In late 2008—late one evening, out of the blue—Devdutt Yellurkar, a partner at the venture capital firm Charles River Ventures (CRV), called me on my cell phone. My phone was listed on the Zendesk website, and I was accustomed to getting weird calls at odd hours, so it wasn't that unusual. People were usually offering to sell me something or pretending they were anything from customers to investors and everything in between. On one occasion I'd even had somebody pretending to be a reporter contacting me in the middle of the night with “unsettling news”; I finally realized he was trying to get a referral to one of our customers.
But this one was different. Devdutt wanted to know more about Zendesk, and he already knew quite a bit. CRV already had a company in its portfolio in a related industry. While doing research on whether or not it should reinvest in another round, Devdutt somehow stumbled on us. He was a brand-new partner at CRV—he had just joined that year—and he was a relatively new VC. He had an investment in only one other company. He was previously an entrepreneur, having cofounded technology company Yantra, which was acquired by AT&T.
Devdutt explained that he was interested in SaaS companies and interested in learning more about us. His background was compelling. He kind of got us, even over the phone, and although we spent the beginning of the conversation feeling each other out, by the end I got the feeling he was a genuinely good guy.
After our conversation, Devdutt completed more due diligence and spoke with several of the companies that were using our product; then he offered to fly out and visit. We immediately said yes. We still didn't have a real office, so we were forced to invite him to Alex's apartment with the “colorful” bars across the street, where he'd have to climb the crooked steps all the way up to the fifth-floor loft.
It turned out that Devdutt was even scrappier than we were. On Halloween 2008, he flew in from Boston and took a cab from the airport directly to Alex's place, worked with us in the kitchen the entire day, and flew back home that night. He worked as hard, and as weird, as we did.
It was an intimate experience to be hosting a prospective VC in Alex's home, but it somehow felt right. Devdutt believed that what we were doing could be game changing. We continued the dialogue with Devdutt and met the whole CRV partnership in Boston. We let them do their due diligence, which also involved understanding Danish tax laws and identifying an immigration path for the three of us. And, ultimately, CRV sent us the fabled term sheet—our very first.
Now, just a short time after that awful trip to California that had led to nothing, things were coming together. CRV was a solid firm with a good track record. And I appreciated the leap of faith it was taking in backing us—three Danish guys who spoke broken English with funny accents and had no real business plan.
I thought it was a huge victory. But my excitement was soon tempered when I discovered that Morten and Alex were not as pleased. Alex was fixated on reading the fine print through a lens of skepticism, and he thought the deal wasn't good enough. He said he had a different idea about the valuation and the amount the company should raise.
“Just read TechCrunch,” Alex said, highlighting deals that were much bigger and much more impressive than what we were being offered.
Of course I had read about those deals too, but I didn't think such a deal was realistic for us. He was alluding to the outlier companies—the companies that had a Series A, or first significant round of venture funding, that got written about with frothy fanfare. Their story lines read like a fairy tale—the little company received a huge valuation, and the founders became rich overnight and lived happily ever after. I agreed that from the outside it seemed like these rounds were fantastic. But that was not the whole story, and it certainly wasn't the typical story.
In reality, most Series A rounds are not that fantastic. Founders do not see any money themselves, investments are rarely more than a few million dollars, and 30- to 40-percent dilution, or giving away a big part of the founders' percentage ownership to the VCs, is very standard. Our deal was not very different.
I thought something else was happening with Alex's lack of enthusiasm, and it wasn't really a money game, but a mental one. Getting your term sheet is scary, and I thought it was the psychological aspect of the deal—not the terms themselves—that was intimidating him. Working with a VC is almost like entering into a marriage. It's a long-term proposition, and you lose the complete control you once had over your own destiny. In any leery founder's defense, the standard practice is strange and intimidating: you give your shares to the VC—they will vest over a four-year period, so you can get them back, but there are many ways you can lose the shares. (For example, getting fired by the board! That was something we suddenly had to realize could happen—at least in theory.)
