How To Raise Capital Successfully with Dan Siroker

What's up, everyone? Welcome back to another episode of Founders Journal. I'm Alex Lieberman, co-founder and executive chairman of Morning Brew. I spoke to a founder recently who did something absolutely insane. Here's the story. He raised a $15 million Series A at a $350 million valuation for his personalized AI company called Rewind. But that is not the crazy part. The crazy part is that he raised this round publicly on social media by putting his deck on Twitter, which led to 170 offers for investment. Ranging from a $200 million valuation to a billion-dollar valuation. So I thought it was time to talk to the man himself, Dan Seroker. Dan is a serial entrepreneur who is currently the co-founder and CEO of Rewind, and prior to that, he was the co-founder and CEO of Optimizely, a $500 million martech business that is doing over $110 million in revenue. In addition to asking him about his highly unconventional approach to raising capital this time around, and also if it makes sense for other founders to do, I also asked Dan for his timeless principles for fundraising based on his experience raising a shit ton of money. Let's hop into it.

Dan, thanks for joining the podcast.

Thanks for having me.

So I want to talk about your raise for Rewind because it was relatively unconventional, and I think there's a lot of wisdom that can be taken from not only the process you went through, but also your lessons that led to your process. So can you first just talk about how you raised your Series A for Rewind?

We did something pretty unconventional. So we actually put our pitch deck out on Twitter, now X. And it came out of this realization that the best way to build trust with our customers was to be as transparent as possible. We were getting questions like, well, I love the product. But what happens if you get, you know, bought by big tech, or if you go out of business? And so we thought, let's show people we have a real business, we're doing well, we got plenty of runway. And so that was kind of reason number one. Reason number 2 was, it was, you know, it was just the beginning of sort of this AI hype cycle. And a lot of people were interested in meeting, and we had plenty of runway. So I didn't really want to meet with a bunch of investors. So I thought, all right, let's just put the deck out there. Let's be fully transparent. We didn't particularly worry too much about competition at the time. And so that's what we did. We put 7 Minutes out there. You can go find it. It's our Series A deck. We didn't redact anything. We didn't hide anything. We showed the full roadmap. And it totally went viral. We got well over, you know, we got millions of views, over 1,000 offers to invest, many from really great investors. And I spent the next week in meetings with folks. The nice thing about this, you put it out once and everyone sees it's there, so there's a— the clock starts ticking for them. They know they'll lose out that deal. So the most enthusiastic investors I met with in person, I had maybe 60 meetings back to back the following week. And then for the finalists, I really did my homework. I went in, talked to references, Ultimately ended up choosing NEA, which is a great alignment of values with what I was looking for. Somebody with a long-term orientation. NEA is known to have 15-year fund life cycles as opposed to the traditional 10. Very often they're buyers at the IPO; they're not sellers. So and and the team was fantastic. So that was really the outcome of the process. But it it started by casting a really wide net, and it worked out great. We raised at a $350 million valuation with. $700K in ARR. So, you know, that was a wonderful outcome and we're really, really happy we did it that way.

It seems like one of the things you did in this process beyond just being super transparent and just almost allowing the internet to work for you to generate demand and also trust in your business, because it seems like that was a big thing for you as well, was people having trust not only just in your product and the technology, but also that the business would be around for a while. is the emphasis you put on spending time with investors and really vetting investors and picking the right ones. Can you share what were the most important criteria that you filtered for in choosing your investors and any questions that you asked to try to get responses that help you understand if an investor was right for you?

It changed. It has changed for me over my career. I think early on when I was younger and I had my first startup, I really wanted more mentorship and guidance. And, you know, that's why we raised my last company, my Series A, we raised from Benchmark, which has this philosophy of really being involved and helpful. And not that I don't want investors to be helpful, but I also think I'm now more mature. I kind of have a better sense of where the company needs to go. And so I wanted an investor that first and foremost was aligned in values. You know, they were investing in me, and they put a lot of trust in me. They're not trying to replace me. They're not trying to, you know, exploit kind of the dynamic today. They see more of the value of the company being created in the future than the value been created so far. So that was first and foremost what I wanted, was like sort of that values alignment, long-term orientation, commitment to building a big, successful company over the long term. And that's where references really actually play a huge role. You know, talking to somebody is one thing. You can ask— and investors are very good at selling, so you should be careful. There's very few questions you can ask an investor that you're going to get to the core truth compared to talking to their references. And certainly talking to backchannel references are very, very important. I think founders will be really honest with other founders. So don't be afraid to— you're thinking about taking a term sheet from an investor, look at all the other people they're on the board with, and just reach out to those CEOs of those companies. They'll respond. I've had, I think, 100% hit rate on reaching out cold. And founder to founder, when you're making these big decisions, are the kinds of conversations that can really shape whether you get the right investor or not.

And out of curiosity, when you were doing these backchannel references, what would you ask other founders to be able to better understand their experience with the investor that you're looking into?

