Funding Challenges | Zapier Co-founder Mike Knoop

There was an anecdote I heard that I think it was from Patrick Collison at Stripe, which was like second-time founders, when they go start their companies, they don't waste any time setting up their operating system for their company. Like within one year, they have all the key infrastructure pieces and all the key initial leadership hires that they need in place to start scaling because they know they're gonna need that stuff to scale anyway, so they just do it earlier. And I think as early founders, we just didn't know what we didn't know at that point.

I wanna transition the talk into raising money now because you guys have a very unique story in terms of reaching profitability as well as raising money. So you went through YC, right? And then I believe you raised only like $1.3 million in total.

Yeah.

And so what was that like? And like, you know, in terms of like, what's your thought process in that? And like, you know, reaching profitability as well as the typical Silicon Valley, you know, raise, raise, raise, raise, raise, raise, raise, raise. And then like, how is that possible for you guys? Like, was it the business model? Was it the founder's decision? Like, How did that work out? How did that play out?

Yeah. So the advice you typically get when you go through any startup accelerator is go to Demo Day, talk to as many VCs as you can, raise a bunch of money, and go follow the Silicon Valley playbook. We were going through YC, and we were really debating whether we wanted to follow that advice or not. We had a lot of paying customers at that point. We looked around our cohort and said, how does Zapier compare up against these other companies that we were going through the batch with? You know, we had paying customers. We thought there was a ton of demand for it. We were seriously considering not raising money at all. The reality though was we kind of looked at our— what we were actually doing as 3 founders, just the 3 of us still at this point. And every day until noon, we would wake up and be doing customer support. We had— this is how like janky it was. We had a single customer support email that when you emailed it would send the same email to all 3 founders' email boxes. So in order for us to do customer support, we had to literally be sitting at the table together because we'd have to like say, who's going to answer this ticket? Who's going to answer this ticket? And we would spend half of our day just responding to customers and trying to like, again, the early feeling of product market fit, just like keep up with like this inbound volume. Finally, after lunch, we would be able to actually start building the product and making it better for people. That was pretty clear that that wasn't like, if we wanted to continue to scale and scale faster, We needed to fix that. We needed to reclaim more time in our schedules to be able to keep building the product and make the company better. And that was what kind of, I think, led to the decision to raise that seed round back in 2012 after we went through YC. We looked at our revenue and said, you know, we can't afford to hire somebody full-time yet to do customer support. You know, we probably could wait and be able to hire that person and call it 6 months from now. Just wait for revenue to catch up and we'd be fine. But we decided, you know, let's go a little faster. Like, let's go raise a small seed round and use that cash to inject into the company and go a little faster in the early days. As it turns out, it took us 6 months to hire somebody. And the anecdote here is we never really spent the money that we raised. That $1 million is still sitting in our bank account. Like it was never, it was never spent. We got profitable before and revenue caught up to be able to pay the salaries for the employees that we hired in the early days that it didn't actually end up changing the trajectory of the company in any way. But the one thing it did was provide, you know, a bit of a safety, psychological safety net for us to like push forward down that route. So I think there is some value in like you know, saying like, okay, depending on how long things take or maybe revenue doesn't catch up, it does give you a little bit of that safety net. So yeah, I think that was probably the biggest utility of that money in the early days was it just kind of let us say, okay, we can make a faster decision here and we can scale a little bit faster. But we kind of had the— we had, I think, the internal confidence that revenue was going to catch up and that we would be able to not have to keep raising money in order to— We'd be okay. We'd be able to escape the VC treadmill, I think. And that ended up turning out true. So I always ask myself, if we were to go back in time, would we make the same decision again and raise the money again? I think we would. I think we would use the money probably smarter. If you're all first-time founders or starting a company or thinking about starting a company for the first time, it just takes a long time to learn how to run it, how to build a company. That's a slow process. You can speed it up a little bit by surrounding yourself with other people who've run companies before and try to model off of them to a certain degree. But there was an anecdote I heard that I think it was from Patrick Collison at Stripe, which was like second-time founders, when they go start their companies, they don't waste any time setting up their operating system for their company. Within one year, they have all the key infrastructure pieces and all the key initial leadership hires they need in place to start scaling because they know they're going to need that stuff scale anyway, so they just do it earlier. And I think, you know, as early founders, we didn't— we just didn't know what we didn't know at that point. And so that, you know, having a bit of a safety net gave us some runway to figure that stuff out. But I think knowing what I know now, if I could go back, I would— I would maybe do it a little bit differently in terms of how we leverage that money.

And in terms of like, you know, because from the outside looking in, right, it looks like, you know, Zapier from the very beginning looked like just, you know, another same sort of software startup, right? In terms of, you know, so what allowed that to happen where you were able to reach profitability and not worried about any sort of venture at all? Like, was it the business model? Was it like, was it a decision by the founders to say, hey, this is how we're gonna run the company? Or was it just how the customers lined up? Like, what allowed that to happen? Like—

Yeah, so we've always been very pragmatic with fundraising. You know, I think we certainly had our strong preferences. Like, we didn't want to give up equity and control of the company if we didn't have to. We, I think, really value the individual autonomy that we got for ourselves and then what we could build and make decisions on behalf of the company as it got scaled. It wasn't an intentional decision to get profitable. This was kind of a sign of product-market fit for us. We were hiring as fast as we could. In the early days, especially for a SaaS company, a software company, there aren't that many things that you can spend money on. And we didn't have an office, so like we didn't have this huge expense that most folks typically have. Our primary cost was paying employee salaries, and we were hiring at the rate that we felt like we could hire in the early days. Again, coming back to the idea that like we didn't quite— we're still figuring out how to build the company while we were building the company. We felt like we were hiring at the maximum peak rate that we could integrate those folks into the company and still be successful at building a really strong early company. Healthy team. So it wasn't intentional that we got profitable at that rate. It just happened because the company started growing faster than we could hire. That was the reality of the situation. But like I mentioned, we've always been pragmatic around raising funding. If there was a big opportunity that we wanted to go chase, say there's a company we want to acquire or a partner opportunity we want to drop $5 million into that we have maybe some kind of engine where you put $1 in, you get $2 out kind of deal, I think we would strongly and seriously consider those things. At the end of the day, money is a utility, cash is a utility, fundraising is a utility to let you decide what you want to do with it. I would encourage you all to think about it in that light. I think there's a lot— again, if you just think back to the typical Silicon Valley playbook, it's like, go raise the capital and figure out what to do with it afterwards. You'll figure it out as you go. My advice to my former self would be, Just be very intentional about what you want to do with it as soon as you do it. I think we did have that. We knew we wanted to do it to accelerate hiring at that point. But having scaled the company, I think there's maybe other things that we could have learned and grown a little bit faster and done a little bit more intentionally in the early days. But yeah, I think that's kind of our view on raising funding is just make sure you know what you want to use the money for. Don't do it just because someone's telling you to.