Fundraising and Cyber Startups

Robert Lord: [00:00:03] 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, nobody wants to give you money. It's like catch-22.

Dave Bittner: [00:00:13] 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.

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Robert Lord: [00:01:38] 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.

Dave Bittner: [00:01:47] Robert Lord is co-founder and CEO of Protenus, where they provide automated patient privacy protection for hospitals and other health care institutions.

Robert Lord: [00:01:56] 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 rest of your argument.

Robert Lord: [00:02:20] 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 paying for the product - if you got those two pieces, you're golden.

Dave Bittner: [00:02:47] John Trauth is CEO, president and co-founder of Bricata, a company that provides intrusion prevention solutions for multi-location and high-bandwidth deployments.

John Trauth: [00:02:57] 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.

Dave Bittner: [00:03:10] In simple terms, convertible debt is a loan that can be turned into equity, generally upon the occurrence of future financing.

John Trauth: [00:03:16] We were very successful in the convertible debt round. And we ended up raising, you know, multimillions 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.

John Trauth: [00:03:41] 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 a 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. Course, if I were to bring in VC money, we would use it to expand our engineering staff. But I think, by and large, that would really add fuel to the fire in terms of sales and marketing.

Dave Bittner: [00:04:15] Mariano Nunez is CEO of Onapsis, where they specialize in securing SAP and Oracle enterprise applications. The company started in Buenos Aries, 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.

Mariano Nunez: [00:04:33] So they kind of said bootstrapping would only get us so far. And there was an opportunity cost, right? If you didn't raise the money, and you kind of thought about - a lot about of dilution and keeping the ownership of everything, then you just may miss the wave - that we thought it wasn't right.

Dave Bittner: [00:04:51] 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.

Mariano Nunez: [00:05:02] We went through a lot of processes where you end up basically pitching your business and your public reputation and your idea to different people. Basically, they help us polish a lot of things, right? They help us polish a lot of 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 finding the right money, but it's also a matter of finding the right investors.

Dave Bittner: [00:05:32] Dario Forte is founder and CEO at DFLabs. Earlier this year, they secured $5.5 million in Series A funding.

Dario Forte: [00:05:40] The real importance for us was not only getting the money but also getting what the people called smart money - so money from investors that know your field and then they can also provide value to the entire culture.

Danny Rogers: [00:05:56] I think that's one important thing, is to find that fit. I think it is more personality-driven than people realize.

Dave Bittner: [00:06:02] 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.

Danny Rogers: [00:06:18] Even before that stage where there's money in hand, but you can kind of tell from the first conversation, you know, what the relationship will be like and whether you jive. I think, you know, having that really well-trained gut feel is important. Many people don't listen enough to their gut instincts or have them kind of well-attuned enough.

John Trauth: [00:06:36] I think relationships are absolutely paramount.

Dave Bittner: [00:06:40] That's John Trauth from Bricata.

John Trauth: [00:06:41] 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.

Mariano Nunez: [00:06:57] I mean, you're bringing on partners. Right? And you want to make sure that they're good professionally but they also share your values and, you know, you kind of think alike at least from a personality perspective.

Dave Bittner: [00:07:08] Mariano Nunez from Onapsis.

Mariano Nunez: [00:07:10] For us, expanding to Europe was a big part of our business strategy. And expanding to the federal market was another initiative that we had as a team (ph) for '16 and '17. And therefore, I basically started marking off the people that were interested, which would help us with that execution. It is really good surrounding yourself with kind of the right type of individuals and people that can help you to get an opportunity, I think.

Danny Rogers: [00:07:37] And then, also, realize that, you know, 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, it's - I'm not super possessive about it. And I think the - you know, to me, it's like I'd rather see all of us succeed together than me fail by myself.

Dave Bittner: [00:07:59] 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.

Dario Forte: [00:08:11] 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.

Dave Bittner: [00:08:21] That's Dario Forte.

Dario Forte: [00:08:23] The slower you are in answering the question, the less possibilities you have to be funded because one of the major issues that funders want to avoid is funding people who are not prepared also from the administrative part.

Paul Paget: [00:08:38] How do you prove the fact that there's a big market for what you're doing? And then it comes down to customer references.