Yeah, my most effective question is one that I've actually adapted for candidates, but it works just as well for investors, which is I ask the person who I'm doing a backchannel reference with, I ask them, Let's say I take this money from NEA and I tell you in 6 months it didn't work out. What's your first instinct as to why? And sometimes I'll even frame like, let's say you and I bump into each other in San Francisco and I turn to you and say, it just didn't work out. You know, I make it really real. I tell— I want them to feel the consequences of if they give me bad advice, what it might feel like. And usually when you ask somebody their first instinct and you ask them in this hypothetical, you get to some truth that you might not otherwise get when you ask about strengths and weaknesses. And, um, so that's one, probably my most effective question is, uh, this hypothetical of why wouldn't it work out in 6 months?

Interesting. And just to make sure I understand, you're asking them why wouldn't the investment have worked out, as in like, why wouldn't your business have worked out, or what would the investor's reaction be?

Usually, well, I, I ask this mostly of candidates, and that usually implies like we've either fired that candidate or if they've quit. I see. So investors, you know, I, I don't know if I asked 6 months, but maybe I asked, yeah, ultimately it didn't work out. Maybe something like that where, And it's framed in the sense of the relationship with the investor didn't work out, or the investor wasn't aligned. And you'll get answers like, well, maybe it didn't work out because that particular investor you're talking to is really excited about X idea, and maybe you're not. You'll hear things that you might not otherwise hear that you end up exposing through this kind of hypothetical.

Super interesting. You've raised over $200 million. You raised a lot for Optimizely. You've raised Obviously for Rewind, what are kind of like the most important, maybe non-obvious lessons that you've learned from just having a lot of experience fundraising now that both led you to this unconventional process, but also are lessons that you would share with founders who don't have all the years of fundraising experience you have to maybe increase their odds of being successful in raising money?

Yeah, well, I'll start by just saying raising money is not the goal. It is a means to the end. And if it is not the right means for your end, then don't do it. You know, especially people in Silicon Valley, can get really caught up in this sort of, you know, you're surrounded by all these other founders raising all this money at great valuations. Like, don't let that put you down a path that's not the best for you. So I would start with what's your end in mind and make sure raising money is first and foremost the right path to that end. I think the second thing I'd say is these relationships may feel like transactions in the moment when you're trying to decide who to take money from or who to talk to. But they're really relationships you'll have for a long time. You know, these are people, if the company does well, you're going to be working with for decades. And so that's something to also recognize, is that in the moment when you're a hot deal or things are going quickly, like, it may feel really good, but like, you're still going to be working with this person one way or the other for quite a while. The third is, even if you're a hot company, you're going to get a lot of nos. It's not— you know, it is almost by definition, even the best and most exciting companies and the most successful founders who've You know, been successful in the past, will get investors who for whatever reason don't want to invest. And I think accepting that upfront—I tell myself that every time—is important because just from a from a mental health, from a perseverance perspective, you shouldn't let that faze you because there's a hundred reasons they say no, and many of them don't have anything to do with whether you'll be successful or not. The last I think I think is is also important to recognize is that like this is a. A business. It's not just like a relationship. You should understand where they're coming from, what their goals are. You know, there's a lot of language out there about founders sort of getting the best they possibly can, and it's sort of like it's this adversarial idea between venture capitalists and founders. But the best deals, the best transactions, are ones where you both win. I think Paul Graham talked about the inspiration for the Y Combinator model came out of when he sold ViaWeb. He had this early angel investor who bought, you know, 6% of the company, and he realized, like, actually, that was a win for everyone. Like, ViewWeb really needed that money. The investor made a lot of money. And like, that's kind of, you know, you want that kind of alignment where you're all at the end of the day going to win if the company succeeds.

I love that. Would you recommend the way that you raised this A to other founders?

I would. And I think you should do it the right way. You know, framing your fundraise as a community round or putting out there publicly can have this maybe stigma that you're desperate. So you should find a way to do it that doesn't come across as desperate. And I think the best way to think about it is to analogize raising the way we did to online dating. You know, you could go to the local bar and find somebody that you might want to marry. That's possible. That's kind of how most people raise money. They go to a handful of best firms, and they go up and down Sand Hill Road, or maybe up and down their Zoom calendar. And they end up meeting with a handful of folks. But the reality is the world is big. There's a lot of great investors who might love your product for one way or the other, for one reason or the other, that you may not think to talk to, or maybe you don't get a sense to know until you kind of put yourself out there more publicly. And I think that's really the value of being more public in your fundraise. It helps you cast a wider net, which then you ultimately find the perfect match, the perfect marriage, and you end up, I think, really getting a sense for what your market price is. That's the other thing that you benefit tremendously from, is getting lots of offers and putting yourself out there. And the last thing I'd say is most people don't do this because of some fear of competition. You know, it's true that since we did raise in public and we were successful, we've had some imitators and some copycats, but none of them really have affected us. You know, it was a little bit of like, should I have been so public about our success when I see all these, you know, imitators and copycats? They've all kind of gone nowhere, or they look like they're fizzling out. So I would say it's overblown concern around competition is probably not worth worrying as much about.

