What It Takes to Raise Capital for Your Startup

Guest: Melody McCloskey, CEO and Co-Founder of StyleSeat

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You’ve probably noticed the ongoing debate about whether or not we’re in a tech bubble. Headlines are always gushing about the latest companies with billion-dollar valuations.

There’s a lot of investment capital out there right now, and if you’re a startup founder who hopes to raise money, you might be wondering what it takes to attract some of that capital to you.

You have to figure out what to say to attract investors, but here’s the thing: depending on whether it’s your first fundraiser or a follow-on round, you have to take a different approach.

So, what do investors look for in a startup ripe for Series A versus Series B? When should you stop bootstrapping and search for seed funding?

To help us out with these questions, I’ve invited Melody McCloskey, the CEO and Co-Founder of StyleSeat, who has successfully raised $39.9 million for her company through four separate fundraising rounds, ranging from seed to Series B.

Each round was different, and it wasn’t all smooth sailing for Melody. Hear how she succeeded in her four rounds and learn:

  • Why it’s important to start bootstrapping before you consider taking capital;
  • What investors are looking for at different stages, like seed, Series A, and Series B; and
  • How to pitch investors who know very little about your industry.

This is a must-watch whether you’re thinking of raising capital for your startup one day or going through the fundraising process right now.

After you’ve watched the video, let us know what your favorite part was in the blog comments.

Want to hear the investor’s side of things? The next episode of FemgineerTV airs in October, and I’ll be hosting Shruti Gandhi, the Managing Partner of Array VC, to explore the other side of fundraising.

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What It Takes to Raise Capital for Your Startup Transcript

Poornima Vijayashanker: Welcome to the eighth episode of Femgineer TV, brought to you by Pivotal Tracker. I’m your host, Poornima Vijayashanker, the founder of Femgineer. Femgineer is an education company where we teach innovators how to build software products so they can find freedom in their careers, enrich other people’s lives, and make the tech community a lot more inclusive and flexible.

So there’s an ongoing debate in the tech community today of whether we’re in a bubble or not. And you’ve probably read the headlines of companies that have billion dollar evaluations. You might be wondering, what are the outcomes? And if you’re a founder, you might be wondering, where did people get all that investment capital, and how you can get some investment capital through your startup idea. To help us out and walk us through the process of going from seed to Series A and beyond, I’ve invited the CEO and co-founder of Style Seat, Melody McCloskey.

Style Seat is an online destination that connects beauty and wellness professionals to clients. It was founded in 2011. Over the past five years, Melody has grown Style Seat and raised three rounds of funding, totalling $39.9 million. We’re here today to talk to Melody about the fundraising process, and have her share what it’s taken for her to go through the various rounds of funding, and hopefully give you some insight as you’re thinking about raising capital, either inside the Valley or out. Thanks for joining us today, Melody.

Melody McCloskey: Yeah, thanks for having me.

Poornima Vijayashanker: So we met a while back, even before you started Style Seat and I think it’s great to see all the success that you’ve had over the past five years of starting it.

Melody McCloskey: Thank you.

Poornima Vijayashanker: You’re welcome. Yeah, before we dig into Style Seat and fundraising, why don’t we just talk a little bit about your background? How did you get into tech?

Melody McCloskey: Sure. I kind of fell into it accidentally. I graduated school and moved to San Francisco with the idea that I would save money and move back to Paris. I lived in France for a little bit—

Poornima Vijayashanker: Oh wow, nice.

Melody McCloskey: —yeah, during school. It was cheaper back then, but still the idea of moving to San Francisco to save money is ridiculous.

Poornima Vijayashanker: Sure.

Melody McCloskey: I don’t know what I was thinking. But when I moved here I started to meet people that were starting companies and working in tech, and it was the first industry that I was really, really excited about. The more I learned about it, the more I wanted to be a part of it. So I got a job at a startup kind of doing all things. There was just a couple people there, it was a video startup. I learned a lot about video technology. It was basically a product position in addition to marketing and PR and a lot of other things. But that was my first exposure to the software process and how products made and done and deployments and all of that stuff.