Dave Bittner: [00:08:42] Paul Paget is CEO of Pwnie Express. They're in the business of detecting rogue, misconfigured and unauthorized devices 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.

Paul Paget: [00:09:03] 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 - you know, 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, you know, to a satisfactory degree, enough so that customers will give you the testimony that you're looking for.

Danny Rogers: [00:09:30] And it took us, you know, 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 kind of, OK, this is the general availability product we need to build and this is, you know, what we need to do it. And that's when we kind of went out for the A round.

Danny Rogers: [00:09:51] 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.

Danny Rogers: [00:10:03] I think one of the advantages we had, as I said, is our story is really simple. And so that - it kind of tells itself. You know, 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.

Danny Rogers: [00:10:20] I mean, that story - which is a real story - I mean, that's - that conversation that was sort of the founding conversation for our product - recounting that to the investors, it was sort of, you know. You could just watch people. In 30 seconds, the light goes on; they say, OK. I understand what you do - which is rare in this world. I mean, there's so many of these security companies out there now that, you know, it's hard to understand what they do.

Paul Paget: [00:10:43] 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 your team ready, understanding the market, having a clear plan - all those things are necessary before you go out.

Dave Bittner: [00:11:03] Company founders, in particular, often have a tendency to keep their cards close to their vests, to resist sharing their ideas with potential investors.

Danny Rogers: [00:11:12] Ideas do matter. And I think that, you 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.

Danny Rogers: [00:11:46] And what investors care about is much more about the, what are you going to do for the customer? What 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 up to you to achieve the technical magic. And I think that's where, you know - 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.

Robert Lord: [00:12:15] 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.

Dave Bittner: [00:12:25] That's Robert Lord from Protenus.

Robert Lord: [00:12:27] 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, Protenus is something that needs to be in every hospital in the U.S. 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.

Danny Rogers: [00:13:07] Our seed round was sort of pieced together by a lot of individuals. And it was just, you know, a sort of groundswell of sort of grassroots interest in us in - as a seed round company. And what it meant was we have kind of a very long list of sort 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 four or six ventures out of Boston. You know, one of the things they did was move very quickly. You know, 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's some great, you know - here's some terms - I mean, there was obviously some back and forth. But I think relative to what it could've been - you know, our goal was efficiently and fair, and I think we achieved that.

Paul Paget: [00:13:57] The company was funded back in 2013 as - in an A round, which was really the initial stage round to develop the product.

Dave Bittner: [00:14:03] That's Paul Paget from Pwnie Express.

Paul Paget: [00:14:06] Once we saw some success and started to develop some traction, then the task - 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 it obviously takes money to go after it.

Dave Bittner: [00:14:24] There's that saying - hindsight is 20/20 - and our group of experts certainly learned their share of lessons along the way.

Danny Rogers: [00:14:30] You know, there's a million little things I probably would've done differently, in hindsight. You know, it's 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 of - 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, you know, being willing to revisit when you sense that something isn't right.

Danny Rogers: [00:15:10] The most important thing is, you know, not to panic and to kind of sit back and, you know, be honest with yourself. OK, what is happening? Really being in tune with your gut - you know, one thing I've learned from 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 if not as - 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.

Dario Forte: [00:16:06] I will probably repeat 90% of the things that we have done. I will probably - I have opened the door to the fund - to investors' fund six to seven months before. But on the other hand, I have to say I was very lucky to know the people at Evolution.

Dave Bittner: [00:16:22] Evolution Equity Partners is the venture capital firm that handled DF Labs' series A.

Dario Forte: [00:16:28] The way they handled the deal and the capability they have to understand the business and the factor and - to support you made us basically recall that there's six to eight month 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 meaningful.

Robert Lord: [00:16:53] 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 of 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.

Mariano Nunez: [00:17:13] 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 add some friction to the process. Right? And the reason for that was because, yeah - I was kind of like basically behind selling. And instead of selling, I was raising money. But there's only so many hours in the day. Right? Yeah. I went to 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 it as is. You have to go through a lot of bad frustrations and making sure you keep yourself to the ground and keep trying. It's a lot about persistence, as well.

Robert Lord: [00:17:54] 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. And 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.