Yeah, I love that. And when you think about what you optimize for when you're fundraising, And I may be forgetting a few things, but let's just say one is valuation, one is like values alignment, one is, let's say, like mentorship and actual like tangible support from your investor. I may be missing a few others, but how in your head, whether it was as a first-time founder or as a second-time founder or now a third-time founder, like how— what, what did you optimize for in kind of the criteria of selecting investors? And how has it changed over time, if at all?

Yeah, I mean, I think values alignment would be the top of the list for me. But I think that's kind of the— if you think of Maslow's hierarchy of needs, that's like the self-actualisation. You also really need some foundations. Like, you need it to be at a fair price. Like, you shouldn't sell your company way higher than it's worth and way less, because both are bad. You need an investor who's going to do no harm. You know, there's a lot of investors out there who will do harm. Like, you shouldn't take money from somebody who ultimately is going to be harmful to the company over the long term. But, you know, if you're able to get a good price, if you're able to find somebody who will be helpful, you can't expect them, by the way, to be the reason you succeed or fail. Like, it's just putting too much on them. Like, a lot of investors have helpful services, and that really does help. But at the end of the day, you are the founder. You're going to be the reason the company succeeds or fails. So you shouldn't have unrealistic expectations for what an investor can do for you. And ideally, if you're lucky, you have those 2 things, then I think that values alignment is also critical. If you get that right, then so many other things become easier. You know, the next time you need to raise money and maybe the company's not doing as well and you really need that last investor to do their full pro rata, like that values alignment is going to be really important then. Those are the scenarios where if you're out of alignment on values, maybe the investor or that firm or the partner of that firm is just in a different headspace and focused on different things. You end up in these situations where down the road it's going to be much harder, even though in the moment it might feel good because they gave you a bigger price upfront. Yeah, super interesting.

One last question for you is not only was this Series A unorthodox, but like super successful in this unorthodox approach, but you raised at a crazy valuation, right? You raised at $350 million on, like you said, $750K, which you look at it as a multiple, it's like 466 times revenue. How do you think about the pros or cons of raising at a multiple that is well higher than where, let's just say, the market is right now? Like, how do you process kind of the trade-offs either way?

Yeah, I would say that's one of the big benefits of raising more publicly is you get a market price. Like, I have, and I probably should publish this, I have this distribution of, from, from, you know, from $75 million to a billion, uh, where do people think we're worth? Because I put up this form, you can go to it today and see how I put this form up. And I tell people how much we do want to invest and at what valuation. And then I get 1,000 data points of where people think our company is worth. We had 20 offers at $1 billion or more, but 20 out of 1,000 is pretty small. You know, the foolish thing to do would be to take the money at the billion-dollar valuation and set these unrealistic expectations for growth. And so we thought, okay, let's— you know, $350 was a lot, but, you know, that was kind of where the market was showing. A lot of people came in around $200, a lot of people at $300. You know, $350 was kind of like, we're starting to realize these are the people really leaning in, believing in the market, believing in where future is. And that's also important too. You don't want somebody who's just investing because they think you're a good deal, or that you're the good old Warren Buffett, like cigarette button, they get the last puff of a cigarette right before it goes out. You want an investor who's investing because, you know, everyone— and we had, by the way, hundreds of investors participate at this $350 million valuation. And when they're doing the math, they're thinking that this is not worth $300 million. They're doing math to say this is worth multiple billions of dollars. And eventually, You know, there's some non-zero chance this could be as big as Google or Apple. And that's what you want. You want investors who are aligned around that goal, because that's my goal. I want to build a big, impactful company. And if that's what they're underwriting it to, then that's not as bad as I think venture capitalists like to scare you into thinking. Don't take the big valuation, because how are you ever going to live up to that? And because the good news is we have 6 years of runway. We've got plenty of time to live up to the big valuation.

Totally. Yeah, I think, to your point, the amount of time you have of runway to basically grow into it is such an important component, as you mentioned. And yeah, it's super interesting. And I really do hope you end up publishing that distribution because it'd be fascinating to look at. Dan, thank you so much for joining Founders Journal and for all of your insights on fundraising. Thank you for having me.

I hope you enjoyed this episode of Founders Journal. If you like this format where I do these kind of celeb shot episodes of having world-class entrepreneurs and investors answer the most important questions or challenges for early-stage entrepreneurs, shoot me an email to alex@morningbrew.com to either suggest a future question or challenge that we should talk about that you want answered, or a specific expert or entrepreneur that you would love to see come on the podcast. That is alex@morningbrew.com. Shoot me an email. I will absolutely get back to you. As always, thank you for listening, and I'll catch you next episode.