After that, I worked at Current TV and did something a little bit similar. It was a business ops position and also had a lot of product exposure, and basically figuring out how to take Current TV which at the time was a television network and help them figure out, how do we take these TV shows and distribute them online? So it was a lot of things around asset management, creating new types of assets, storing them in CMS, distributing them to partners, and basically helping to drive growth and revenue numbers. That was really fun.

It was kind of like my own little startup within a bigger company because I had an engineering team, other folks on the team sort of playing all the different roles, and we were in charge of revenue and growth for the business and also building this completely different area of the website and of our brand and video assets. And through that experience, I loved it so much, I was like, “I want to do this but I want to do this at my own business.”

Poornima Vijayashanker: Yeah, so then what inspired you to take all that knowledge and expertise and put it towards Style Seat?

Melody McCloskey: Well, I didn’t really have much knowledge or expertise, honestly. I mean I’d had a lot of really great learning experience through that process, but it was definitely not something that I’d done before. I’d never started a company before. I was inspired by the industry because number one, it’s a massive vertical. It was over $80 billion it spent every year in the US in salons and spas, in both services and products sales. And that was really interesting. A lot bigger than a lot of other markets that I had researched.

In addition to that, I had personal experience in trying to find a stylist in San Francisco. When I moved there, it was horrifying. You know, you either go to review sites and you search through hundreds of reviews and try and pick out names, and hope that they’re a good person for you and go drop several hundred dollars on cut-and-color and just cross your fingers. Or you ask a girlfriend which is also hit or miss. And I wanted there to be a smarter way, and the more I spoke to stylists, salon owners, aesthetician, barbers, the more I realized a lot of them are running their business via pen and paper, and that it was clear that technology could solve problems for lots of different areas in the space.

Poornima Vijayashanker: That’s great. Now you’ve gone through three rounds of funding. You did a seed, you did Series A and a B, and I know there’s a lot of literature out there on how to go with raise capital, signaling, and all that stuff. But what I want to focus on for our viewers today, I think it’ll be really valuable, is to talk about what it took to get through each of those rounds, cause I think people are really confused today about what’s a seed, what’s a Series A, what’s Series B? There’s a lot of talk, there’s a lot of movement in the market, but I really want to guide our viewers into each of those rounds since you’ve been successful, and also talk about some of the challenges. So why don’t we get started and talk about how you got introduced to your seed investors?

Melody McCloskey: Sure, so we actually bootstrapped for over a year, almost a year and a half, and I think that was really beneficial for us in a number of ways. It keeps your eye on the prize, you have to really be diligent about identifying what success is from a metric standpoint and rushing toward that success, it keeps you honest about hitting your metrics and really focused. For our first investors, honestly, because we were a hair startup in San Francisco in 2011, it was something that a lot of VC investors especially didn’t understand and were passionate about because most investors are men. Especially at the time, it’s not like it was 20 years ago, but this is a fast-moving industry, so in 2011 it was fairly different. And got a lot of nos from traditional VCs.

Poornima Vijayashanker: Yeah, how many nos did you get?

Melody McCloskey: I mean, so many, so many.

Poornima Vijayashanker: More than you can count on hands, yeah.

Melody McCloskey: Yeah. So it was basically, our first seed rounds, was a bunch of angels, my friends essentially, that were like, “We don’t understand beauty, we don’t get this market at all, but you’re a hustler and we believe in you and Dan,” so that was how we raised capital. And already at that time we had had thousands of users that were using us everyday, and the product was growing at a fast clip, 100% organically. So we had a lot of proof in the product, and showing that this customer will use technology and it’s actually very useful for them. So that helped.

Poornima Vijayashanker: Great. Yeah, so your friends, your family, people that believed in you but also saw that your business was picking up, there was momentum, there were people who were interested in the product?

Melody McCloskey: Exactly, yeah.

Poornima Vijayashanker: Got it. So you’ve raised a pretty sizeable seed round, to about $4 million, and most seed altogether is around $1-3, so why so much capital, and how’d you get access to all of it?

