When It Does and Doesn’t Make Sense to Fundraise for Your Startup

Guest: Erica Brescia, COO of Bitnami


Ready for more myth busting around startup funding? Let’s get to it then!

Last week, I shared a number of reasons you should share care about fundraising, whether you’re a founder or startup employee. Here they are again, and in the Build episode we talked about why it’s a bad idea to reach out to investors when you have an idea.

This week, we’re going to continue our theme and focus on what compels us to think we need to raise capital, like competition heating up, the belief that the business will stop growing, or that the idea we’re pursuing isn’t really big enough. We’ll also be diving into the mechanics of investment, talking about the nuances of an angel versus a venture capitalist, and why it’s important to look for investors that have knowledge of your marketing or industry.

Erica Brescia is back to help us out with this episode. Erica is the COO and co-founder of Bitnami. Erica has also recently joined XFactor Ventures as an investment partner. XFactor is an early stage investment firm that’s looking to fund female founders as well as mix-gendered teams.

Erica is a founder and investor, and having sat on both sides of the table, she knows how to separate fact from fiction!

Here’s what you’ll learn as you watch today’s episode:

  • why Erica and her partners at XFactor are putting their money where their mouths are and starting a fund to invest in female founders and mix-gendered teams;
  • what the XFactor investment partners and other angels look for versus venture capitalists, and how much they are willing to invest;
  • why competitors will come and go, and you cannot let their actions intimidate you or direct your business goals; and
  • why only you as a founder can decide when the right time is to raise for your business.

In the next two episodes, we’ll explore handling all the rejections you receive from investors, how to motivate yourself to keep going, and what it’s going to take to get that first check!

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Startup Funding: When It Does and Doesn’t Make Sense to Fundraise for Your Startup Transcript

Poornima Vijayashanker: Last time, we talked about how as a first-time founder, you don’t necessarily need to immediately rush out and get investment to get your tech product off the ground. We discovered some alternate ways of funding your product development and company growth. If you missed that episode, I’ve included it in the link below this video.

In today’s episode, we’re going to dive in a little bit deeper, and talk about when it makes sense to go out for that angel investment, and then how do you transition from getting capital from angels to eventually getting it from venture capitalists, and what you need to do in the interim to make sure you’re growing your company. So stick around.

Welcome to Build, brought to you by Pivotal Tracker. I’m your host, Poornima Vijayashanker. In each episode, I invite innovators, and together we debunk a number of myths and misconceptions related to building products, companies, and your career in tech.

What compels startup founders to fundraise

One myth a lot of founders fall prey to is the need to constantly fundraise. They’re worried that if they don’t, their competition is going to swoop right in and outpace them. Or their business is just going to stop growing, and even worse than that, people might not think that they are actually onto a big idea. To debunk these myths and more, I’ve invited Erica Brescia, who is the COO and co-founder of Bitnami. Erica has also recently joined XFactor as an investment partner. For those of you who aren’t familiar, XFactor is an early-stage investment firm that’s looking to invest in female founders and mixed-gender teams. Thanks again for joining us.

Erica Brescia: Thanks for having me!

Poornima Vijayashanker: Yeah! I know we talked a little bit in the last segment, but let’s just quickly do a refresher, tell us a little bit about your background and what you do at Bitnami.

Erica Brescia: Sure. Bitnami automates the packaging and maintenance process for server software for containerized, cloud, and behind-the-firewall deployments. We’re most known right now for the Bitnami Application Catalog, which contains over 150 different pieces of server software, ranging from business schools, like content management systems, more project management systems, to development tools like GitLab and Jenkins for building out your development processes and pipeline, to stacks of things for building applications, like Node, or Rails, or Django. We work with all of the major cloud providers, and have over a million deployments a month of the apps we package across all the platforms that we support.

Poornima Vijayashanker: Awesome. In addition to Bitnami, you recently joined XFactor as an investment partner.

Erica Brescia: I did, yes.

The difference between angel investors and venture capitalists

Poornima Vijayashanker: Yeah! We talked a little bit about that last time, and I want to pick up the conversation from our last time and dive a little bit more into not only what does XFactor do, but this whole position between angels and venture capitalists. How do you guys think of XFactor? Are you considering yourselves as angels or VCs? Would it help to start with defining angels and VCs?

