Starting, building, growing, scaling a business is like being on a journey. Along the way there are pivotal moments that shape your destiny. In my experience, these moments happen without you realizing in real-time the impact they’re going to have on success or failure.
Probably the most talked about moment in TaxJar’s history involves Dwight Schrute, burritos and an angel. The moment occurred on a day that covered the full gamut of emotions – anger, panic, and exhilaration.
First, the background story. In the Summer of 2013, team TaxJar was myself and three other brave souls who had committed to working nights and weekends. We only had 50 paying customers, but they were converting from free trial to paid at better than 35 percent. It was clear that the product had a fit in the market.
The team agreed to test the waters to see if we could raise a little bit of capital. The hope was to use the money to prove there was an opportunity to build a big business. We decided to raise an angel round on a convertible note. We reached out to our networks and were able to set up a series of meetings with potential investors relatively quickly.
Our first in-person meeting happened in late August and would serve as the catalyst for “the moment.” We’d had a preliminary meeting with these investors previously. They liked what we were doing so much that they wanted to take the lead and bulk of our $500 thousand round. “Circle us for $250 [thousand]”, was their exact wording.
Based on the first meeting, we were optimistic a deal would get done. We made the mistake of allowing ourselves to think ahead. If we could get a lead investor, that would allow us to hire our first employee – a hotshot developer who’d we worked with in the past. Plus, it seemed logical that we’d be able to tell an even better story in future pitches. We already had the bulk of the money. Invest now or miss out.
The company had no money, so I flew on my own dime from San Diego to San Jose for a day trip. Kevin Reeth was (and still is) running product for us. He and I would make the pitch.
The investors setup the meeting to take place at the VC firm of someone who, they explained, helps them vet potential investments. No problem, we thought. We like our story. The more the merrier.
We got there, made our introductions, and got right into the pitch. Everything was normal except one thing. The investor who was there to vet our pitch wasn’t paying attention to anything Kevin or I said. He constantly looked at his phone. He looked out the window several times to daydream. His mind was anywhere but on our master plan to take the sales tax world by storm.
When our pitch ended, the investors turned to their so-called expert and asked for his opinion. Without a whole lot of enthusiasm, he said we weren’t worth anything near the $5 million cap we were looking for. He added it would be impossible to raise under those terms. A priced round made more sense to him…something along the lines of a $1 to $2 million valuation.
Clearly he’d been brought to the meeting just for that one moment. Our investors didn’t have the guts to be the bad guys and negotiate, so they had someone else do it for them. Because we’re nice guys, Kevin and I politely said we’d think about it and get back to them (both of us thinking the whole way to the parking lot there wasn’t a chance in hell we’d do that deal).
All I could think about on the way to our car was the scene in ‘The Office’ where Dwight and Ryan the Intern throw eggs at a building after a failed sales call. Eff those guys.
Some may argue we look like spoiled brats turning down a $1 to $2 million valuation with 50 paying customers, but we knew we had something valuable. Fortunately, the team’s previous experience raising money helped us stand our ground. Kevin’s input was enormous. He’d raised from names we all know on Sand Hill Road.
We knew raising first money at a priced round would put us at a disadvantage. We were confident based on early results that if we could raise on a note, we’d avoid being boxed into the lower valuation and be worth a lot more.
It’s also worth noting that we’d done our homework to figure out what “market” was for convertible notes at the time. We WERE at market. These investors had misplayed their hand by being overly aggressive in their negotiations. It’s hard not to take it personally at the time, but that’s really what happened.
We made our way to a nearby Chipotle to regroup. We we starving and had time to kill before we had to make two more pitches. Damn, the burrito tasted fantastic as always but we just lost our lead investor. We were now facing a whole new reality.
Doubt was creeping in. Maybe we couldn’t raise money on the terms we wanted. Whose idea was it to raise on a note anyway?
Kevin and I spent the next 30 minutes brainstorming about how we could keep the company afloat until we could raise on better terms. Change the business model. Raise prices. Maybe I should go back to getting a paycheck and only work nights and weekends so I could support my family. Our confidence was rattled. We believed so deeply that we had the opportunity to build a massive, sustainable business. The path to get there was a lot murkier.
Expectations were pretty low for the second meeting, mostly because it was practically unplanned. Just the day before, Ryan Thompson, one of our moonlighters, noticed that an executive at a Silicon Valley powerhouse had made an angel investment in a company in eCommerce. On a whim, he blindly reached out to the angel thinking he might be interested in what we were doing. And he was right. The angel responded right back. They talked. And Ryan convinced the angel to put Kevin and I on his calendar for the next day.
A little bit of guts and research set the table for a meeting that could have easily never happened.
This meeting was a whole different ballgame right from the start. We never took out our laptops. We didn’t make a pitch. The angel didn’t challenge us on every assumption we were making. We just talked. We talked about our experience working together. We talked about our passion for technology. We talked about how crazy the world of sales tax is for small businesses. It was just easy.
And then, finally, after a long and trying day, the moment happened. It went like this:
Angel: What’s the minimum size investment you’re looking for?
Me: We’re looking for a minimum of $25k, but we’d prefer $50k.
Given what had transpired so far that day, I think we’d taken $10k and been ecstatic. I remember there being a brief moment where no one said anything. It felt like an hour, but it was probably more like 5 seconds.
Angel: My check will be for fifty [thousand].
We all stood up, shook hands, and I said we’d send the proper documents. Kevin and I walked as fast as we could to the car so we could high five and let out a loud “yeah baby!”.
In just a couple of hours we had gone from thinking TaxJar may not get off the ground to pure excitement. Dare I say optimism. We had our first investor (we would end the day with two). We had terms we could take to other investors. We could hire our first employee. And we promised each other we’d only laugh about that lunch at Chipotle when we thought about it in the future.
Our angel’s investment is worth many times more than what he paid, and those investors who told us they’d take the lead on our round would kick themselves if they ever knew exactly how much their $250 thousand would be worth today.
Most entrepreneurs can relate to that day. Most days are hard, but every once in awhile something unexpected like a check for $50 thousand from someone who believed in you changes the trajectory of a business forever. Kevin and I tell that story often. And every time we do we have a smile on our faces.