Melody McCloskey: Yeah, we did it in a couple of different notes, so it’s not like it was a full $4 million round at once. We raised a little over $700 in sort of the first note, at one evaluation, and then a little bit later as we had more proof points and as the product was growing and the community was growing and it was clear that we were on to something, but—especially for us because we were building back-office tools, it takes a decent amount of time to make them right, you know? It’s not like a consumer app where you can, I mean this is oversimplified, but you can sort of put something out there and see growth or not. This is the type of thing where we had one developer who was Dan, and he was building something that was steadily gaining a lot of traction and he was building an amazing product that customers were loving that hadn’t existed on the market. But we needed a little more time, so we were very, very lean in those early days, but we raised a couple of different notes together to make up that $4 million seed. Poornima Vijayashanker: Got it. And as you were doing that, how did your investors shake out…like did you have new investors that came in for each of the notes, or did you have people that put more money in who already believed in the business?

Melody McCloskey: Yeah, yeah. So in the beginning it was individuals, and then it slowly moved into more micro-VCs and as it was clear that this was a business that’s going to raise more capital in the future, and that there was a lot of proof point and this could be a big business, some of the larger players came in and said, “We want to get in on this business.” It was definitely a lot of investors that understood back office, sort of SAS types of companies, in the beginning, because that was what our dynamics were, even though we wanted to be a marketplace for the first two-and-a-half years, the company, we were full back-office tools. So even though consumers used us, it was just…we just cared about all the consumer engagement and those were our KPIs for the business. And it wasn’t until we launched at TechCrunch Disrupt that we actually turned on StyleSeat.com as a marketplace, and started to move towards a transition of becoming a true marketplace.

Poornima Vijayashanker: And at the time, when you were talking to your micro-VCs, your early investors, how were you pitching the vision to them to get them onboard?

Melody McCloskey: It was, we want to be a marketplace, we think that we’re going to be the largest marketplace in the space, but in order to get there we need to become the largest back-office tool for stylists first.

Poornima Vijayashanker: Interesting.

Melody McCloskey: So that’s actually been…it’s a hard way to go and it’s a slow way to go, but ultimately puts you in a much stronger position. So for us, for example today, we’re in 15,000 cities, we have over 300,000 stylists that use us on a regular basis, and almost 100% of that growth has been organic and word of mouth, and that’s because we have such powerful backend tools for them. The average stylist can double the revenue in the first 15 months of using Style Seat, just about. They grow about 70%. So because that’s so powerful, that has led to our growth but that meant that we had to really build amazing tools which takes years. So it was slower in the beginning, but that’s allowed us to really move faster in the past couple of years.

Poornima Vijayashanker: Yeah, and the investors were OK with that initial slowness, they weren’t like, “Come on Melody, step on the gas?”

Melody McCloskey: Yeah, I mean business tools take time to build, and those types of investors understand that timeline. It wasn’t until we raised later rounds where it was more apparent that we were much more consumer marketplace, and the investors that were interested that stage was less of the back-office house investors and more of the marketplace consumer investors.

Poornima Vijayashanker: So you went out and actually targeted investors who were more business focused and didn’t talk to the consumer internet guys as much? Melody McCloskey: We did, but it was more, “these guys get it.” Cause they have all these businesses in their portfolios and they understand the metrics that we’re paying attention to, why the timeline. And as the business started to evolve, which was always the plan and we were very clear with everyone about that, but as marketplace became our focus and our metrics, our KPIs and sort of our roadmap, that’s when more of the consumer marketplace investors stepped in, cause they understand that stage of the company.

Poornima Vijayashanker: OK, and they started to make more notice and were interested.

Melody McCloskey: Exactly.

Poornima Vijayashanker: Now last year you did a Series A, which a lot of people out here and even as far as the East Coast and Europe claim is the hardest round, cause there’s a lot of companies getting C capital, you know, 500, 750, or a million, but then there’s this jam that takes place once you get to the Series A. What was that process like for you to go out and raise a large Series A?

Melody McCloskey: Yeah, it was about a year and a half ago. It is challenging. I would say it’s the difference…rounds previous to that, you’re raising on your vision and market size and your competence in getting there, I keep saying, your ability to convince someone that you can get there. Series A is all about numbers.