Erica Brescia: Sure. I mean, I tend to think of angels as primarily investing their own capital, and VCs are investing other people’s capital. We all actually have our own funds in the fund as well, so we’re LPs in addition to being the investment partners.

Poornima Vijayashanker: What does that mean?

Erica Brescia: That means that we’re the people who put money into the fund, as the limited partners, who just put money in the fund, and then they step away, and they entrust, basically, the team of investment partners to invest that capital in companies that will produce ventures that yield returns.

Poornima Vijayashanker: Where is that money coming from? Is that your own hard-earned money, or is that from somewhere else?

Erica Brescia: In the case of the LPs for the XFactor fund, it’s from a range of different people. Some of them have just been very successful in business. Some may be managing endowments or trusts, or other investment vehicles, and they invest both in the stock market and in VC and angel funds as part of their diversification strategy.

Poornima Vijayashanker: Got it. I think some of you have also contributed personal funds, right?

Erica Brescia: Yes. We have put our own funds into the plan as well.

Poornima Vijayashanker: That’s important to note. Yeah.

Erica Brescia: You’ve got to put your money where your mouth is, right?

Poornima Vijayashanker: Great! No, I certainly appreciate you guys doing that.

Erica Brescia: Plus, honestly, I think we’re going to make money off of it! So why would you not do that?

Poornima Vijayashanker: Exactly!

Erica Brescia: That is the whole point.

Poornima Vijayashanker: Yeah. You guys are operating a little bit like angels, but a little bit like VCs as well, but let’s dive into more of a traditional VC model. What does that look like?

What seed-stage investors are really looking for and the size of check they write

Erica Brescia: Sure. The distinction there is interesting, because I would say there’s seed-stage financing, which a lot of people think of as coming from angels a lot, but VC funds do as well. Those are typically much smaller rounds and much earlier stage. The company probably has something built, probably has some users, probably can show some traction, but they’re usually not raising huge amounts of money, at least not by Silicon Valley standards, which are different than the rest of the world.

Poornima Vijayashanker: Yeah. Let’s get some ranges. Because I know some seeds can get crazy.

Erica Brescia: Huge. Yes.

Poornima Vijayashanker: So let’s do a more middle-of-the-road seed. What would that look like?

Erica Brescia: These days, I would say they’re usually between $500K and $2 million. I know that’s a wide range, sometimes it’s smaller, sometimes it’s bigger, but the fundraisings that we’re participating in are usually somewhere around there. We have had some companies raise significantly more than that, and we’ve almost gone in more at like a Series A stage. But typically you’re raising $1 million or $2 million to get your idea off the ground and show a little bit more traction, before you go and raise at a Series A. Those used to be maybe $2 or $3 million. Now, most of the time, you’re looking at maybe $6, $7, even $10 or $15 million as a Series A, which we certainly see in the cloud and container space in particular, which is where I’m focused with Bitnami.

Poornima Vijayashanker: OK. That makes sense. Now, I’m not going to dive into microfunds and syndicates, and all that stuff. We’re going to do that in a later episode. But let’s go back to you, and let’s talk a little bit about how you initially funded Bitnami.

How to initially fund your startup when you cannot attract investment

Erica Brescia: Customers.

Poornima Vijayashanker: Customers!

Erica Brescia: We sold stuff. Yeah.

Poornima Vijayashanker: Yeah. When was this, by the way?

Erica Brescia: We started with a company called BitRock over 10 years ago, and BitRock built some really interesting technology around application packaging and deployment, which has become the foundation of Bitnami. We’re very unique, I would say, for a Silicon Valley company. We developed a package software product. We sold it to customers, and we generated money that way.

Then we started providing a subscription service to a lot of software companies that needed us to build, we called them “stacks” of software, so their products could be installed and distributed very easily, and we worked with a lot of the biggest names in open source, in those days. So we had that money coming in—

Poornima Vijayashanker: If you don’t mind sharing, how big were some of those contracts?

Erica Brescia: They were in the tens of thousands of dollars a year. So reasonably sized, but we now, in retrospect, we charged far too little. But that’s one of the lessons that you learn as a founder, you’re always underpricing yourself in the early days. So we did that, and built up the company that way. Then we decided to evolve into Bitnami. We went through Y Combinator in 2013.

Poornima Vijayashanker: So before you did that, you actually had revenue coming in?

Erica Brescia: Yes.

