When it comes to money, there's often a mismatch between perception and reality—and then there are different spheres of reality.
While the $50,000 line of credit that I took to start Zendesk was a sizable personal liability for me, it wasn't a sizable amount of money to build a company. It covered some of the hardware and the costs associated with running the service, as well as the ads. We were very frugal, and we were earning modest revenue right after launch, but what we were bringing in wasn't keeping pace with what was going out. There was Morten's token salary and the paychecks we had to give to the freelancers who were now helping us build and maintain the site. We wouldn't be able to subsist on this for long.
Almost as soon as we launched, we started to approach investors. We were very much under the impression that, given that we were three hard-working guys with lots of relevant experience who had invested a massive amount of time in building a next-generation product for a big global market, it should be pretty easy to raise venture money. That was what we read on TechCrunch, and there were also plenty of reports on the great state of the Danish venture market.
I reached out to everyone I knew. I reached out to people I didn't know. Everyone gave me the impression that there was money to invest, but locating it was a lot harder. We spent plenty of time with Danish seed funds and venture capitalists, but that proved to be a waste of time. They were nice and acted professionally, and I think many of them wanted to invest, but they didn't have any significant capital. The Danish VC market was not very established back then; almost all of it was government-subsidized initiatives—nothing that could really go to our venture. The investment “industry” was almost a joke.
There were individual investors, but nothing like what there is in Silicon Valley. I got nowhere with something called the Danish Angel Network; they didn't even reply to my email. Denmark has such a small economy, and there really wasn't any risk capital at the time.
Things were looking dire. We were rapidly running out of money at Zendesk, and I was rapidly running out of money personally. I did not want to go back to consulting and neither did Alex or Morten, but soon we would have to look for some better-compensated alternatives. Part of me wondered if that was the more responsible thing to do. I had another infant daughter at home. Baby Erna was born two months after we launched, and I needed to provide more stability for my growing family. Mie was supportive of my chasing this idea, but living without a paycheck had its limitations. Diapers are expensive.
I wasn't alone in feeling torn between choosing to have this completely break apart or committing everything to finding a way forward. Alex, Morten, and I all shared an understanding that maybe this was only temporary, that maybe it would last only a bit longer, but at the same time we weren't ready to let it go. I always found myself saying, “Let's give this another month and then we can think about alternatives.” They always agreed.
But it was a very borderline time for all of us. You are balancing two extremes: one, you are completely invested and narrowly focused and wholly dedicated; the other, you are hyperaware that there is very little chance you will make it. You are at odds with yourself, consumed by both ecstasy and fear. You have no balance, but you have found meaning. This is the every day, every moment dilemma of a startup.
And, then, suddenly, it looked like our problems could be solved. A friend of Alex's introduced us to an experienced Danish angel investor who was very interested in funding us. This was the real deal—an investor with an apparently good track record and many connections. He gave us the impression that he wanted to invest up to $500,000.
“Let's not make this complicated; let's make it easy,” he said.
It seemed too good to be true.
And then it became clear that it was.
It's customary for prospective investors and VCs—both professional and amateur—to ask for materials to validate your business. After all, they are giving you money that, statistically speaking, they will likely never see a return on, and that they might lose entirely.1 This investor was no different. He was not shy about asking us to produce copious documentation: details on how we fit into the competitive market, addressable market, go-to-market plan, and so on and so forth. He wanted a lot of the usual stuff that is purely fantasy so early in a startup's life.
I produced all of these materials, some of which we had and some of which we had to create or make up, working diligently to appear professional. Still, he kept on coming back, requesting more. At some point I became really confused. I thought we had produced everything he needed, and I was very unclear about what he really wanted. I wondered if he even knew what he wanted.
One evening, he called while I was out shopping for groceries. I was in the dairy aisle picking up milk and not entirely prepared to be grilled.
“I'm very disappointed you can't do the basic things that I am asking for,” he said.
He was making it clear that he felt I was not capable of doing my job. I don't remember the point of the call or what information he asked for, other than his trying to question my abilities and make me question my abilities.