Although I wanted the deal, I understood that there was a lot of risk, and it was overwhelming. After all, you don't know these VCs. You don't trust them completely. And yet you are supposed to give them everything you've been working for? It's unsettling.
Alex pored over the contract, reading and rereading the fine print, and becoming even more paranoid. Morten was not unaffected. The realization that dilution would make us minority shareholders over time was a harsh awakening. I wanted to rely on a team of advisors to help explain that this was typical, but I didn't have the right network of experts to call upon. We were represented by one of the biggest law firms in Copenhagen, but it had very little experience with these type of investments. We had no real data that would be helpful in determining the right thing to do.
Still, from my experience trying to raise money for the past six months and meeting with myriad VCs, I thought the deal was okay. I saw it as a good first step—and one we needed to take soon. And though we hadn't known Devdutt for very long, I believed his initiative and approach thus far demonstrated that he would fight for us.
Alex was deeply concerned that I wasn't looking at it critically, that I was moving too fast.
“You are being a twelve-year-old,” he told me.
I accused him of getting carried away by his anxieties. I told him he was thinking small and not being visionary.
Alex could not be persuaded. I would not cave. Morten was somewhere in the middle, but more inclined toward Alex's position than mine. Tensions reached a boiling point. Fights erupted, and I couldn't take it anymore. Fully frustrated, one day I stormed out, yelling, “Let's forget all about all this shit!” I drove home very upset and spent yet another night with little sleep and lots of irritation.
Obviously that was ridiculous. We couldn't just forget about it; we had a business to run and decisions to make. The next day I showed up for work, as did Morten and Alex, and we did what had to get done to take care of the company and our customers. During this time I felt as if Alex, Morten, and I, friends and cofounders, were more like parents engaged in an ongoing disagreement—not speaking during the day, sending snarky emails, walking out angry, and lying on opposite sides of the bed at night. That was the awkward undercurrent, but we didn't let that get in the way of what was most important. The priority remained ensuring that our kid felt good, even if we didn't. Our baby united us—even if we didn't like parenting with one another.
Ultimately, we had to give CRV an answer, and although I wanted to accept the deal, I did not succeed at convincing Alex and Morten, and I couldn't do it alone. A good friendship and strong partnership is very powerful for a founding team. But it can also make things harder. You have to work in agreement, and no single team member can have the final say.
I thought we would be making a mistake in turning down CRV, and that Morten and Alex were overestimating the leverage we had in negotiating the deal. But we all had to feel good about the deal, and that just wasn't the case. We rejected the term sheet from CRV.
I was so disappointed and so tired. But incredibly, Devdutt, who had invested so much time in us—and gone to bat for us with his partners—showed he was understanding. He was sensitive to the issues we were struggling with as cofounders. He appreciated the difficulties and the dynamics. Maybe it's because he was an entrepreneur himself and likely had experienced similar problems of his own, but more likely it's his personality.
“It's not an easy process,” he said, almost trying to provide some comfort. “Don't worry about it.” He left the door open and told us to come back at any time. No bridge was burned.
Friends should never work together—so goes the adage. But who would you want to build a startup with, if not your friends? Even Facebook recognizes that when it comes to relationships, sometimes “It's complicated.”
We weren't desperate for money at this point, but we did want capital to grow the business, and we didn't have a lot of choices. Denmark still didn't have any real investment scene, U.S. venture capital firms weren't routinely investing in small Danish startups, and the credit crunch was still casting a shadow—making it even less likely to get funding.
It was just before the New Year. I had spent so much of 2008 on the road trying to get money. Now we would enter 2009 without anything to show for it.
Devdutt had graciously left the door open, and now going back to CRV looked like the best option—the only option. Devdutt had been so stable all along; even with all of the turbulence in the markets, he remained dedicated and committed. Maybe he would still be interested; maybe he could improve the terms.
We knew that accepting funding from CRV meant we would move to Boston, where the VC firm was based. It was even part of the funding agreement; CRV was not interested in investing if we stayed in Copenhagen, and if we moved back there the deal would be over. That was acceptable; we were interested in moving to the United States, and the conditions made sense: we could leverage the network and the expertise of CRV, and they needed us located in a place where they could actually be helpful.