Poornima Vijayashanker: Give us a range of how big you were at that size?

Erica Brescia: We had 12 people, and seven figures in revenue, when we—

Poornima Vijayashanker: Oh! That’s fabulous!

Erica Brescia: —went through Y Combinator.

Poornima Vijayashanker: Yeah. OK. So why even bother going to—

Erica Brescia: That’s a great question! It was a subject of much debate, but again, interesting story, I suppose. My co-founder’s wife had gone through Y Combinator with her own company, and had a great experience with it. And we knew that we wanted to send the company on a different trajectory—

Poornima Vijayashanker: Which was?

Erica Brescia: Growth.

Poornima Vijayashanker: OK. OK!

Erica Brescia: We wanted to build a huge business, and the model that we’d had previously was really what we talked in the last episode about, more of a lifestyle business. Right? We built a solid business, but that’s not what we were there to do. We wanted to build a huge and very meaningful company. And we felt like Y Combinator was the right way to do that.

It gave us a lot of focus, and helped us make some interesting and difficult decisions. It also helped us a lot with hiring in the early days, and bringing more folks to the team. We’ve been on a pretty healthy trajectory since then. Over 75 people. I don’t give out revenue numbers, but we’re profitable and growing, and doing well.

All of that money, except for a million dollars, which we still have sitting in the bank, has come in through customers. And that million dollars we raised after going through Y Combinator. We brought in some angel investors whom we really liked, for different reasons. Some of them have a lot of experience in building companies, specifically in our space, and we felt like they could help us a lot with that.

A couple of them are VCs who invested personally in us, because we didn’t want to raise a VC fund, and a few were overseas venture investors, but they make seed stage investments. One from Japan, and one from China. And that was purely because we plan on going into those markets, and we thought it would make sense to have some people over there with a vested interest in our success.

Y Combinator served as a good catalyst to bring that round together-

Poornima Vijayashanker: How big was that round?

Erica Brescia: It was just a million dollars?

Poornima Vijayashanker: Oh! OK. But you were already in the seven-figure revenue at that point, when you raised that million.

Erica Brescia: Exactly.

Poornima Vijayashanker: OK.

Erica Brescia: And that money is still sitting in the bank, and we’ve added a healthy amount to it, and—

Poornima Vijayashanker: That was what year?

Erica Brescia: 2013.

Poornima Vijayashanker: Oh! It’s been a while. It’s been four years.

Erica Brescia: Yep.

Poornima Vijayashanker: Now, interestingly enough, you have that million, you’re raising revenue, and you had grown without a lot of outside capital. I mean, you were already growing, so in that span of time, weren’t you afraid that some competitor was just going to swoop right in and go out and raise $10 million or $100 million dollars, and put you out of business?

Don’t let competitors intimidate you into fundraising for your startup

Erica Brescia: What’s actually funny about that question is we had a bunch of competitors do that, and they all went out of business…

Poornima Vijayashanker: Oh, OK! Yeah!

Erica Brescia: OK! Some spectacularly so. One raised $40 million, had huge names. One of the people on their board tried to come and intimidate me, and say I could never compete with—it was actually a woman running that company, too. But I won’t name her, because that’s not good for anyone.

Yeah. We had a lot of companies come and raise money, but the model wasn’t there yet. And that’s why we didn’t raise, either, right? There’s a time, and we talked about this in the last episode. It’s my belief that in most cases, you’re better off raising when you have product-market fit. We had that at small scale, but we hadn’t found what was really going to fuel exceptional growth of the company. It took us a while to get there, and a bunch of other companies tried to come in and do that, and they all went bust.

I mean, there is a time and place when I think it does make sense, and when you do have to worry about competitors, because the truth is, once a big name competitor raises a big round, it’s really hard to get anyone else to invest in you. I think Docker’s a pretty good example of that in my space, right? They have tons of money. Nobody’s going to invest in another container startup. Why would you do that? It doesn’t make sense for investors.

It is something to consider, but I think a lot of people spend way too much time worrying about their competitors, and not enough time worrying about their own business.

Poornima Vijayashanker: Yeah. Or their customers.

Erica Brescia: Yeah! Or their customers. Exactly. So, yeah, that matters, but you need to do what’s right for you, and what’s right for what you want out of your life and your business. You should ask yourself those questions. Taking on VC is taking on a lot of additional responsibility, too—

What kind of return venture capitalists look for

Poornima Vijayashanker: Like what?