Danny Rogers: [00:18:32] One of the most important things is to have a really clear and competent vision and to stick with that - you know? - 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 something - there's a lot of good stuff out there. But there's also just a lot of volume. And be OK 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, OK. I've had this conversation, and it's not - it doesn't fit with that vision.

John Trauth: [00:19:03] I would do a lot of research about the market. I would not leave it to your gut, you know? You've 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.

Dario Forte: [00:19:26] Industry analysts are very important, but I still remember the time - it was in two thousand - I think between 2011 and 2012 - we had analyst briefing. And at the end of the presentation, the analyst told us, look. Don't lose your time and spending money and investing your money in these things. This is a very narrow field, and nobody's going to buy this software. And after one week, we got our first appeal from a Fortune 10. It was about $300,000. So OK, analysts are very important. But they are not in - 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.

Dario Forte: [00:20:20] When VC invests in you, one of the first things they are going to watch is the quality of your technology and the quality of your team. So invest in your new 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 they're confirmed - very important customers that just knocked our door because they had 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.

Mariano Nunez: [00:21:03] I wouldn't get too obsessed with illusion and control. But most important - raising money with the right people - which - what you think are the right people. So do a lot of due diligence on the investors. Right? 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.

Mariano Nunez: [00:21:26] You should speak with former - I mean, you should really, really go through the portfolio companies and try to reach out to their CEOs or former CEOs, people that have exited successfully and hard good withdrawals with them or people that failed, especially - right? - because everyone's nice when things go well. But trying to understand what's in their mental process and their attitudes when things do not go well, I think you learn a lot from that. And that's something you should definitely - anyone should definitely do, I think, when they're raising money because you're bringing in partners, and you want to really know them how they are.

Danny Rogers: [00:22:00] People sometimes think I'm crazy because I've said no to investors before. I mean, there's a kind of mentality out there that 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 when we wanted to build. And so it's, you know, take what you need from the right people to get what - 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 - you know, we don't have any more space right now - to everyone else 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.

Danny Rogers: [00:22:42] Unfortunately, there's no magic formula. You know, there's no kind of, say these magic words and, you know, 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. I think that's some - you know, something people forget and sort of hope it's more logical than it actually is.

Danny Rogers: [00:23:15] You know, if you have a solid idea and are perseverant - and that's the big one - is you - 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, you know, especially if you have - if you're in a - the right space at the right time, then you - and then good things will happen.

John Trauth: [00:23:34] 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.

Dave Bittner: [00:23:42] That's John Trauth from Bricata. That comment is particularly interesting because Bricata's solution involves hardware.

John Trauth: [00:23:48] 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, 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. I - 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, I - 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.

John Trauth: [00:24:39] I mean, again, you know, we've been lucky enough that we've been able to overcome those obstacles, but, you know, not everybody is so fortunate. You got to sort of compartmentalize and have a very positive attitude. And you got to have passion about what you're doing and really have a strong will to succeed. This is not easy. You know, a lot of people see people succeed at, you know, entrepreneurship and being a startup. And they think, you know, 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.

Mariano Nunez: [00:25:17] 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, like - and 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 - that had the best outcome for you as a founder, right? If you have only one option, then - on the table then there's not too much you can negotiate, I think.

Paul Paget: [00:25:53] Well, I think the most important thing I could tell somebody is to go talk to lots of people. You can imagine, you know, 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 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.

Robert Lord: [00:26:21] 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.

Robert Lord: [00:26:47] 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, combined 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.

Dave Bittner: [00:27:34] Our thanks to John Trauth, Mariano Nunez, Dario Forte, Paul Paget, Danny Rogers and Robert Lord for sharing their views on fundraising and cyber startups.

Dave Bittner: [00:27:44] And thanks to Cylance for sponsoring this Special Edition.

Dave Bittner: [00:27:47] You can learn more about the CyberWire and subscribe to our daily news brief and podcast at thecyberwire.com. The CyberWire podcast is produced by Pratt Street Media. Our editor is John Petrik. Our social media editor is Jennifer Eiben, technical editor is Chris Russell, executive editor is Peter Kilpe. And I'm Dave Bittner. Thanks for listening.