Poornima Vijayashanker: OK, so what numbers were they looking for?

Melody McCloskey: They were…well, at that time we were the fastest-growing platform in the industry with marketplace components, is how I pitched it because we were still really back-office. We didn’t launch our consumer app until less than a year ago, actually in September, and this was, because it was a year-and-a-half ago, this was pre- our consumer app. So we were saying we’re the fastest-growing back-office tools for this industry, we have the ambitions to be a marketplace, we believe that we can be the largest when we launch. And we actually took one meeting with Lightspeed, they preempted our round and then they decided to invest that day.

Poornima Vijayashanker: Oh wow, so did you have other meetings before that or you just had one meeting and they were pretty excited to invest?

Melody McCloskey: Yeah, we were very lucky because they were involved months before we had even started the process.

Poornima Vijayashanker: Oh, that’s good to know.

Melody McCloskey: And so there were a lot of conversations that led up to that meeting, it wasn’t like this is the first that they’d ever heard of Style Seat, so they’d already gone through numbers and we’d already talked about our philosophy to build the business and how we were going to do that and our approach and everything. Poornima Vijayashanker: Got it.

Melody McCloskey: So we were all very aligned there, but that was the time that the partnership could really look in the deal and meet Dan and I, in addition to reviewing the numbers and make a decision.

Poornima Vijayashanker: And what was that process like, the due diligence process, as they were looking at you?

Melody McCloskey: I mean, I think it’s different for every firm, and it takes different amounts of times for different folks. Because we had already gone through so many numbers with these guys leading up to that meeting, diligence was fairly quick. Nothing was a surprise, it was basically let’s make sure that financially and from a metrics standpoint, and everything lines up with their expectations and what we had told them, which it did. So it wasn’t too intense, but I think having that relationship with an investor leading up until that point was very helpful, and it helped us give them the information they needed along the way so it was a little less of an arduous process when it came down to it.

Poornima Vijayashanker: And did you have introductions to them or had you talked to them during your seed? How did it go about?

Melody McCloskey: They had approached us.

Poornima Vijayashanker: Oh, OK.

Melody McCloskey: Yeah, which was great. When an investor puts that much effort and interest into your business, I think it helps because they’re really passionate about the business. When you’re looking for a new board member, that’s exactly what you want, is someone who is really into the dynamics of the business and wants to build a relationship with you and wants that to be a long term relationship.

Poornima Vijayashanker: Got it. And in terms of the numbers, was it about revenue, was it about user acquisition, or was there a package?

Melody McCloskey: You know, our pitch for the most part was: “We’re the fastest growing. Here’s what the market looks like, it’s massive, it’s a huge opportunity. There’s really interesting shifts in the breakdown of labor. There was a big movement from professionals from being employees to independent contractors, and we were helping to drive that movement. So very similar to what’s happening in transportation and a lot of other verticals. And here’s what the competitive landscape looks like, we’re growing much faster than these guys, and here’s how we’re going to leapfrog them. And here’s how we’re going to actually completely transform the industry.” And so it’s, again, because that had been several months of conversation, it was something that they were excited about and we had the opportunity to show them what we were going to build and how we thought that would be successful.

Poornima Vijayashanker: Got it. And your Series A was about $14.1 million, is that about right?

Melody McCloskey: The seed was $4, and Series A was $10.2.

Poornima Vijayashanker: $10 million, OK, $10.2. OK, so what did you use that money for?

Melody McCloskey: Team. Yeah, we’ve done almost zero marketing to date. We actually don’t even have a marketing team really.

Poornima Vijayashanker: Oh wow, that’s fantastic.

Melody McCloskey: Well, it’s…

Poornima Vijayashanker: Maybe you want to tell the audience for people that want to apply to marketing positions.

Melody McCloskey: Yeah, if you were interested in marketing at Style Seat, please call me immediately. Yeah, we’re looking to build up that team for sure. It was mostly around building up the team, so getting more engineers on board, data science has been a huge push for us, it’s the majority of the company, product engineering and data science. So really, really building up that team and our competency, and when we first launched our consumer app in September, we were like two stars.