Erica Brescia: Well, they’re expecting a certain level of return, right? A $100 million exit is not something a VS wants, where it might be completely life changing for you, if you don’t have venture capital in the company. If you’re taking venture capital, you’re committing to running the company for at least 5–10 years, providing they don’t push you out, which happens sometimes, too, if you’re not doing things the way they want.

You’re committing to managing a board, with outside parties who are going to have sometimes divergent interests from you. It could even be the case that the fund cycles are usually 10 years, and they have to return the capital to their limited partners, which we talked about earlier. They might need to get out, and want to push you to sell when you don’t want to. They might want you to sell to somebody you don’t want to.

There are a lot of great things that come from venture capital, if you partner with the right people. Obviously, you get the capital you need to fuel the growth of your business, and that can be incredibly important, especially to support go-to-market activities, or SaaS business models, where customer acquisition costs might be high, but the LTV is huge. There are reasons to take money.

I’m not against that. But you also need to understand what you’re signing up for, and what it really means, and that there may be an alternative path for you if that’s not the path that makes the sense for you. If you don’t want to run this company for 5–10 years, and you don’t expect to sell it for hundreds of millions, if not billions, of dollars, don’t take venture capital.

Startups that focused on growing their business first

Poornima Vijayashanker: Yeah. Some folks in our audience might be thinking, “Erica, that’s fabulous for you and Bitnami, and all of the success, but I could never do that. I couldn’t just sit and wait for my business to grow organically.” Are there other examples of companies here in the Valley, that you’re familiar with, who have done a similar approach? I know I can think of a couple, but I’m curious—

Erica Brescia: Absolutely! Well, Atlassian, they’re in the Valley now, but they came from Australia, and that’s a spectacular story. They really couldn’t raise, because they were in Australia, and especially back then, the VC climate in Australia was almost nonexistent. They raised very late, and a lot of it was secondary to the employees, and they’ve done spectacularly well. GitHub’s another example. They raised very, very late in the process, in a very big round, and that gave them a lot of flexibility to do other things.

We’ve seen that happen a lot. It really depends. Again, I think, going back to what I said before about product-market fit. It’s my view that the best time to raise is when you just need fuel for the engine. You already know how the engine works, and it’s already built, and the machine is there, and you know, “If I put X in, I’m going to get Y out.” Right? That’s when you can really take advantage of venture capital, and that’s when it can really make a difference.

I’m not saying take a long time to build your company like I did. I would certainly do a lot of things differently this time around, but a lot of it just has to do with where the business is, and what the capital’s going to be used for.

Poornima Vijayashanker: It’s been a four-year period, right? Where you haven’t taken outside investment. You took the initial million. But in that period of time, how has not taking capital, or not thinking about fundraising, how has that helped you and Bitnami?

Erica Brescia: Well, several ways. I think the most important thing is focus. Not having $10 or $20 or $50 million in the bank makes you focus on what’s really going to move the business forward. It’s really easy, and I have seen this countless times with companies that I will not name. They raise a ton of money, and they go out and hire a ton of people, and everything falls apart.

Because humans are humans, right? These are not just cogs in the machine, especially when you’re trying to build a breakthrough or game-changing product. You need incredibly smart people. They’re going to have strong personalities. They’re going to have past experiences from other companies. And you need to be able to get those people to work well together. So many startups have failed in doing that, and it’s led to their own demise, or at least slowed them down a lot, and really burned a lot of bridges with fantastic employees. I’d say it’s allowed us to build out the infrastructure to responsibly scale the team, and it’s helped us to focus, again, on making the right investments in terms of where we’re spending our time. It’s also great for negotiating business deals, I will tell you. That doesn’t come up a lot—

How to compel customers to do business with your startup

Poornima Vijayashanker: How so?

Erica Brescia: I was in meetings, even earlier this week, and these are quite big, multimillion-dollar-a-year deals, and they were asking some questions about what the business model looked like, and I could look at these people with a straight face and say like, “Look, we’re not VC backed. My company needs to make money. You want me to be around. This needs to make sense for us, financially.”

That drives a lot of my decision making. I’m very, very involved in the corporate and business development stuff that we do. I need to do deals that make sense for my business. For some reason, it’s a lot easier for people to get their heads around that when you don’t have venture capital, which is kind of a funny thing, right?

