardware-based appliances and it creates too much sales friction. So just some interesting points for other people. I mean, again, we've been lucky enough that we've been able to overcome those obstacles, but not everybody is so fortunate.

You've got to sort of compartmentalize and have a very positive attitude and you've got to have passion about what you're doing and really have a strong will to succeed. This is not easy. A lot of people see people succeed at entrepreneurship and being a startup, and they think, shoot, I can do this. And then they jump in, and all of a sudden they figure out it's incredibly difficult. It's incredibly stressful. The highs are very high, and the lows are very low.

But it's fun. So yeah, I think it all comes down to who you're partnering with. Raise more money probably than you think you need. That's another thing. Raise it when you don't need it and try to get options. I also worked very hard on making sure that I had multiple options and had multiple offers on the table because that's really the only way you get leverage and you can really try to influence the, have the best outcome for you as a founder, right?

If you have only one option on the table, then there's not too much you can negotiate, I think. Well, I think the most important thing I could tell somebody is to go talk to lots of people. You can imagine between watching Shark Tank on television and listening to your relatives, your ideas can seem, to you, could seem bigger than life. But most important thing is to engage with people that are in incubators, people that do work with young founders and entrepreneurs. Those are the people that have a very clear understanding about what it takes. And I think those are the most valuable conversations you could have. Understand your customer as well as you possibly can. Understand

who's going to be paying for the product, who's going to be using the product, often two different things, who might stand in the way of the product or be a blocker, who can help you get the product to where you need to go. Really understand that full ecosystem of who your buyer is and your user. And I think that that's a huge catalyst for success moving forward. Surround yourself with people that you're really excited to be working with and that you just love working with and trust. Because starting a company is hard. You're going to have some bad days and you're going to have some good days that you want to celebrate. And so you want to be with people that on both of those types of days, it's exactly the right room to be in. It's people that you love sharing that joy with and it's people that can

keep you held up when you're feeling down. And I think that those two things together combine with a respect for their abilities and an ability to execute and people that you feel are just A plus at their job. I mean, if you've got those things, the customer perspective and an amazing team to work with, everything else really falls into place. Our thanks to John Trout, Mariano Nunez, everything else really falls into place. The Cyber Wire podcast is produced by Pratt Street Media. Our editor is John Petrick.

Our social media editor is Jennifer Iben. Technical editor is Chris Russell. Executive editor is Peter Kilby. And I'm Dave Bittner. Thanks for listening. Cyber threats are evolving every second. Thank you. suite of solutions designed to give you total control, stopping unauthorized applications, securing sensitive data, and ensuring your organization runs smoothly and securely. Visit ThreatLocker.com today to see how a default deny approach can keep your company safe and compliant.