Challenges with Raising Venture Capital & Being Transparent about It
It hurts to get close to something that you want and then not get it, doesn’t it? When we’re talking about money and business, this situation is even more painful. Furthermore, talking about the situation does nothing but add more grief to an already complicated situation.
Unfortunately, this is exactly the scenario that our friend Rand Fishkin, the CEO and co-founder of SEOmoz, found himself in not long ago. In 2007, the company received venture capital funding from investment firm Ignition, and earlier this year, was approached by a number of firms interested in investing further.
Fishkin told us that the company had not planned on raising funding but that it began to get excited about the potential opportunity. During the bidding process, there was clearly one firm that stood out. Fishkin said it made them a good offer and the companies signed a term sheet.
As he explained, this is “usually a done deal unless the investment firm finds fraud of some kind.” However, three weeks after the signing, the investment firm pulled out. Aside from the fact that SEOmoz did not receive the funding, he said it was also hard to understand why it happened since the firm did not give a clear reason for its action.
“That experience was new for us,” said Fishkin. “I think folks tend not to write about the fact that even after a term sheet is signed, the investor can still pull out.”
Because he has always been very open about all things SEOmoz, Fishkin wrote a very detailed post, within legal bounds of course, about the entire experience. WebProNews asked Fishkin about why he felt so compelled to be open since most companies would not go to the extreme to find out what they could actually disclose.
He told us that transparency has always been a core value of SEOmoz and always would be. He believes that this includes both the good times and the bad times.
“There’s nothing up my sleeve,” said Fishkin. “It’s all out there.”
Is it possible for a business to be too transparent? What do you think?
Fishkin and SEOmoz take transparency very seriously and believe in being upfront about all matters, even when they involve finances and legalities that aren’t flattering.
“It’s one of the qualities that consumers and business customers appreciate so tremendously much these days,” pointed out Fishkin. “We’re getting a culture, it’s particularly in the technology world, that anticipates, loves, and rewards transparency.”
With this transparency, there is also a risk since investors may avoid SEOmoz in the future out of fear of being the subject of a blog post. Fishkin admits that this is a very real concern but said it was one that he was willing to take.
“It’s a risk that we feel comfortable with,” he said. “I would rather say I’m going to commit to our core values, we’re going to do it 100%, we will be transparent no matter the costs, rather than say… we’re transparent but only when it’s convenient for us.”
Even though SEOmoz didn’t receive the funding, no one can say that the company doesn’t stick by its values. The experience, however, has made the company hesitant about raising capital in the future.
“We’re going to go back to our original mission of not raising capital,” said Fishkin. “Maybe we’ll think about it again next year, but I sort of hope we don’t.”
“I’d prefer not to go through that process,” he added. “It takes a lot of time and energy away from running the business.”
If the opportunity were to come up again, Fishkin told us that he would like his company to be in a position in which it doesn’t need the funding, so that it could walk away if it wanted. Since most startups that are covered by the Silicon Valley media receive funding, he also said that he would try to create buzz around his company before he attempted another VC round.
Although the experience was difficult, Fishkin and SEOmoz have received a lot of praise and support for being transparent. Fishkin told us the praise is a “good consolation prize” but that it was a little “bittersweet.”
Going forward, he hopes that startups will be more aware of potential issues and that investors will be more cautious.