Poornima Vijayashanker: Well, people understand where you’re coming from, and what resources you have at that level.

Erica Brescia: Yeah! I’m not BSing them. “I have to pay people, and you’re going to get a lot of value out of this, and you need to pay me, and I’m not going to do it on a bet that the relationship itself is going to benefit me enough, because that wouldn’t be responsible business.” That’s what I go to all the time. It’s not responsible business, you’re not doing it. I think being bootstrapped and funding through customers really helps you think through that and make very good business decisions. We say no to all kinds of things, too. And I think that’s easier, as a result of that.

The one other aspect I’d say is, we don’t have to manage investors. It takes a lot of time to build investor relationships, which I do do that anyway, because we may raise in the future. But also just to raise funding, to go through the diligence process, and then to manage a board of directors that involves VCs, again, who might have competing priorities, or other things going on.

Again, we don’t get some of the pixie dust you might get if you’re VC funded, and sometimes we have to have interesting conversations with procurement departments, and show them our financials, to prove that we’ve got a great business, and that they can feel comfortable working with us, but it saves a lot of time and overhead.

Poornima Vijayashanker: Yeah, that’s interesting. So you feel, because you’re in the B2B space, the enterprise space, some companies may feel like, “Oh, you’re not VC backed, so you might go out of business sooner.” But what you’re saying is, “Actually, we’ve got customers. We’re going to stick around because we’ve got real revenues coming in, so no need to worry about this.”

Erica Brescia: Yeah. And I can point to, we do business with Microsoft, Amazon, Oracle, Google. All these big companies. It’s gotten a lot easier, now.

Poornima Vijayashanker: Right. You’ve got the credibility.

Erica Brescia: Exactly. And we’ve got a track record. We’ve not just been around for a year, and we have an established team of senior people, and we’ve proven that we can execute, and we can deliver. And what often happens is we’ll start with a smaller relationship, and it grows over time. After you get your foot in the door, what they care about is do you deliver on your commitments, not whether or not you have a VC in the company.

Keeping your options open when it comes to investment

Poornima Vijayashanker: Awesome. Now, I know you said, “Never say never.” So you are thinking about capital, and then your future. How are you thinking about attracting that VC capital?

Erica Brescia: Let me be clear: we haven’t decided to raise capital, but it’s a discussion that we’re having currently between my CFO, my co-founder, me, and some of the other people on the executive team, because we’re launching this new enterprise business. We’re incredibly lean as a company right now.

I told you we have in the mid-70s in terms of employees. Over 50 of those are in engineering and product. So the business team is quite lean, and we have very, very little sales on the sales side. Building on an enterprise business means I need a whole new go-to-market plan that involves field people, inside sales, solutions architects, and support people, and a bunch of other folks. Account executives, all these things.

That’s very capital intensive to build. We can do it off of cash flow, actually. We’re in that fortunate position, but at the same time, we might grow a little bit more slowly, and especially hire more slowly, than we would if we had, say, $15 or $20 million in the bank. So we’re starting to think through the tradeoffs, and what might make sense there.

I’ve been in the Valley now long enough, I know a lot of VCs. There’s several whom I like and respect quite a bit, and I still develop relationships with them, and we talk about the industry in general, and Bitnami, and where we’re going. I think it’s a little bit different than a company that’s just coming out of nowhere. We have people who know us, who know the business, who have said that they’re interested. So when the time comes, it’s more of a matter of sitting down with people who are already friendly and interested in the company, and talking through what makes the most sense.

Poornima Vijayashanker: It’s a partnership.

Erica Brescia: Mm-hmm, absolutely.

Poornima Vijayashanker: Yeah. Wonderful. Well, thank you for sharing your experience with us today, Erica. I know our audience is going to get a lot out of this episode.

Erica Brescia: Thank you so much!

Poornima Vijayashanker: That’s it for today’s episode of Build. Be sure to subscribe to our YouTube channel to receive the next episode, where we’ll dive in deeper with some of Erica’s co-investors and explore more topics around funding your startup. Ciao for now!

This episode of Build is brought to you by our sponsor, Pivotal Tracker.

Build is produced as a partnership between Femgineer and Pivotal Tracker. San Francisco video production by StartMotionMEDIA.