It was a tense conversation, and on the way home from the market I really started to doubt myself. I felt that I was letting Morten and Alex down because I was failing to manage the investment situation. And in many ways I felt that investor had deemed me dispensable from the founding team.
But during a relatively sleepless night my confusion gave way to clarity. With each of the unnecessary demands, it became increasingly obvious he was exploiting the situation—trying to weaken us to gain more negotiation power. He knew we were running out of money, and he aimed to stretch us and tire us out as much as possible. I felt like he was messing with my mind and trying to take advantage of us. And it made me super uncomfortable.
We were facing a huge conundrum. Do we continue with this charade and do the deal with him—someone we didn't trust—to keep afloat? Or do we turn away from the deal and face sinking on our own?
The next morning I approached Morten and Alex: “We can't do this. It is going to be all wrong.”
They agreed. They also felt his vise-like grip exerting too much pressure. Alex, who had the original relationship, agreed that he would tell him that we weren't ready to take investments.
The investor was offended; he took it personally. And in a way it was personal. We did not want to be controlled by someone who was aligned with what was best for him but not best for us, for the company.
I learned an important lesson in this experience—one that influenced all of the investor decisions we've made since then. There is a vast spectrum of investors. Professional investors are extremely aware of the fact that they will be successful only if everyone else is successful. Great investors have unique relationships with founders, and they are dedicated to growing the company the right way. Mediocre and bad investors work around founders, and the company ends in disaster. The problem is, early on many startups have few options, and they have to deal with amateur investors who are shortsighted and concerned only with optimizing their own position.
As so many startup founders know, it's really hard saying no to money, but sometimes it's the right thing to do. Taking money comes with a price, and it can take you in directions that aren't always healthy. We dodged a bullet by saying no to that money, though it wasn't an easy decision. We had no cash, we were back where we started, but we didn't look back. Rejecting the offer carried the same relief you feel when you break off a bad relationship. We were free and ready to move on. Poor, but happy.
So, without any other options, we did something I never originally wanted to do, but what so many founders find themselves doing. We went to friends and family and asked them to invest. I now realize it was a last desperate action. Truthfully, I didn't realize how desperate it was at the time. But think about what a terrible thing this is to do! There was a greater chance we would fail than succeed. And here I was asking my friends for money that could be lost, that would likely turn into nothing, that almost assuredly (statistically at least) would be wasted. Why was I risking this? What would become of these relationships if things deteriorated?
I wasn't taking the long view. But I didn't try to sell anyone either.
“You are going to lose this money,” I said to these potential funders. “Think about it like a lottery ticket. There's a much better chance that you'll get nothing out of it.”
Still, we made this friends-and-family fundraising round a formal process, working with a lawyer to draft the documents and creating a presentation in which we pitched the idea. I invited potential investors in to meet with us. In these discussions I made it clear that they would have no control or influence over how we ran the business. (They had no experience with what we were doing, so giving them any power could only bite us in the ass.) They would be completely blind as to what was going on.
And yet, despite all of this, these people, family, friends—maybe fools—wanted to invest anyway. I was surprised by the level of interest but also so heartened. They wanted to invest because they believed in us. They believed in the crazy idea that we could make something out of nothing.
It's also just as true that we were really lucky with the timing. The climate for individual investors was perfect. We were still months away from the credit crunch in 2008. Real estate in Denmark was crazy hot. People had equity in their houses, and they had disposable money. They saw this as another opportunity.
My old friend Michael Hansen, the big-hearted, big-mouthed so-called king of Denmark, invested a bit. My friend Joachim, a television producer, invested and told his boss, who also invested. In fact, his boss wanted to invest more than our round allowed. Word spread, and it was fun to see so much interest. Most people put in around $10,000 to $15,000; the biggest investment was around $30,000.
We even turned away some people. Some of our family members really had no idea what we were talking about; they just wanted to help and be supportive. We couldn't accept that kind of money. And we had what we needed.
We were officially closing this round, and relieved that it was over, when something completely unexpected happened. A German angel investor named Christoph Janz sent an email exploring an opportunity to invest. After our months of chasing investors and getting absolutely nowhere, this was rather surprising.