Poornima Vijayashanker: Oh, no.

Melody McCloskey: Well, we were just so lean because at the beginning of last year we were like six people or something. Today we’re 45, so we’ve grown tremendously, but our app is almost five stars at this point and all of our metrics have gone through the roof.

Poornima Vijayashanker: Yeah, how did you have to get through that period? I’m sure for a lot of people, I mean your team, your investors, they might have looked at that and been like, “What’s going on?”

Melody McCloskey: Yeah, well I mean, that’s not like an email that you send immediately, but it’s like, “Here’s the first pass and here’s our plans to really improve this and make it better.” So we have an awesome product process, so we do two to four releases a week, we’re constantly AB testing everything across the board, so always our metrics, every single week and every month, are growing. So part of it is like, “This is what we are, we’re really lean, our team’s really small, but here’s all of our ideas to make this better. Here’s designs for how the app is going to look, and then here’s our process to AB test to get metrics through the roof.” So like in December, the conversion of a brand new client coming to Style Seat and booking on our mobile app was like 1%, and today it’s over 9%.

Poornima Vijayashanker: Oh, wow.

Melody McCloskey: So, it’s fun to see the steady iteration and how that improves metrics over time, and it’s encouraging for the team and for everyone.

Poornima Vijayashanker: Nice, so what led to the decision to go out and raise a Series B? I know you just closed, it was $25 million, so what was the reason for raising more capital?

Melody McCloskey: Because it became more and more clear that this continues to be a massive opportunity, and that we are best positioned to step up and take it. You know, $80 billion is a lot of money in the states, well—

Poornima Vijayashanker: Is that just U.S. or is that…?

Melody McCloskey: It’s just U.S.

Poornima Vijayashanker: OK, wow.

Melody McCloskey: So it’s hundreds of billions globally. And this year we’ll do over a billion dollars across the platform. So that sounds like a lot but it’s just a tiny piece of market share, and growth has continued to increase. So it was a matter of me and Dan sitting down, looking at the metrics, looking at the opportunity and saying, “This is actually very clear that we have a pretty good shot at being a big business, let’s go out and raise the capital so we can do it faster.”

Poornima Vijayashanker: So what were the major differences between your Series A versus your Series B?

Melody McCloskey: Our Series A pitch was “we are the largest platform in this industry, fastest growing, with marketplace ambitions,” and our Series B pitch was, “we are the largest and fastest-growing marketplace in this industry with a real shot at turning on international.”

Poornima Vijayashanker: And what is it about the marketplace that you really want to focus on?

Melody McCloskey: I’m really excited about turning on marketplace economics. Because historically we focused on positioning ourselves to be the market leader and on growth, Style Seat today is free for stylists to run their entire business, we double their revenue as I mentioned just with our free products, and if a stylist would like enhanced scheduling and marketing tools, they can pay us around $30 a month for that. What we’re going to be evolving our business model into now that we are as big as we are, and we are a great source of new customers for our stylists, is adding an additional tier where we’ll allow stylists the option to pay for any clients that we drive them.

Poornima Vijayashanker: Oh, wow, that’s great. So lead gen for them, which is what they struggle with?

Melody McCloskey: Exactly, yeah. They’re new entrepreneurs, the beauty industry is a really tough space as a professional, and they don’t have a lot of options when it comes to growing their business. They can either pay a review site a monthly fee, or they can pay a daily deal site 75% effectively, cause they’re cutting their prices in half, then they’re getting customers that are deal surfers, etc., and they’re not going to come back. So what Style Seat would be is an awesome source of new clients for them, we’ll take a 40% one-time fee and a 10% ongoing fee. So the economics are much better, they make money off of the first appointment alone, and then with our client retention tools, we’re going to hustle as hard as we possibly can to make that client a long-term client.

Poornima Vijayashanker: Got it, that’s great. Yeah, to really be embedded in the life cycle of their business.

Melody McCloskey: Yeah, exactly. And in this respect, because we’re taking a percentage, we want to maximize the revenue that the stylist is getting every single time, and over the course of their business.