Copenhagen was separated from Boston by approximately ten hours of travel and 3,659 miles, via a connection in London. We didn't really have any relationships there or any idea of what it meant to build a business in Boston. We had even less of an idea of what it meant to live in Boston. We knew nothing about Boston.
I don't think we were particularly excited about moving to Boston, but you could easily argue how it made sense. I approached Morten and Alex and begged: “Don't think about this as the rest of your life; think about this as the first step. We just have to get the fuck out of Copenhagen.”
They knew the investment climate was now freezing, they were aware the nonstop traveling back and forth was unsustainable, and most important, they also understood that the mental distance between Denmark and the United States was too great. If we moved, we would have an easier time growing Zendesk outside of Denmark's small community, which was very limiting. We all wanted a better chance.
I called Devdutt. “Can we reconfigure the deal somewhat?”
CRV changed the terms and made it better. Truthfully, the difference was minor. The dilution was somewhat smaller, but it wasn't significant. I felt it was like scraping pennies or saving the change you get when you make a purchase. And though I felt that this incremental addition would never make a material difference, and it hadn't been worth fighting for, it was massively significant in that it made it palatable enough for us to close the deal. Alex and Morten appreciated the new terms, and most of all I think they appreciated the loyalty Devdutt demonstrated to us.
The clean term sheet from CRV finally arrived when I was on Christmas vacation. We were at Mie's parents' farm in Jutland, at the opposite end of Denmark from Copenhagen. It's at the top of the peninsula, where the wind careens through the flat lands bordered by two seas. It's where my in-laws raise chickens, ducks, geese, and turkeys.
As a family, we go to Jutland for summer and holidays—and curiously enough, many of Zendesk's pivotal moments happened while we were at the chicken farm. Our first big customer, MSNBC, had signed a deal earlier that year while I was visiting Mie's parents. I remember being up in the middle of the night, when it was still daylight in New York, and desperately trying to get an internet connection.
Now, once again, I received important paperwork in the middle of the night due to the time difference with the States. Again, I sat on the porch with my laptop struggling to find an internet connection (the 3G connection is actually pretty good because the land is so flat). I fielded calls with people in meeting rooms starting their days. I felt disconnected. (Maybe because they were in an office building and I was in a house with a duck in the parlor.)
But the agreement came in as promised, signed by the partners at CRV. I countersigned it, sent it back, and went to bed. We had a deal. And even though this giant feat had been accomplished, life didn't change one bit.
Back home in Copenhagen, Mie was studying for an exam, so I was with the kids. I took them to the park in the rain. I snapped a picture of the girls standing in the rain in a big muddy pool, stomping through the mud, and sent it Morten, Alex, and Devdutt: “Celebrating our Series A!”
Getting money was a relief, but it did not bring elation the way I had expected. Suddenly having a few million dollars transferred to your bank account is a weird thing. It becomes very real, and it's a bit unexpectedly uncomfortable in many ways. It's transactional.
Until this point, everything was aspirational—we had all these big ideas; we wanted to do all of these big things. And now it was anticlimactic. It's great to see a big number in your account, but at the same time you ask yourself, Is that it? I just went through all of that for this amount of money?
And suddenly you feel a little dirty.
We determined that Morten, Alex, and I would go for a week or two every month to work in the United States, close to our new VCs, but we couldn't make it permanent until our work visa situation was in place. In January 2009 we decided to get everybody on the founding team together, which meant the founders, plus Michael from Hong Kong, and Thomas Pedersen, who now lived in Los Angeles and who had been ramping up his work with us, helping us with anything from business development and sales to customer support. We needed a place where we could work and live for a few weeks, and where we could be relatively close to CRV as we were finalizing the due diligence prior to formally closing the funding.
We searched on the Internet and found a house in a neighborhood called Jamaica Plain, which sounded great. It turned out it was nothing like its name.