Christoph was very professional and clearly an experienced and dedicated investor. He had been a founder of Pageflakes, a personal web portal (think My Yahoo!), which was acquired by LiveUniverse; Alex had used the Pageflakes product. Christoph was involved in a few great startups, and unlike the rest of the investment community, he had money to invest—and wanted to invest in us. He emphasized that he saw the role of an investor as someone who not only gave money but also gave expert assistance and advice. He wanted to put money into Zendesk and introduce us to key players in the investment industry. But we thought this was coming too late. So at first, we politely declined. “We don't need your money.” However, we had to admit we were intrigued by what he could offer.
Christoph didn't travel a lot, so he and I met in Hamburg, halfway between Copenhagen and Stuttgart, for a casual lunch, and we had a great discussion. He wasn't combative and didn't put me through an ordeal, but instead demonstrated that we had a mutual respect for each other. There was a good vibe between us, even though we were extremely different. Christoph was very German—very deliberate and very precise. I was the opposite, more nonchalant and impulsive and always thinking more about the big picture than the tiny details. Ultimately, I think we recognized that we were a good balance for one another.
I left Germany excited, and after Morten and Alex spoke with Christoph they agreed it would be valuable to have him be a part of what we were doing. Maybe we could extend the seed round and include him? It would have to be at a higher price, though. Amazingly, he agreed.
With a total of $500,000, everything looked different. We'd gone so far on one-tenth of that. We'd gone so far on zero. Now we could do so much. It was not as if we were going to take big salaries, but with some seed capital we are able to take a modest paycheck and reduce some of the financial pressure. I started paying off my credit cards. There was a path forward that wasn't filled entirely with fear.
We now had a new direction. The investment from this seed round inspired a new mindset and created a big change in pace. Christoph helped us with a business plan and helped us build out what would be the first attempt at describing the financial model of our business and ultimately our business model. There was lots of work in Excel at this stage, and that turned out to be where Christoph really felt at home. He helped us think about scale—and about the possibilities.
For so long we had been just trying to survive. Now we had the luxury of time to think about ideas. We were able to see beyond the bleak bank account and recognize that we had all of these users all over the world on the service and offering feedback. The big personal sacrifices we had made started to make complete sense.
We had declined the more common alternative: working in a cubicle or corner office, being a cog in a corporate wheel. We were building something for a greater good, and it was growing bigger than ourselves. It had the possibility to become real, to have a life of its own, and we wished for it the wonderful things you wish for your child. It's so rare to have that opportunity. Knowing that we had this chance is what had kept us going—even when we were too mired in the muck of day-to-day combat to see the beauty of it.
After we closed the seed round, we publicly celebrated with a press release, which Christoph sent to his network in Silicon Valley and San Francisco. He pitched it to various tech blogs, most notably GigaOM and TechCrunch.
GigaOM got back to us pretty quickly and asked for an exclusive. We were thrilled. Om Malik did the interview himself. Then, right before it ran, TechCrunch reached out.
“We want to run this story. Give us the details.”
Christoph wrote back, “You didn't respond, so we gave the story to Om Malik.”
That kick-started an exchange with Michael Arrington that had me shaking in my sneakers.
“Don't ever email me again,” Arrington wrote.
I tried to step in and smooth things over between Christoph and Arrington, emailing some funny remarks. They were no better received.
“Take me off your email list,” Arrington responded. “This is not a joke. Don't ever call me again.”
I was profoundly worried. TechCrunch was the mother ship of everything startup—I needed for us to be anointed by it, not annihilated! I was not well prepared for this game. Sitting in Alex's kitchen, I had to admit that I had no idea what I was doing.
“Oh my god, Michael Arrington just blackballed us from Silicon Valley,” I announced.
The only consolation was that later, Om Malik did publish a nice post. “It's not sexy, like some social networks, but it is useful and fully featured,” he wrote of us. “Zendesk would fall into our ‘small really is beautiful’ category of startups.”2
It wasn't a total disaster.