Poornima Vijayashanker: Wonderful. So we’ve talked about your three rounds of funding, we started with your seed, then we talked about Series A and Series B, let’s just take a holistic view for our viewers out there. With the seed you said, what was the most important thing to getting that seed investment?

Melody McCloskey: I think building relationships with the right investors, targeting the right investors, and having a really great pitch. Having a good idea in a market that is interesting with a novel approach, and then having a solid pitch with great content, great delivery, to the right people.

Poornima Vijayashanker: And then where did metrics play into that?

Melody McCloskey: Metrics don’t play into it as much, it’s more about, “here’s my vision and this is how I want to change the industry.” For us, because the industry that we were going after is just so far away from the personal interests of investors, we had to also show numbers and so it was a combo pitch for us, but I think for most seed pitches it’s, it’s an awesome industry, the way it exists today is horrible, we’re going to fix all of that, the world will be a better place, and we can make a lot of money.

Poornima Vijayashanker: Got it. And then for your Series A what was the takeaway from that?

Melody McCloskey: That you have to have great growth. So the performance of the business has to be great, you have to be able to say that you’ve done the things that you set out to do, and be able to show that you can do the things that you still want to do with the business and that that’s a big opportunity.

Poornima Vijayashanker: And for B and beyond?

Melody McCloskey: Business is growing, let it grow even more.

Poornima Vijayashanker: OK, so we have local, international, a lot of new markets?

Melody McCloskey: Yeah, wonderful.

Poornima Vijayashanker: OK, last question for you. For all the founders out there, I’m sure they’re wondering what are just like one to two things that you think are really important to get through that fundraising process? I know you’ve been pretty optimistic about it, but not everyone’s going to have the smoothest ride, so what do you think is important to keep in mind as they’re going out and fundraising?

Melody McCloskey: I would say, first of all we did not have a smooth ride.

Poornima Vijayashanker: Oh, OK good.

Melody McCloskey: Even if your business is great, fundraising is challenging. No one starts a company cause they want to fundraise. Not many founders that I’ve met love fundraising, so it’s OK if you’re totally intimidated by the process and—

Poornima Vijayashanker: That’s good, that’s good for them to know.

Melody McCloskey: —and it doesn’t come naturally to you, because it did not come naturally to me at all. I would say find a great advisor. I had kind of the best in the business, and someone that has raised money, has raised a lot money and he’s raised money recently, so that they understand the ecosystem and the players and they can help you around that process, cause how you run the process is incredibly important. So I’d say find an incredible advisor or series of advisors that can help you and work with you along the way and to help you with every email that you’re sending to investors and how you’re responding and how to speak investor language, cause you don’t know that unless you’ve raised money before. And then I would say have an amazing team, right? Whether that’s a co-founder, Dan Levine is my co-founder, he’s incredible, and we were able to do that together sort of along the way, so that was…without him, I don’t know if I would have been able to do it.

Poornima Vijayashanker: Well, that’s great. Thanks so much for coming on the show and sharing all of your fundraising process, and how your business is growing.

Melody McCloskey: Thank you, yeah, thanks for having me.

Poornima Vijayashanker: So is there anything else you’d like to share with our viewers?

Melody McCloskey: We are hiring. I would love especially to get more lady engineers on our team. We have a couple, we need more. Engineering, data science, products, marketing, anything. Please apply, we’re growing very fast.

Poornima Vijayashanker: Awesome, well we’ll be sure to include a link to your Careers page.

Melody McCloskey: Awesome.

Poornima Vijayashanker: So that’s it for our eighth episode of Femgineer TV. Thank you Melody for joining us today.

Melody McCloskey: Thanks for having me.

Poornima Vijayashanker: Yeah, it was fun. And of course to you, our viewers, for joining us, and our sponsor Pivotal Tracker for helping in produce this episode of Femgineer TV. If you’ve enjoyed this episode, then please share it with your friends, your teammates, and your boss, and subscribe to Femgineer’s YouTube channel to receive the next episode of Femgineer TV, where I’ll have special guest, Shruti Gandhi, who’s an investor and founder at Array VC.

This episode of Femgineer TV is brought to you by Pivotal Tracker. Build better software, faster.


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