In Jamaica Plain in January, it is very very cold. Copenhagen, although it is at a more northerly latitude than Boston, is warmed by the Gulf Stream, and we were not used to these frigid temperatures. We wore big puffy down jackets and wool sweaters, but these layers did nothing to protect us from the frigid temperatures, and we all had to go buy boots and hats and winter underwear. We couldn't figure out how to properly regulate the heating in the house we were renting, and we ended up huddling around the single fireplace.
We worked in the kitchen with hundreds of sticky notes and ideas posted everywhere. We were making progress. We tried to lay the groundwork for the next phase of the company, and for us it always started with product. We definitely had more ideas and visions than we had resources and capacity. But that's the charm of an early startup. There's no ceiling for your ambitions. A lot of the product capabilities we laid out back then didn't get properly implemented until many years later. Priorities, priorities.
We were having fun together, although of course we also argued a lot. But we always ended the evening by going to one of the little bars in the neighborhood. And the neighborhood really grew on us, even though we sometimes had to fight our way through eight feet of snow to get anywhere.
In that same period, January 2009, a lot of milestone events and fun things happened. Twitter posted a blog post about its switch to Zendesk, and that gave us some good attention. We signed a very interesting customer that later became our first customer with more than a thousand seats on Zendesk. And we also turned down one of our first big enterprise opportunities, as its product requirements would have sent us down a path we were not willing to take.
But the due diligence phase with CRV was less fun. Moving the company was an intellectual-property and tax challenge. Additionally, it was incredibly costly to get the details of the deal closed. We each had a law firm in the United States and a law firm in Denmark, so four law firms were involved—and the language and cultural barriers didn't make things easier. There were accountants and auditors. The bills piled high and ate up a solid chunk of the investment. I wasn't the most experienced negotiator, and I had no clue about the amount of legal work associated with doing business in the United States. I probably had a very Danish “we'll figure it out” attitude and was unprepared for how much work and documentation must go into properly assessing liabilities and everything else. It's a very intrusive experience, having lawyers dissect what at that point is less of a business and more of a love child. It puts you in an oddly defensive position, fearing that the mess they uncover may jeopardize the deal.
I often lost my patience during this period. It took me many years to fully appreciate and embrace the work of lawyers in the United States. Today, I couldn't live without it. I've learned to love and live with lawyers.
It was sheer willpower that drove the Series A deal and our relocation to America to completion. What if we didn't get visas? We were taking a big risk, but the VCs were taking a giant leap of faith.
I credit Devdutt, for his belief in us and for his ability to remain a stable force when everything around us was often crumbling. I learned just how deep his loyalty ran when one day, while waiting to meet with the partners, I could hear through the air ducts a conversation they were having about our deal. Devdutt fought hard on our behalf. And his courage and conviction led everyone through.
This knowledge gave me even greater confidence in Devdutt, and it also taught me a lot about what makes a great VC. Particularly in the past, some VCs have had a reputation for routinely replacing founders with “professional” CEOs with more big company experience. Good investors understand that the founding team often is what carries the spirit of a company and makes it what it is. Most of all, they understand that the inspiration that comes from helping people grow is much more valuable than the experience you could buy by replacing them. The investment made in a founder and in helping him or her develop leadership skills is the difference between really good investors and mediocre ones.
Although we believed in Devdutt and we had come a long way in our understanding of working with investors, we were still very green. It was our first time working with VCs—and we were paranoid.
What if they took our stuff and kicked us out? The Danish VCs didn't help to curb our concerns. Though they had not been interested in us before, now they were vying for our business. Their new angle: We will control these venture guys for you; we can protect you from the American VCs! We were told all of these stories about the big guy screwing someone over, running them over, taking their businesses from them. Maybe it stemmed in part from our culture, from being from a small country that was accustomed to being threatened by a bigger player, but the paranoia didn't serve us well.
It was really absurd that we were always worrying. It made Alex's beard turn gray, and it wasted all of our time and sucked up too much energy. Looking back, I can see that it was kind of crazy of us—and very amateurish—to think that our company and technology were so valuable that the investor wouldn't also need the people who had created all of it. The venture guys didn't want to do this work themselves—and who could blame them? But this was just one more lesson we had to learn for ourselves.